Corbyn and the railways: the costs of having a life-size trainset

A major part of Corbyn’s campaign to become leader of the Labour Party was the promise to re-nationalise the operation of the UK railways. Indeed, that promise became Corbyn’s very first official policy, with part of the supposed rationale being that “the public have paid £10 billions in subsidies and the operators have posted aggregate profits of £1 billion” since the railways were privatised.

Although there have been a few articles in the mainstream media that purport to examine the feasibility of re-nationalisation in terms of the costs of doing so (see, for example, here and here), these articles have, at best, been cursory and only scratched the surface.

In particular, these articles fail to examine 1) the initial costs of regaining control of the railways from private operators; and 2) the annual costs of running the railways once they have been re-nationalised. These are discussed in turn below.

The first issue of the government regaining control of the railways could be solved costlessly (in terms of government money) if a Corbyn government were willing to wait until the franchises running the railways came to a natural end. However, this approach does not seem likely for two reasons. First, the current schedule of rail franchises indicates that all will run out prior to 2020 (the first year of an hypothetical Corbyn government), such that the current Conservative government likely would re-new the franchises at lengths of around 7-10 years (as suggested by the Brown Review) means that the earliest date at which a franchise will expire under an hypothetical Corbyn government would be 2022. Second, given that the policy of re-nationalisation was the first of Corbyn’s official policies, it seems that Corbyn would be unwilling to wait particularly long to enact this policy.

Hence, Corbyn’s re-nationalisation most likely would require buying out all franchise owners. Although there do not appear to be any publicly available figures regarding how much it would cost to buy out all rail franchises, we can construct a back-of-the-envelope estimate. Using the fact that Stagecoach and Virgin paid £3.3bn for one franchise (implying that the franchisees consider a franchise to be worth at least that much), and assuming that this value is directly related to the number of passenger kilometres (i.e. the value of a passenger kilometre is the same across all franchises, then using the information provided in the Office for Rail Regulation Report here (excluding London Overground),  the total value of all rail franchises in the UK is about £38bn. This amounts to a one-off cost of roughly 3% of GDP in the year in which the Corbyn government would re-gain control of the railways.

Although that doesn’t sound too bad, there is also the second item involved in running the railways – namely, the ongoing costs (or profits) from operating them. Indeed, currently the franchises together have a profit margin of about 3% – in other words the railway operators make roughly £250 million per year as profit.

While it might be tempting to conclude that re-nationalising the railways would therefore actually make it profitable on an annual basis to do so, this would imply that it would take almost 150 years for the initial £38bn cost to be recouped by the government. That probably does not make much business sense.

Moreover, that £250 million per year figure assumes that the current prices, price increases, and levels of investment apply in future. However, isn’t the entire rationale for Corbyn wanting to re-nationalise the railways so that prices are kept lower and investment higher than they would be if the railways were not re-nationalised? Although it is difficult to put an exact figure on how much it would cost per year to achieve Corbyn’s aims of lower prices and/or higher investment levels, it is plausible that they would pretty much wipe out any current profit. In other words, the initial outlay of £38bn is unlikely to ever be recouped.

Now, whether you think that this outlay of public funds that are unlikely to ever be recouped (and that could be used for other things such as new hospitals, new schools etc. if they were not used to re-nationalise the railways) is worth having possibly (but not guaranteed) lower prices and higher investment levels, then that’s your choice. But I know where I’d rather have £38bn spent, and it’s not on taking back control of the railways.

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Corbynomics and the expropriation of private assets

With Jeremy Corbyn’s victory in the Labour leadership elections, there likely will be a renewed focus on Corbyn’s economic policies.  Indeed, there has already been some interesting analysis of Corbyn’s proposal for “people’s QE” and the ramifications that would have for the (instrument) independence of the Bank of England (see Simon Wren-Lewis’ mainlymacro blog).

However, one area of Corbyn’s stated economic policy that has received less attention is his desire to (re-)nationalise the energy, rail, and banking industries. It is conceivable that there might be a re-hashing of the age-old debate regarding the relative advantages and disadvantages of privatisation vs nationalisation, with the same age-old conclusions.

Much more interesting, on the other hand, is the mechanism (and the implications of said mechanism) by which Corbyn proposes to carry out his re-nationalisation policies. Specifically, Corbyn has stated that he “reserves the right to” nationalise a firm “”with either no compensation or with any undervaluation deducted from any compensation for renationalisation.” (as reported by The Independent)

In other words, Corbyn has stated a potential desire to expropriate a privately-owned firm (or multiple firms) while providing a less-than-market return on the assets that a Corbyn government would acquire.This is likely to have a dramatic impact on private incentives to 1) acquire any of the assets that the current Conservative government would privatise over the next five years; 2) invest in the energy and rail industries that Corbyn has said he already wants to re-nationalise; and 3) invest in other industries in the UK.

First, Corbyn thus far seems to have restricted the target of this policy to firms that are privatised by the current Conservative government over the next five years.  Therefore, the heaviest impact is likely to fall on those assets that the current Conservative government was planning to sell off over the next five years. In particular, Corbyn’s expropriation policy is likely to reduce the amount of money any selling-off of assets by the current government is able to raise.

To see this, note that should a Corbyn Labour government win the 2020 election, any asset sold off by the current government between now and then would be taken back by the Corbyn Labour government. This means that any private entity thinking of purchasing any asset the current government sells off would need to factor in the possibility that they lose control of (and, hence, also lose any profits resulting from) that asset in 2020.  As such, a private entity would reduce the amount it was willing to pay for the asset being sold-off – the obvious result of this is that it reduces the amount of money the current government would be able to raise from selling-off any assets (with the associated implications concerning any reduction of the national debt).

It is possible that this makes selling-of the asset not to be worthwhile such that the current government decides to retain control of it after all (perhaps this is Corbyn’s plan all along?). If so, then it would mean that assets that might be put to more efficient use in the private sector instead continue to be run by the public sector (with the resulting potential impact on GDP).

Second, although Corbyn does seem to have restricted his expropriation policy to government assets that are sold off between now and 2020, there remains the possiblity that he extends that policy to his entire re-nationalisation aims.  In other words, Corbyn could conceivably expropriate the assets of energy and rail companies.  This introduces substantial uncertainty regarding the rate-of-return energy and rail companies can expect to obtain on any investments they might make between now and then. As increased uncertainty regarding the rate of return of an investment results in fewer investments being made (see here and here), the impact of Corbyn’s policy (even if Corbyn is not elected in 2020) is to reduce the current levels of investment made by firms in these industries. This comes at a time when both the energy and rail industries are in need of substantial investment in new infrastructure – anything that reduces the incentives of these firms to make these necessary investments cannot be a good thing.

Third (and this is somewhat speculative on my part), to the extent that Corbyn might wish to expand his nationalistion policy to other industries, the same impact would be felt in those industries.  However, the impact in these as-yet-unnamed industries may well be negligible, particularly in comparison to all the other areas of uncertainty that affect firms’ investment decisions (at least until any further nationalisation policies are stated).

It remains to be seen if Corbyn gets a chance to implement his policies, but, regardless those stated policies are already having an effect. Corbyn needs to clarify exactly what his plans regarding nationalisation are very soon lest those effects grow substantially.