TalkClimateChange

Last week I wrote of the need to invest tax revenues from motorists into the poor public transport infrastructure which exists in many countries today - an issue set to become a critical developmental factor as both population and our need for mobility grows. Following some brief discussion on the rights and wrongs of using public money to fund public transport I decided that a follow-on post was required to thoroughly present my position.

To begin with, let me say that I am whole heartedly in favour of privatisation of national industries, and I’ll make no apology for the experiences which have shaped this view.

Growing up in Great Britain as a child of Thatcherism (surprisingly that word is actually in my computer’s spell checker), I was afforded every opportunity and comfort during prosperous times. Benefiting from a university education that would have been out of reach for my parent’s generation, I subsequently worked for several years in the recently privatised and deregulated telecommunications industry, fully reaping the spoils of its rapid expansion. The proceeds from these booming years financed an MBA program, after which I went to work in the financial services sector being happily rewarded by the machine that is capitalism.

The rewards of capitalism have served me well. Many scholars may argue that it is not a perfect system, but as often remarked – it’s the best system we’ve got.

However, there is an increasingly irritating fly in the ointment.

The capitalist model relies on an assumption of indefinite growth, which is becoming increasingly at odds with another issue – the fact that our resources are finite, and that there is a limit to the amount of resulting pollution that can be absorbed.

But surely this is just a question of supply and demand, a concept at the core of capitalist economics, which free markets readily solve day-in, day-out?

Theoretically, yes: Scarce resource = increased prices = dampening of demand = competition to develop new solutions = better use of resources, or development of alternative resources.

However, few markets were created equal, and few come close to representing what economists call Perfect Competition. Markets frequently require government intervention to mitigate the effects of external factors which distort the playing field.

For example, the extraordinary chain of events which lead to Microsoft’s dominance of the software market has required frequent intervention in an attempt to create a more competitive market. Boeing and Airbus both receive healthy doses of subsidy (in the forum of defence contracts and reduced rates of borrowing) in order to maintain regional competition in a high cost industry. At the other end of the aviation industry, flag carrying airlines were for a long time subsidized to ensure nations had important business access to world markets – few people are aware that on aggregate the aviation industry has never made a profit in it’s entire history. There is a long list of necessary and beneficial government interventions which have improved the efficiency of many markets.

Back to Trains

Getting back on topic, I’m sure that in many scenarios privately funded and operated rail services can provide efficient, effective transport. However, in terms of providing a truly effective solution which can honestly compete with private cars there are a number of external factors and variables which may justify government intervention and funding to level the playing field and let the market do its work;

Uncertainty of demand – With so many potential acts of climate legislation still undecided, nobody can be quite sure how much demand might eventually exist for public transport. Road building programs, levels of private car taxation and other proposals such as further carbon taxes and even rationing may all play into this equation creating an uncertainly which many private investors will surely be wary of.

Timescale of investment – The huge investments required to upgrade and build effective rail networks make payback times longer rather than shorter, particularly in competitive markets where prices will be under pressure. Few private investors will be enthusiastic about uncertain and long term investments.

Inertia – Public transport infrastructure not only requires building, it also needs adoption – opinions, attitudes and practices change slowly and often require incentives. Today, many governments receive significant tax revenues from motorists. Governments have few reasons to incentivise motorists towards privately owned public transport if tax revenues are at risk – although they may consider transferring motorists from one revenue to stream to another government controlled revenue stream (although probably a loss stream) in the form of public transport fares.

Hidden benefits – Having an efficient national transport network provides a number of significant hidden benefits which don’t necessarily show up on the balance sheet of the owner. The billions of £ in lost productivity due the traffic congestion in the UK alone would justify the British government in making some substantial investments. Since private investors won’t see these benefits they are unlikely to see a true return on value for their investments, reducing investment value even further.

As a brief summary, since I realize this is a long winded post, there are some factors unique to public transport which transcend the regular benefits of the privatised capitalist model. We would all benefit in one way or another from good transport infrastructure and it is a worthy public project. Privatisation is theoretically the best way to run a railway, but only IF the right market circumstances prevail – which in the case of the UK they do not.

I’m sure you’ll have plenty to say about that?