The Recent Railway Fare Increases - Essay Example

Running Head: THE RECENT RAILWAY FARE INCREASES The Recent Railway Fare Increases Prove That It Is Time for Major Restructuring of the British Railway Industry [Writer’s Name] [Name of Institution] The Recent Railway Fare Increases Prove That It Is Time for Major Restructuring of the British Railway Industry The public business industry is a cause of constant argument and preoccupation for government officials, as well as for society as a whole. European railway companies have been part of this argument for some time. This is a consequence of the amount of public expenditure demanded by this industry both because of their importance in politically desirable and strategic areas and because of its impact on other industries. In fact, railway companies take a big share of the Gross National Product, total employment and direct investment. There is a long tradition in the measurement of production characteristics, and restructuring, in railways. From Klein’s (2003) seminal study on US railways to the recent studies using frontier analysis techniques (Coelli and Perelman, 2003), the majority of this research is devoted to detailing partial productivity analysis (British Railways Board and University of Leeds, 1979; Nash, 2005), and total factor productivity (TFP) comparisons based on the estimation of multi-output cost functions (Caves et al., 1981). “Regulated fares, which cover season tickets and saver tickets, are going up by an average of 3.9%. Unregulated fares, including cheap day returns, are rising by an average of 4.5% - but by 8.8% on one line. The rail companies say they need the extra money for investment but passenger groups and unions say some of the higher fares are "eye-watering".” (BBC, http://news.bbc.co.uk/1/hi/uk/4574246.stm) The term privatization is usually taken to mean an outright sale in the UK. The method used to transfer railway to the private sector may be different depending upon the state concerned. The five options available in the possible privatisation of railway. Not all of these options exclude government control or involvement at the business level: (1) Government ownership with either direct control over management or through an autonomous entity. (2) Management contracts. (3) Leases, including build, operate and transfer. (4) Private sector minority participation. (5) Private sector ownership and control, including majority or full ownership in equity and outright sale. The initiative to change the environment within that railway firms dwell is part of the overall framework set by the European Union on transportation. Thus, directive 91/440/CEE enables a certain freedom of access for third parties to the infrastructure of some services like groups of railway companies interested in providing international services involving third countries, or supplying multi-modal services regarding international freights. It is to be highlighted, though, that a further extension of these rights is still under study. Also, the above directive defines as an objective the split of the operation of the transportation business from the operation of the railway infrastructure – at least at the accounting level. In this regard, some railway companies have accomplished restructuring processes with the aim of entrusting the planning and/or operation of the infrastructure to other “entities” different from the ones realizing the operation of the transportation services. (German railways are currently in this process, with the birth of DBAG after Germany’s reunification; in Spain, RENFE changed in 1990 to a more decentralized organization consisting of some strategic business units; in The Netherlands, since 2005, two groups have been born, one accounting for the infrastructure, and the other aiming for the commercial business.) Nevertheless, just a few countries have transferred these activities to totally independent enterprises. Sweden was the first in taking the initiative – in 1988 a new public organization was created completely different from the Swedish railways, whose decisions on investments and price are set based on criteria of cost and social advantages. The UK was second in following this model: in April 2005, Rail track was created as a government firm, independent from British Railways. The British example, though, is completely the opposite of the Swedish, since Rail track is a service company, receiving no government subsidies, and privately owned (the public sell-out of all the shares of Rail track took place in May 2003). Simultaneously, the services offering were privatized by simply selling out the freight and mail transportation, and licensing the passenger transportation. It is to these service activities that all government subsidies are addressed. Equally, the impact of technological evolution is felt in this last decade with the introduction of high-speed trains. This means the arrival in the transportation market of a “product” whose features transform the traditional railway into a strong competitor of the other transportation means. This newcomer also requires a significant investment in infrastructure – countries like France, Germany or Spain are good examples of the effect of this technological evolution. From the methodological point on view, one use Farrell’s (1999) frontier functions because these do not present the problems of other methods associated with measuring efficiency. The starting point to measure technical efficiency in Farrell (1999) is the observed output and input data in an enterprise set; the isoquant estimation is then the frontier, or envelope, of the observed data. Technical efficiency of an enterprise is thus given by the proportion by that the given firm should reduce input utilization to be on the isoquant. One found two main reasons to choose the frontier method to analyze European railway efficiency: (1) For Färe et al. (2005) theoretical analysis of production is based on optimizing procedures that lead to the frontier concept (maximum level of production, minimum cost or maximum profit). However, empirical