May 22, 2004

Vertical fragmentation of the railways doesn't work

Patrick Crozier | Fragmentation

Regular readers of Transport Blog will be familiar with my belief that one of the major causes of the failure of British Rail Privatisation has been the vertical fragmentation of the network. However, I have never written a post specifically stating that view. Until now.

First, some definitions. Vertical fragmentation is where control of the infrastructure and control of the trains are in different hands. The opposite, vertical integration is where control rest in the same hands.

As I understand it, right at the beginning of the history of the railway when the world's first railway line, the Stockton to Darlington, opened in 1825, this very question came up. Initially, anyone was allowed to run a service. Very soon, however, the owners realised that this was impractical and decided that from then on only they would run trains. After that date and until the 1990s, to the best of my knowledge, all the world's railways were run as vertically-integrated enterprises.

In the early 1990s, the UK's nationalised railway was fragmented as (to a greater or lesser - usually lesser - extent) were all the other railways in the EU). This was following the enactment of EU directive 91/440.

Since then, in the UK, we have seen a decline in punctuality (overnight it has been said), and an explosion in costs.

It's not just the UK. Carlo Pfund, a Swiss transport expert, conducted a detailed survey of Europe's fragmented railways. While he could find few examples of success he could find many of failure. He also found that the more intensive the service the more severe the problems.

There is also plenty of anecdotal evidence. One example is what happened when, after fragmentation in the UK, EWS, a freight operator, was allowed to run its trains on the Settle to Carlisle line. The infrastructure couldn't handle it and the cost of repair ran into millions of pounds. Another is the story of the difficulties a Virgin manager had trying to reposition a single ticket machine.

Frequent Transport Blog commenter, Mark Ellott, had this to say about what happened when fragmentation happened to him:

What we lost, though, was the seamless co-operation. Overnight we became separate companies trying to avoid blame in the event of overruns. Now, these always happened, but the blame culture (compensation and penalty payments) wasn't there. As a signalman, I was actively involved in possessions and signalling maintenance tasks. Should anything go wrong, I was on hand to minimise any operational impact. Okay, so most of the time I didn't do a great deal - I was insurance. Insurance that today would be regarded as wasteful. However, a few minutes' delay avioded or reduced would compensate for that. Because the tasks involve outside contractors, this doesn't happen today and I believe is something we lost.


When the Central Railway were trying to get parliamentary approval for their freight railway scheme they were desperate to avoid vertical fragmentation.

There are exceptions to the rule. There is, for instance, the example of the London and Greenwich railway which for 80 years from the 1840s to when it was finally merged into the Southern Railway in 1923, did not run a single train. Instead it charged companies like the London, Dover and Chatham and the South Eastern Railway for the privilege of running over its rails. But this example seems to be unique in UK history.

That example is fairly minor. The big exception to the rule, however, is Metra, Chicago's commuter system. It is hugely fragmented, yet seems to work well.

Just for the record, I don't think through-running counts as fragmentation. Before 1922, in the UK, one company would give another running powers over its lines. But in that case the company owning the line would also be the majority operator of trains over it. There were also cases of joint ownership of lines but I think the same would apply.

So, that being the case, why doesn't vertical fragmentation work? Why does it work on the roads but not the railways? What is it about substituting steel for tarmac and rubber that makes such a difference? The truth is I don't know. But I don't seem to be alone in that. As Mark Ellot (in another comment) said:

What I do know, though, from personal experience, is that it [running the railway] works more smoothly if the people who run the trains also manage and maintain the tracks and signalling - sorry I can't be more scientific. Sometimes, I think, there isn't any science - it just "is".
 

Update 19/06/04

Andy Wood has had a go at answering the "why?" question. He thinks it boils down to bilateral monopolies.

Update 03/09/04

Even Gerald Corbett, former chief executive of Railtrack, seems to agree:

It [privatisation] was done the wrong way - the fragmentation, the tying it all together with adversarial contracts, the splitting it up into 100 pieces. It made it a managerial nightmare.
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Comments

My (admittedly weak) understanding is that Metra is more of a common marketing agreement between the various railroad operators in the Chicago area: rolling stock is owned and operated by the rail companies, while Metra takes care of the stations and customer service. So I don't think it's quite vertical fragmentation--more like if the old (pre-nationalization) railways in Britain had sourced out all their customer service functions to a common company.

Posted by Chris Lawrence on May 22, 2004

Who ran the commuter services in the pre-nationalisation days? I'm thinking of say the lines between Peterborough, Bedford, Bletchley and London. Did LMS or LNER run commuter trains in addition to the express trains? Or, given that these areas have four tracks with two for expresses and two for local trains (Welwyn viaduct aside), did one firm own one pair of tracks and another firm the other pair?

what I'm getting at is, is there a place for LNER *and* WAGN or GWR *and* Thames Trains?

