art with code

2017-08-26

Finnish rail privatization

TL;DR: Rent out train cars to commercial operators and give customers choice on which company's car they want to sit, but keep the core rail network and rolling stock as a state-run company funded by taxes.

The Finnish govt has decided to privatize the state railroad company. This is ... well, railroads are really terrible infrastructure to privatize. They need massive investment, make quite little money directly out of the investment and require central planning and co-operation to keep the network used at max capacity.

Building new rail is expensive, even in Finland where there are no people. No privatized railroad company has ever built any new rail. It's just not doable for a private company. Privatized companies are forced to operate on the existing network and wait for the government to foot the bill for new rail links. Sure, the companies might want to have new rail links or even just improve existing ones, but they don't have the money to do that. And they never will, because rail doesn't attract investors because rail doesn't generate enough profit. "Hey investor Bob, will you give us 5 billion euros to build a new rail link between these two towns? We reckon it'll pay itself off in increased tax payments to the govt in 20 years and it'll pay itself off  to us, the rail company, in 180 years or so. While it might not affect our share price much, you'll recoup your investment in dividends in maybe as little as 700 years."

Running rail as a profit-focused company is directly in conflict with running rail as a service. A profit-focused approach to rail is: never replace running stock, automated ticket gates on train cars (unless the govt subsidizes ticket control on stations), no conductors, no station maintenance, vending machines in all cars, trains wait on stations until they have enough passengers, run trains as slowly as possible to minimize power costs, oversell seats as much as possible, no customer service, no train drivers, no rail network maintenance, only run segments of the track that generate profit, stop trains at company-owned service stations with an over-priced shopping mall and no other transport connections for an hour at a time, charge extra for "fast" trains, focus service on segments with no other public transport & charge through the nose, buy the stations and charge extra from last-mile connection providers & parking, make stations very difficult to navigate and fill them with shops, sell concession store space on trains, block mobile network on cars, sell expensive wifi, use sturdy cheap-to-wash and cheap-to-replace interior in cars (read: unpainted metal seats, standing-only trains, video ad displays mounted behind plexiglass). Train cars made out of repurposed shipping containers with no windows (they take money to wash). Wash cars using ceiling-mounted sprinklers. No heating or AC because costly. Record everything customers do in the train and sell the tapes to advertisers.

Private rail operators, I'm available for consulting at $3000 per day. A steal at that price!

Nowhere in the "rail as profit" manifesto does it say: affordable, fast trains for comfortable travel. Transport networks are run to maximize long-term tax income through indirect boosts to the economy. Rail as profit is run to maximize short-term income to owners of the rail companies (in the transport infra long-term, the owners will be dead).

The new private rail operators can't run more trains on the network, the current network is already saturated. And because they lack coordination with each other, they can't run the network at as high capacity as a single operator. The end result is fewer trains per day. Which means higher ticket prices and maximizing on-journey profit (read: selling stuff on train) to recoup the losses from fewer trains. Add to that the other cost-cutting and you get the classic death spiral (less revenue -> cut costs, increase prices -> fire employees, do less maintenance, provide less service, run trains slower, shut down unprofitable parts of the network -> less revenue due to worse value proposition -> cut costs, increase prices ... repeat until you reach a steady-state or go bust.)

How should you run a rail privatization then?

Keep the rail network and the rolling stock as state-run services. You can think of a rail network as a network of neighborhoods enabled by the network. Would you sell all those neighborhoods to a private company who could then wreck 'em and probably screw your tax revenues alongside causing suffering to your people living in them? Nope. So you keep the network and rolling stock as something you run.

For the country, the best rail network is one that has good coverage and that links together the maximum number of people for a given travel time and that transports the maximum amount of goods around the country. These are competing needs, so on good rail networks you end up with multiple levels of rail service: fast intercity trains that link cities into larger economic units, commuter trains that tie the surroundings of a city together, and cargo trains that run long slow trains between industrial centers, cities and ports.

For the country and  the people, time spent in trains and waiting for trains (or cars for that matter) is time wasted. For that reason, the best commuter rail service is the one that runs fast trains frequently. Fast trains need a fast rail network. Frequent trains need a high-tech rail network. Frequent fast trains need a fast high-tech rail network. Which is kinda expensive.

At a governmental level, trains are profitable, much like road networks. They may be a big cost on a year-by-year spreadsheet, but the profit is captured in taxation of the increased economic activity. As such, rail and road networks are pretty much guaranteed to run at a loss, and that's by design. At country level, the best rail and road network is one that's operating at full capacity. And you don't get to full capacity if you're charging the users of the network enough to recoup the costs. You get to full capacity if using the network is very cheap, but the network is paid for by the economic benefits it creates.

Privatizing the rail service is a terrible idea. You'd be creating a tax-payer subsidized company that isn't accountable to tax payers and .. well, for the owner of the private rail company, the most profitable setup is one where they don't have to run a service and get all the subsidy money. Running a rail service is not profitable. Rail services are all subsidized. Subsidized services need massive regulation to function (rather than just sucking in the subsidies). Massive regulation creates monopolies. Monopolies are best run as state services.

What you can (and probably should) privatize are the external services. "Hey companies A, B and C! We'll rent you some space and carts in our train! You'll have this many passengers in the train every day, and you can sell them improved service in your space." Ditto for stations (or perhaps, specifically for stations.)

Having company revenues depend on number of passengers on a train makes the companies want to increase rail network coverage and number of passengers on the network. By also having shops at the stations, companies would want the trips to be fast so that people can spend more time shopping.

Leasing cars to competing companies while fixing ticket prices for the majority of the seats and allowing customers to pick which car they want: companies would have incentive to create great travel experience to attract more customers for their on-journey sales. You'd still have guaranteed network capacity & maintenance, all the country-level benefits of a transport network, but you'd privatize the parts that aren't part of the core service.

For an example: the British rail privatization. The best part of British rail are the mall-like stations and state-run inner city public transport (e.g. Transport for London). The actual privatized rail service is like if someone was paid to provide a rail service by the government and wanted to spend as little money on it as possible while extracting the maximum ticket price the traveler is willing to pay. To fix British rail, you'd have to turn it back into a state-run core network with privatized add-value services.


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Built art installations, web sites, graphics libraries, web browsers, mobile apps, desktop apps, media player themes, many nutty prototypes, much bad code, much bad art.

Have freelanced for Verizon, Google, Mozilla, Warner Bros, Sony Pictures, Yahoo!, Microsoft, Valve Software, TDK Electronics.

Ex-Chrome Developer Relations.