analysis of production is aimed to obtain average functions of cost and production (for instance, cost and production functions estimated by econometric procedures). The origin of this divergence is the fact that the implementation of maximization and minimization is easy in the theoretical area because analysts work with continuous and derivable functions, but in empirical work analysts can only use a limited number of data and they are forced to operate in a discrete domain. But frontier methods allow us to reconcile theory and empirical analysis acknowledging that it is possible to observe firms on one side of the frontier (those that produce less quantity than indicated by the production function, those that bear more cost than reflected by the cost function, or those that gain less profit than represented by the profit function), but due to the definition of frontier itself, no firm can be observed on the other side of the frontier (that would mean an enterprise would be able to produce more quantity, bear less costs or gain more profits than indicated by the corresponding function). The inefficiency would, then, imply any deviation in the only possible direction given the production or cost function. (2) There is no need to use prices, thus arbitrariness is avoided, and different causes of inefficiency are not combined into a single measurement, problems that as Farrell (1999) states are present in the efficiency ratios and cost comparisons. In empirical work deterministic, non-parametric frontiers will be used because there is no need to establish a priori explicit function for the frontier and, accordingly, our conclusions are not affected by previous hypothesis (Grifell et al., 1992). In spite of this advantage, one acknowledges the limits of this method; for instance, the impossibility of understanding whether the movement of the frontier is due simply to random factors (Grifell et al., 1992), or the sensitivity of the obtained measurement to the sample used, or the need of input homogeneity for all the units analyzed (Farrell, 1999). One studies only technical efficiency in order to avoid the problem of the input monetary valuation. Among the components of technical efficiency one only analyze purely technical efficiency and scale efficiency because one assume strong availability of inputs, thus the possibility of congestion is not considered. Besides, one use Pareto efficiency concept to classify units, and an input orientation. The analysis calculates the efficient frontier and the values of purely technical and scale efficiencies for each company, in each of the sample years. The aim is to find out if, throughout the studied period, variations of those values could be observed due to facts that occurred in the railway industry. There is no unanimity on how to measure output and input variables, whether this should be done in physical or monetary units. In this paper, output and input are both measured in physical units: first, to avoid problems with monetary value across different periods; second, because in the railway industry it is easy to find variables that describe quite precisely the firm’s production capacity and the obtained output without using monetary units; last, according to Hausman and Neufeld (1991), when calculating technical efficiency physical input levels are minimized, while when calculating overall efficiency the cost of inputs is minimized (Berg et al., (2004) also prefer the measurement in physical units). For the election of outputs and inputs, one acknowledges that a railway company produces two different products, i.e. passenger transportation, and freight transportation. This might state the possibility of analyzing the efficiency independently for each activity; nevertheless, this is not possible since there are production factors shared by both activities – e.g. tracks and employees. In sum, as output variables for railway firms one have considered the number of passengers and the tons moved each year as indicators of the total volume moved; and the passengers/km, and the tons/km as measures of the distance traveled. Regarding production factors, one have considered the number of employees as the labor input variable, and the installed kilometers of tracks, the number of passenger cars and the number of goods cars as the capital input variable. Bibliography BBC, Rail fare rises come under fire, retrieved on 20 March from http://news.bbc.co.uk/1/hi/uk/4574246.stm Berg, S.A, Førsund, F.R, Jansen, E.S (2004), "Bank output measurement and the construction of best practice frontiers", Working Paper 2004/6, Norges Bank, . British Railways Board and University of Leeds (1979), "A comparative study of European rail performance", BRB, London, . Caves, D.W, Christensen, L.R., Swanson, J.A (1981), "Productivity growth, scale economies and capacity utilization in US railroads, 1955-74", The American Economic Review, Vol. 71 pp.994-1002.. Coelli, T, Perelman, S (2003), "Efficiency measurement, multiple-output technologies and distance functions: with application to European Railways", Working Papers, Liege University, . Färe, R., Grosskopf, S, Lovell, C.A.K (2005), Production Frontier, Cambridge University Press., . Farrell, M.J (1999), "The measurement of productive efficiency", Journal of the Royal Statistical Society, Vol. 120 No.III., . Førsund, F.R, Lovell, C.A.K., Schmidt, P (1980), "A survey of frontier production functions and of their relationship to efficiency measurement", Journal of Econometrics, , Vol. 13. Hausman, W.J, Neufeld, J.L (1991), "Property rights versus public spirit: ownership and efficiency of US electric utilities prior to rate-of-return regulation", The Review of Economics and Statistics, Vol. LXXIII No.3,, . Klein, L.R. (2003), a Textbook of Econometrics, Row Peterson, New York, NY. Nash, C (2005), "European railways comparisons – what can we learn?", in Bulton, K.J, Pitfield, D.E (Eds),International Railway Economics, Gower House, London,, pp.237-70.. UIC (1995-2005), International Railway Statistics. UIC (2005), International Railway Statistics. Read More