Posted by Mark Holland on May 23, 2004

In pre-nationalisation days the same companies did run both express and commuter trains over the same tracks; there were relatively few joint lines shared by more than one company

The GW/GC joint line through High Wycombe was one example, the GW ran the locals and both companies ran expresses. But that sort of line was very much the exception.

More common was several companies sharing a major station; Carlisle was the classic example, shared by no less than seven different companies, which even beats the number of TOC sharing Manchester Piccadilly

Posted by Tim Hall on May 23, 2004

...why doesn't vertical fragmentation work?

The answer usually given in economics is transaction costs. It all goes back to a paper entitled On the Nature of the Firm (or something like that) by Ronald Coase.

So what you need to do is identify transaction costs that are large for railways but small for roads. That's what I was trying to do the last time we discussed this.

I did identify one possibility, and I have written a posting on it, but I'm not entirely happy with it yet. I'll see if I can return to it when I have the time.

Once again, I'll recommend that you read Law's Order and also Hidden Order by David Friedman, which both contain discussions about transaction costs. The discussion in Law's Order is more extensive, because transaction costs are fundamental to understanding why some laws work better than others.

Posted by Andy Wood on May 23, 2004

I think the answer is that trains rely on the infrastructure a lot and if the infrastructure fails is has the potential to cause a lot of problems and is very highly to be life threatening. With other industries it is different.

For instance BT in integrated but I’m sure if the network was split off from the rest of BT it would not cause a major downtime in telecoms. A faulty telephone does not threaten anyone life and BT routes the call to a mobile phone for free so as not to cause any inconvenience. A faulty rail can cause 100 mins of delay and people get annoyed quickly.

British Gas was integrated and decided to sell of its fixed line business to avoid the regulation that BT gets. It has no become vertical fragmented with British Gas owned by Centrica and a lot of other players in the market. A faulty gas main can be dangerous. But again if it becomes faulty it doesn’t cause so many problems else where on the network. A faulty rail delays a train which delays another train etc etc...

This is why trains need to be vertical integrated. I would come to a compromise with the government. Trains that are the sole providers on the rails should own infrastructure and train. Where there is more than one company either keep the track with Notwork Rail or set up a company owned by the two or more TOC’s

Enough Rants everyone knows what I think here so I won’t waster any more of your time. More comments will be appreciated

Posted by Amir on May 23, 2004

Prior to Nationalisation, ech company, ie LMS, LNER, GWR, SR, were responsible for the movement of all traffic over their system for which they had total responsibilty. Passenger and freight was moved expeditiously, with the former taking priority. It was like working within a family, the operators responded to the needs of the commercial department, and the civil engineer ensured the track was up to standard. On the operating side all decisions were made to minimise any delay or dislocation and to endeavour on time running. Tim is correct that there were seven railway companies using Carlisle Citadel Station, but there was very little sharing of tracks. From the north, the Caledonian and Glasgow and South Western shared the line from Gretna Junction, about 11 miles. At Carlisle No3 SB, about 1 mile north of Citadel Station, The North British joined the other trains from the north with their Silloth and Edinburgh Waverley services. In fact, the connection from Port Carlisle Junction, the junction for the Silloth and Waverley route was owned by the Caledonian Railway, a distance of 40 chains. Carlisle Citadel Stationwas owned by ajoint committee; The Caledonian and the London and North Western Joint. The actual boundaries were 18 chains to the north, and 34 chains to the south. The Maryport and Carlisle came in from the west, and the final journey into Citadel station was on the 34 chains of the joint line. The Midland, Settle and Carlisle Line, ceased at Petteril Jucntion, about 1 mile from Citadel station to the east, and used North Eastern lines to reach the station, the final 34 chains being over the joint committee lines. Trains from Newcastle used the North Eastern Railway. The London and North Western came from the south, Euston and Crewe, to an end on junction with the joint committee lines. The only through trains using the station wre LNWR/CR, and MR/GSWR. The latter had three each way during the day, with two at night. The LNWR/CR line was busier, about 8 each way during the day, but at night this culd be inreased to 12 each way, particularly at hoiday periods. During Glasgow Fair Friday night, about 35 trains would arrive from the north. Postal and parcel trains used Citadel Station, the goods traffic used designated goods lines which bypassed the station. All staff worked harmoniously together, and in the 1960's, the occasions when mistakes were made were minimal, the experience and knowledge of the staff ensured that correct decisions were made.

Posted by Brian Hayes on May 29, 2004

Then came Beeching. Make the railways pay. Her certianly did and thats why we have nothing left nowe and a half national half private with government sticking its big fat nose in and making it completely unworkable. No private company would run a railway like this. This is the government for you. They issue a railway franchise and then put it to the competition commision about a sole provider if rail services. Funny that if you want to go from Hastings to Eastbourne you can use Southern's services or who else exactly? The government knows hows to keep paying its cronies.

Posted by Amir on May 29, 2004

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