On Privatization

My post identifying the FRA as American passenger rail’s biggest nemesis drew a lot of links due to the relevance to Rep. Mica’s proposal to privatize the Northeast Corridor. So it is time to step back and ask in general which problems privatization could solve, and which problems are facing American rail travel apart from the FRA. The operating assumption here is that capitalism is not a magical thing that always works, but rather a system that solves some problems created by competing economic systems while creating others.

First, privatization can be done in two separate ways. In Japan, or in the US before 1971, railroads comprise both infrastructure and operations. They run their own trains on their own tracks, and negotiate bilateral trackage rights agreements when they need to access other companies’ tracks. They compete for passengers, but cooperate when necessary; for example, many Shinkansen trains run through the territory of both JR Central and JR West, but the change of drivers only takes a minute.

The other way to privatize, favored in Europe and by Mica, is to split track ownership and operations, on the model of airports (not owned by airlines) and highways (not owned by truckers). Tracks remain public, operations are contracted out to the highest bidder. Regional services in Europe require subsidies, so the highest bidder in this context is the one asking for the smallest subsidy. Depending on which country it is and whether the service is regional or intercity, the public entity controlling the track may fix the schedules and fares in order to guarantee seamless compatibility between different operators.

Both ways have subcategories – for example, in the first method, the government could provide zero subsidies (Hong Kong), minor subsidies for capital construction (Shinkansen construction in Japan, the electrification of the Northeast Corridor south of New York in the 1930s), or ongoing subsidies for operations (Metra, some US commuter lines until the 1970s or 80s). In the second method, the operators can be all private as in Britain, or they could be a mixture of private and state-owned as in France and Germany.

The competition in Japan and the US works, when the railroads have power. There is not much cooperation apart from bilateral agreements and trackage rights. Thus, while Tokyo’s Suica and PASMO are top-notch smartcard implementations, they are poor examples of fare integration; people can swipe the same card on any company’s lines, but transferring from one company to the other requires paying for a separate ticket. For travel between two different metropolitan areas’ companies, smartcards are compatible only based on bilateral agreements, even though all smartcards in Japan use the same FeliCa technology.

When the railroads are not in power, disaster can happen. This is not easily seen in Japan, where the largest cities have not undergone urban renewal or transit decline, but in the US, agency turf means competing for a shrinking customer base and making the customer experience worse.

Therefore, straight Japanese-style privatization requires modifications to ensure timetable and fare integration, and compatible rolling stock. Here, ironically, FRA regulations provided something positive, paving the way to make the Bombardier Bilevel Car a standard commuter rail coach, which different North American cities can lease from one another when necessary; this indicates that what is necessary is better regulations modeled after those of the UIC or Japan rather than a free-for-all.

The other issue with privatization is that one of its primary features, the pruning of marginal branch lines, can become a bug. Focusing on core products has led railroads to neglect markets perceived as marginal rather than try to improve them. Both France and Germany have neglected regional travel in order to look more profitable; although SNCF and DB are state-owned, they act like private companies. In Berlin the resulting deferred maintenance led to a total meltdown, in which three-quarters of the S-Bahn stock had to be recalled on a day’s notice; while German trains are for the most part all compatible, the Berlin S-Bahn is an exception because it was electrified earlier and uses a different voltage from the rest of Germany.

Even in Japan, this is visible once one notes that for JR East and West, the core products are both the Shinkansen and the Tokyo and Osaka commuter networks. All the rest on those networks is lumped together under “Other lines,” so that JR East’s reports do not distinguish the Sendai and Niigata commuter lines from legacy intercity lines. It’s perhaps telling that the fastest non-Shinkansen train in Japan is in Hokkaido, where tilting DMUs on curvy single track with a top speed of 130 km/h average 100 km/h between Sapporo and Hakodate.

Note that the regulations here are mostly irrelevant, except where they involve cooperation between different private companies. Bad regulations can exist both under a private system (e.g. the US before 1971) and under a public one (e.g. the US today); the same is true of good regulations.

