Subsidy and Productivity in the Privatised British Passenger Railway

Abstract

This paper gives a brief overview of subsidy arrangements in the privatised passenger rail industry in Britain before focusing on productivity performance across the first four years under the new privatised structure. Subsidy reductions are analysed in terms of the average annual percentage increases required in passenger revenues to offset these reductions for each train operating company. These are found to range from 2% to 21%. It is highlighted however that such 'gains' could equally be achieved through cutting costs, hence subsidy cuts are also specified in relation to cost reductions and found to range from 1% to 10%. Productivity is then examined through the use of a Translog productivity index, with passenger train kilometres specified as the output, and labour, traction rolling stock and infrastructure specified as the inputs. For the network as a whole, it is found that total productivity has risen on average by 4% p.a. over the initial privatisation period. Most of these gains have been achieved through labour reductions and increases in output resulting from improved utilisation of existing inputs. Comparisons are then made with the performance of thenationalised British Rail over a number of time periods. The overriding conclusion is that gains made in the early period of private sector management, although appearingto be of a sufficient size to offset subsidy reductions, are not as high as those made in the later period of public sector management. It would appear therefore that it is ownership structure, towards a more market orientated organisation, rather than ownership form per se, that is the key component in productivity gains