Fractured railway tracks or broken policies?

The railway structure is by no means the most complicated of the regulated utilities

Whatever the lessons for the railways from the tragic accident at Hatfield, all other utility regulators and policy designers should be taking note.

Whatever the lessons for the railways from the tragic accident at Hatfield, all other utility regulators and policy designers should be taking note.

The fashion for breaking-up old nationalised industries has let the light of competition into some dusty and inefficient corners, to the benefit of the customer. There is however a price, in terms of complexity. In the old days, blame would have oscillated between BR and its paymasters, the Government. Today it yo-yos further from Government, along a chain of contracts. If the public finds this too hard to follow, if those concerned spend too much time passing the blame around, opinion will rebound against the system itself.

The break-up of vertically-integrated monopolies, the introduction of competition in supply, and of access to networks, has, for example, transformed the energy sector. But it is not so easy to find out where the buck stops when something goes wrong with your gas supply. If and when "common carriage" gets under way in the water sector, there will be complicated relationships there too. Ministers and regulators would do well to subject them to a rigorous test of public comprehension.

For the railway structure is by no means the most complicated of the regulated utilities. It came about in 1991, when the satraps of Whitehall debated rail privatisation. British Rail was the Cinderella of the public utilities, a byword for poor service, and seriously underinvested. (As for broken rails, the Transport Minister Lord Macdonald fairly pointed out last Thursday that the number was far higher in BR's later days than it is now.)

The Ministry of Transport wanted money for the railways, but the Treasury did not want to pump more taxpayers' cash into an inefficient nationalised industry. Everyone was anxious to get its future settled.

The Ministry of Transport originally favoured a monolithic model for privatisation, with all (or all of the best parts) of the industry sold off in one company. That cut no ice elsewhere, because the biggest mistake associated with privatisations so far was seen to have been the transfer of powerful, vertically-integrated monopolies to private ownership, unchallenged by competition.

The Prime Minister originally favoured a return as close as possible to the great railway companies, each operating on its own line. But the science of "benchmark competition" (which enables regulators put pressure on utility companies by comparing their performance, rather than rely on the market pressures that come from direct competition), was in its early days; so the Treasury did not like this solution either. And the Ministry of Transport did not want to responsibility for the track broken up.

So the Treasury drew on the experience with other utilities (where networks had been separated from retail supply) and devised the solution: one company would run the network, others would hold franchises to run trains along it, just as air traffic control and airlines are in different hands. This was duly outlined in the Government's 1992 Manifesto. In Downing Street at the time, I thought rail privatisation would attract a lot of attention in the election campaign, but I was quite wrong: with the honourable exception of Channel 4 News, the media largely overlooked it.

Far from the railways being torn apart to plump up the Treasury's coffers, the commonest post-privatisation criticism was that the companies had got the railways on the cheap - so anxious had the Government been to get credible bidders and leave investment headroom. Another early worry concerned the franchise system, where there is an obvious dilemma: if franchises are granted for long periods, the regulator has less hold on the company, but if for short periods, franchise-holders may be reluctant to invest in the expensive rolling-stock. (This problem is hardly unique to the railways, and is being vividly illustrated in the wrangle over the lottery: if Camelot loses, what happens to all its well-functioning kit?)

Last week's fatal crash has put the spotlight on the relationship between the train companies, Railtrack and the regulator. However, this Government had already decided not to make fundamental changes in the structure, while (of course) blaming its inheritance. As a sop to the pressures behind him for renationalisation, John Prescott has added another regulator, or rail authority. But, as Ken Livingstone has helpfully reminded him, he is forcing through something remarkably similar to the railway structure, if rather more complicated, for the London Underground. Meanwhile, the present Tory Shadow Cabinet seems equally (if somewhat less convincingly) to be trying to dissociate itself from the past while offering nothing very different for the future.

It may prove to be the metallurgical lessons that have the greatest impact, waking us up to the dangers of metal fatigue on heavily-used lines carrying high-speed trains. Railway use has soared in the past decade, and it doesn't take much of a hitch on the line to reduce even the flagship, GNER, to overcrowded chaos. (Ask anyone who attempted to travel north and south over the last Bank Holiday.) Railway timetables are vulnerable to landslips, failed engines, vandalism (a big worry), signal failures - let alone those famous leaves on the line. If speed limits and much heavier track maintenance programmes are now deemed necessary, some very big questions have to be asked about the capacity of the existing network, the need to expand it, and how the institutional structure can be made to respond.

What does that mean for our "integrated transport policy", which has so far consisted of trying to tax us out of our cars? The Government is getting itself better prepared for another fuel taxpayers' assault (e.g. by wheeling out trade union leaders to make sheepish disapproving noises.) All the same, as Professor Andrew Oswald of Warwick University has engagingly pointed out, "standing firm" on fuel taxes looks more attractive in Hampstead (or to an academic economist with four bicycles) than it does out in the sticks. Throughout Europe, fuel taxes are provoking popular revolt.

And the British have noticed that, since duty has risen 60 per cent faster than the RPI since 1987, they are being asked to pay easily the most.

The Chancellor could, Professor Oswald points out, redistribute the burden of petrol taxes across all energy use (which would include much more lightly-taxed aviation and home heating). Petrol taxes are not very "efficient" environmentally, because petrol consumption declines only about a fifth of a percentage point for each one per cent rise in price. Other estimates quoted by the Institute for Fiscal Studies also put this response to price below 0.5. Which is, of course, precisely why petrol taxes are so "efficient" in the Treasury's eyes. They are an easy way to raise revenue: over £22bn at the last count, and rising fast this year. Put 6p on road fuel duties, and you get as much as from an extra higher-profiler penny on the standard rate of income tax.

The Government would therefore have more hope of persuading us fuel taxes will pay for public transport than that they will save the planet. But this argument is least persuasive to those who pay most, and benefit least, living in remote areas. For them, Gordon Brown was said to be contemplating reductions in Vehicle Excise Duty. This would have led to sharp "cliff-edge" arguments about eligibility, which may be why he is said to be considering cuts for all. But it would have been some recognition that the big distances between villages in the countryside create real difficulties, and not merely when it comes to public transport. "Sparsity" is a factor the Government has studiously refused to acknowledge in the allocation of central government grant. But that's another story...

Sarah Hogg is chairman of Frontier Economics