We should now step back and look at what enabled the success of the breakup of Japan National Railways, and the subsequent sale of its three constituents serving Honshu to private investors. Restructuring slashed the labor force, improved the quality of management, shut down lightly used lines, and erased the debt that JNR has accumulated to cover operating losses (for it was not subsidized, unlike Western money-losing railroads). It was done slowly, and the government helped find jobs for the displaced workers, which was easy since at the time Japan’s economy was booming. Subsequently, safety and punctuality increased.

The problems privatization solved, then, include operational inefficiency, political meddling forcing the operation of marginal lines, and labor problems. JNR not only was overstaffed, but also was represented by four separate unions, split along political rather than professional lines, ranging from centrist to communist. In the years before privatization, this was mitigated by reforms to both management and labor.

The experience of the positives of JNR privatization further shows that instead of shock therapy or PPPs, a slow reforming approach is required. The best practice is to do this slowly, like in Japan, and postpone the final decision until substantial changes have been made. A government that is too incompetent to run things by itself is also too incompetent to ensure privatization works for the public rather than just for cronies; at least some increase in the quality of government is required if privatization has any hope of success.

This entry was posted in Consensus, Good/Interesting Studies, Labor, Politics and Society, Studies. Bookmark the permalink.

14 Responses to On Privatization

  1. ant6n says:

    Actually I’d say that the Berlin example is one of privatization leading to a monopoly, and the company basically trying to make as much money as possible, at the expense of service, knowing that they cannot be replaced. This is because they use third rail electrification at DC 750V, whereas every other regional/commuter/S-Bahn system uses 25KV AC overhead (except Hamburg, which use a mixture). Retrofitting would be really expensive, especially since Berlin’s North-South Tunnel has a too small loading gauge. So the private S-Bahn Berlin gmbh, a 100% subsidiary of DB Regio, being forced to pay 100~150 M Euro dividends, and owning more than 1000 unique emu cars did what they had to – make money from their monopoly. This should really be a lesson on what not to do.

    But the dynamic of subsidizing regional rail and having the private companies pay for long distance rail (not just HSR, but all long distance rail) means that not very profitable lines are cut back – and then have to be subsequently replaced by slower and shorter but subsidized regional lines. You may call that stream-lining the market, I’d call it an unintended consequence of subsidizing regional rail, which skews the market against long distance rail lines with lower margins than the subsidies – and is another one of the dangers of privatization:

    “Simultaneously, the German railway has reduced in the last 10 years the number of long-distance train stops outside of the core network by 48%. 13 regional centers (eg, Krefeld, Heilbronn, Bremerhaven, Salzgitter, Gera) have their long-distance connection lost completely. Even large cities that fit well into the network, have suffered massive supply reduction, such as Magdeburg -62%, Regensburg-55% , Darmstadt -36%, Bonn (including Siegburg) -35% and Dresden -33%. Whole regions such as Eifel, Moselle, Black Forest, Bodensee-Alps, northern Bavaria, Brandenburg and Mecklenburg-Western Pomerania are now free of long distance trains or only see a few “token” trains.”

    In Germany, DB still runs basically all long distance train service, and the new private companies mostly enter the market operating regional lines/networks on contracts (and one S-Bahn system since this year). So in Germany, private companies are only slowly entering the long distance market, even 15 years after the liberalization reform started.

    • Alon Levy says:

      It’s interesting how Germany replaces profitable intercity trains with subsidized regional trains…

      Is there a realistic way to create competition on the Berlin S-Bahn? It may be incompatible with the rest of the system, but it’s large enough that it could have multiple companies competing for train slots as scheduled by VBB. On the other hand, that might only create further problems if the private companies are allowed to set their own maintenance regimes (and if they’re not, it’s not too different from today) – because disasters are so rare, the incentive is to not be as preventive. One of the issues I read about surrounding Amagasaki is that there’s intense competition in the Kansai commuter market, and that led to skimping on safety in order to guarantee punctuality; both Amagasaki and the other major crash since privatization, Shigaraki, were in Kansai (and Shigaraki came about due to shitty coordination between JR West and another railroad, creating an opening for SPAD).

