Rail Industry
...out rail rights to TOC’s. It is also important to note that the ORR – Office of the Rail Regulator – is independent of the government. Attracting private sector investment into the rail industry is one of the principal roles of the SRA as it is estimated that 60 billion pounds will be required over the next 10 years for the rail network to meet the targets set out in the governments 10 year transport plan. Also, the SRA has overall responsibility for “consumer protection” issues, such as fares, overcrowding and customer complaints. The Economic Case for Regulation Government intervention and regulation in the rail industry has many economic advantages, both for the customer and for the well being of the rail industry in general. Firstly, the government guidelines set out in the various pieces of legislation (e.g Railways Act 1993) which impinge upon the rail industry are there to ensure that the parties involved with the rail industry conduct their business in a consumer – friendly manner and the legislation also ensures that the users of the rail service are not being ripped of – both in terms of price and quality of service – by the service providers. This highlights one of the principal results that de-regulisation could have – that Railtrack and the TOC’s will focus solely on profit maximisation for themselves with less concern for the consumer. Various measures that Railtrack and TOC could take to do this would be to downsize, causing redundancies and other cost – cutting exercises which would affect the quality of service provided. Also, if the government was to withdraw its regulatory powers and withdraw the post of the ORR, then it would be very easy for Railtrack to abuse its monopolistic position as the responsible party for the British Rail Network Infrastructure. By this is meant that when tendering out rights to TOC’s, Railtrack would be able just to take whichever contract offer it wanted without any government regulation. This would usually mean that Railtrack would give the contract to the highest bidder; however it may not always be the case that the highest bidder is actually the most suitable bidder and therefore in this case a lack of government intervention would result in higher Railtrack profits at the expense of service quality. Also, because at the current moment the ORR regulates the business activities of Railtrack this means that the quantity of service it provides and the price at which it provides these services are maintained at the SOCIALLY EFFICIENT level. However, if this regulation was withdrawn, Railtrack may not have any economic incentives to maintain the socially efficient levels because it is a monopoly and therefore is a price-maker. Also as any person wishing to travel by rail in the UK has to travel by Railtrack owned tracks, Railtrack’s demand curve IS the overall market demand curve. This means that the levels of price and quantity that maximise Railtrack’s profits result in a “DEADWEIGHT” loss to the economy and higher prices for a lower quantity of services provided. A graph showing these differences between a competitive market and a unregulated monopolistic market – which Railtrack would be in as a result of the removal of government regulation – is shown below. The black shaded triangle represents the Deadweight loss to the economy of a monopoly. Also one of the situations that current Government regulation prevents from arising is that of Anti-Competitive agreements or cartels forming, either between Railtrack and TOC’s or between TOC’s themselves. Without government regulation or intervention, it becomes much easier for such agreements to be formed. For example, Railtrack and a particular TOC could enter into a contract, the terms of which were specifically designed to harm the profitability of a rival TOC – i.e. by Railtrack giving the rail rights cheaper to one TOC than another. In addition, if many TOC’s are happily entered in anti-competitive agreements with Railtrack then this collusion will make it very difficult for any other companies to successfully bid with Railtrack for the rights to operate and maintain the British Rail Infrastructure. Finally, government regulation of the British Rail Network– through the HSE (Health and Safety Executive) ensures that safety and maintenance of the British Rail Network is carried out to a suitable standard. However if these standards were removed, there is a higher chance of Railtrack neglecting – or at least reducing the quality of – track safety and signal maintenance standards. This would in turn lead to more major accidents as a result of safety standards, and the resulting bad press would further discourage investment in the Rail Industry – investment which is necessary to fund a rail network if that rail network is to meet the standards set out in ...