Monday, 23 March 2020

British Rail Services “Nationalised” in Response to Covid-19

In response to the global pandemic involving the transmission of the Covid-19 (Coronavirus) disease, a number of extraordinary measures are being put in place around the world. In the UK, the Conservative Government has taken a number of steps which, ideologically, go against their principles. Today, the latest in a line of extraordinary measures was taken when the Department for Transport stepped in to, essentially, nationalise the rail industry in the UK on an emergency basis. The developments and details of that extraordinary measure form this post.

Rail services, along with other modes of travel like aeroplanes and coaches, were quick to suffer the natural consequences of the worsening of the Covid-19 pandemic. A number of rail operators had already started to reduce their services before the British Prime Minister requested that non-essential travel be avoided, and this was accentuated by a further reduction in services in places like London (where up to 40 underground stations were closed last week). The Transport Secretary Grant Shapps stated last week that the aim was to reduce services, but to allow some services to continue so that keyworkers could still perform their duties, and so that freight services could continue delivering much needed supplies across the country. However, today, the Department for Transport spectacularly announced that the Government was taking emergency measures ‘to support and sustain necessary rail services as operators face significant drops in their income’.

Those significant measures centre around the headline-grabbing move to temporarily suspend the franchising system and ‘transfer all revenue and cost risk to the government for a limited period, initially 6 months’. What does this mean? Essentially, the Government has guaranteed the survival of all rail operators who choose to sign up to these measures. The sentiment is that all the operators will fall in line, as there is little chance of survival without doing so. Yet, there are a number of key elements to the decision. Although it has been suggested today that the franchising system ‘had long had its day’ before today’s announcement, the reality is that the rail system in the UK is, as from today, essentially nationalised and that marks a huge turnaround. Second, it is clear from the wording from the DfT that this is not a pre-determined system, and could go on longer than the 6 months cited. Those representing the rail industry supported the moves, whilst the Shadow Transport Secretary also welcomed the moves and suggested that these events will form part of the discussion on how the rail industry moves forward after the crisis. The Government have not just guaranteed the rail industry, but put in place measures for rail passengers to be refunded on all tickets, so as to remove any penalty for abiding by the promoted guidance – not all providers were willing to refund all tickets, like advance tickets. The Government has also placed a cap of 2% of the cost base of the franchise, which they suggest incentives operators to perform adequately but will see a reduction in the profits being extracted by the private companies. In the event that an operator takes the unlikely decision to reject this approach, the Government has said that they stand prepared to step in and rescue the operator and take it over.

So, there are a number of conclusions. Yes the Conservative government has essentially nationalised the rail industry, but this is not nationalisation. It is a response to an emergency which will not be repeated, so the suggestion from Labour that this decision will form part of any post-crisis discussion on the formulation of the rail industry are probably wide of the mark. Also, the argument that this decision will be more cost-effective for the taxpayer in the long-run is accurate. However, this leads to a much more important discussion about what capitalism has become, or perhaps what it has always been. The decision by the Government to nationalise rail operators, and guarantee that any operator who fails will be saved, fundamentally proves that the concept of ‘too-big-to-fail’ is pervasive in the modern society. It is highly likely that the airline industry will prove the same concept, as too might many other sectors. The question is whether these events will be remembered once the crisis is over, or whether it will be ‘business as usual’? Any sort of liberal economic theory now has to be understood in context, and arguably should always have been (as demonstrated by the Financial Crisis) – when push comes to shove, the market cannot support society alone. It is the ‘lender-of-last-resort’ principle that makes capitalism as we know it possible. It is for this reason that there are now claims surfacing, more than before, that this time ‘small people should get the bailouts’. For the time being, that is being promised (in a number of senses, although not universally) but whether or not the principles underlying those claims survive after the crisis has passed is another thing altogether and, most likely, will have a familiar conclusion.

Keywrods – Covid-19, rail, trains, economics, politics, business, @finregmatters

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