      • ant6n says:

        Well, the intercity brand that’s all but disappeared (“InterRegio”) and the regional lines that get put in its place (“RegionalExpress”) are becoming very similar, with some lines up to 500km ~600KM, and the fastest average speed at 100Km/h (list of long regional lines). Although I also hear also of cutbacks/consolidation of the ICE brand. I’ve also heard of some states ordering intercity trains.

        The Berlin mess is difficult to deal with. Apparently the city/VBB is allowed to open the north-south lines for bidding after 2015/2017, but decided not to for now – with some vague arguments about protecting jobs coming from the social-democratic/socialist coalition. There’s an election coming up later this year (with the greens actually having a shot at the mayoralty (!)), S-Bahn operation will definitely be a big issue.

        I’ve heard proposals for the city to buy back the S-Bahn Berlin Gmbh and run it as a public company again (which worked for over 80 years) – although the question is whether DB Regio will sell it. Another proposal is for the city buy all the rolling stock/buy new rolling stock and lease it to whoever is going to operate after 2017 – this may make the most sense, because no company is interested in procuring so much rolling stock that cannot be used elsewhere if they are not reasonably sure to operate the lines for decades.

        Adding to that problem is the policy of the DB to not to sell unused/old rolling stock, because it might be used by the competition (…). Note that the rolling stock was purchased mostly before/around the privatization, some of it was actually built by the GDR before the fall of the wall. Almost all of the trains are only 15-20 years old.

        Regarding the rough Japan competition: How long are the contracts? Possibly a long contract length (~8 years+) could make competition less severe, in that operators could be reasonably sure to keep a contract. I guess a good balance in punctuality requirements in the operating contract is another lesson to learn (I hear contracts in Switzerland are pretty good at ensuring punctuality, with good malus-rules).

        • Alon Levy says:

          In Japan, they don’t have contracts – the companies just own the tracks. It’s like freight rail in the US today, or passenger rail until 1971. The punctuality emphasis comes from market demand for it: trains are reliable enough that the riders expect them to be always reliable. A 5-minute delay or a missed cross-platform connection is immediately noticeable whereas a major accident happens less than once per decade. So far JR East and JR Central have managed to avoid such problems – JR Central has never had a fatal accident, and JR East has had one with 5 fatalities, which is extremely low for its passenger volume. However, because a big rail crash is a low-probability, high-impact event, it’s hard to evaluate who is likely to crash in the future, and for all I know a Tohoku Main Line train could derail and kill 150 people tomorrow.

      • ant6n says:

        I find it hard to understand how there can be competition if the passenger rail companies own the tracks. There must be a lot of redundancies in the network for something that to work. Otherwise, how can a passenger choose a different company?

        Having a lot of redundant tracks probably won’t work well in 21st century America, at least for passenger rail, so I don’t know whether this is the best model.

        • Alon Levy says:

          In the case of Shigaraki, they had trackage rights and at the boundary between their turfs the signals were incompatible. (Despite that bout of incompetence, Japanese trains’ safety record is very good. I want to say unparalleled but it doesn’t beat China and France by much if at all.)

          In Japan the competition comes from the fact that sometimes you get to choose between multiple companies’ lines. Those lines aren’t really redundant, but that’s because they’re all packed beyond capacity. The closest American equivalent I can think of is the situation in New Jersey before 1960, when you had the PRR’s Northeast Corridor, the CNJ’s Raritan Valley Line, the Lackawanna’s Morris and Essex Lines, and the Erie lines, and in many cases you had the choice of two different railroads. It’s just done better in Japan, where using trackage rights and a change of drivers those lines usually enter the CBD and run through to the other side.

      • Miles Bader says:

        Because the density of rail in Tokyo is so high, it tends to form a rough mesh, so that although you don’t get complete redundancy between lines in most cases, there are often redundant routes between any two locations.

        For instance, to get from Musashi-Kosugi to Shinjuku, I could take the (JR) Shinjuku Shounan line directly, or I could take the Tokyu Toyoko line to Shibuya, and then transfer to the Yamanote line or the Fukutoshin line (subway). Or I could instead take the Meguro line to Meguro and transfer to the Yamanote line… (etc).

        There are various tradeoffs between routes (the Shinjuku Shounan line only runs every 15 minutes — and in fact is stopped right now because of the electricity problems! — and the others run more frequently but require a transfer; some may be more crowded than others at certain times; etc), but they are all quite viable. Since they are owned by a number of different companies, the result is that there actually is fairly robust competition.

        [When JR added the new station at Musashi-Kosugi, so the Shinjuku Shounan line and other lines could stop there, there was a very noticeable reaction from the Tokyu company (who owns many of the other lines serving Musashi-Kosugi): they started promoting increases in frequency and other conveniences, are now extending the platforms to allow longer trains, etc.]

    • MobilMan says:

      The privatization problems in Germany have a special dimension since someone decided to turn DB into the biggest logistics company in the world – managerial megalomania. All the acquisitions of the past ~15 years in over 130 countries are surprisingly not profitable enough to pay back their capital cost. One would expect the money to flow inwards. Instead, DB Regio makes the biggest profit by way of subsidy and DB goes on a shopping spree. Parliament has never officially sanctioned this ‘strategy’. All the politicians sent to the board are expected to simply nod their heads when decisions like that come up. So it’s very important that clear boundaries are drawn before privatization is attempted.

      Then there is the infrastructure dimension of privatization which is simply non-extant. Almost all the costs of new construction are born by the taxpayer. DB Projektbau GmbH makes a special killing by charging outrageous amounts (more than 10% of total cost) for planning&managing the projects. Therefore DB is very tempted to endorse and build extremely costly lines that will never ever make economic sense (Nuremberg-Erfurt-Leipzig, Stuttgart-Ulm, …) because they have the infrastructure monopoly and can use that extra cash to buy some other toy for their collection.

  2. BruceMcF says:

    Since Amtrak is not planning to start doing anything about Express HS in the Northeast for the next decade or two, that would be an area that could be privatized in a clean-sheet way, since there is no preceding practice to reform.

    • Alon Levy says:

      The problem is that critical parts of any reasonable ROW are owned by commuter agencies, and others are owned by Amtrak but shared with commuter trains. You’re right that it’s relatively easy to privatize than anything else, but questions arise if the private consortium wants to use Philadelphia’s Airport Line (owned by SEPTA), or the straighter portion of the Shore Line (owned by Metro-North), or the Providence Line (owned by the MBTA). Some federal power is required to prevent the commuter railroads from bleeding the investors dry. The alternative is gratuitous tunnels and takings.

      • BruceMcF says:

        Yes, that’s the same trouble that the CHSRA has, but wouldn’t Amtrak have similar trouble with the Express HSR? That is, once you leave the NEC track and its intrinsic constraints behind and break out to a new built-for-Express HSR alignment, you got to hammer out how you are going to get the use of an appropriate alignment.

        I don’t see a private consortium bidding for that until after the California (or some other) Express HSR corridor has forced the promulgation of an Express HSR regulatory framework, because until that is in place the project risk is just too great. But getting going sometime in the decade ahead would stand as a substantial jump start relative to the 2030+ timeline of the Amtrak ST-NG (SuperTrain-NextGeneration).

      • Nathanael says:

        This issue of buildling redundant ROW to serve downtowns is the same reason why the *third* railroad to serve any British city, back in the 19th century, invariably spent a fortune on ROW and civils; the same reason why Chicago railroad service was never fully untangled until Amtrak.

  3. Pingback: Mica Introduces NEC Privatization Bill | Pedestrian Observations

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