Lessons on railway reorganization
- By John Ross
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E-mail china.org.cn, March 20, 2013
The same mistake was made on London's underground railways. The London authorities ran the trains but infrastructure construction and maintenance was privatized – artificially legally splitting an integrated system. The result was private companies lost the taxpayer $2 billion before the system was renationalized.
All this was part of Public Private Partnership (PPP) promoted in the UK at that time as an attempt to bring private capital into the state sector. The PPP is now generally discredited and abandoned due to large financial losses. Borrowing by private companies is necessarily more expensive than state borrowing, as the risk is higher for lenders, which made borrowing for large scale capital expenditure on railways, hospitals etc, more expensive when carried out by private companies.
Genuine competition is powerful and useful. But for it to operate there must exist economic units which are genuinely competing – whether these are the millions of farmers, tens of thousands of city taxi drivers , or 12 large companies dominating the global motor industry. But attempting to create a legal fiction that something is competitive, when it is really a monopoly, necessarily leads to serious errors as UK experience demonstrated. That is why polls show 70 percent of the UK population want the whole rail system back in state ownership.
Giving an opinion on precise details of China's railway reorganization would require more detailed interaction with the precise situation. But certain universal principles apply to dealing with monopolies and successes occur where these are followed.
The starting point is to firmly reject any artificial illusion that competition can be created. The starting point must be clear recognition that what is being dealt with is a monopoly and that monopolies, if left to themselves, necessarily charge excessive prices and produce low quality. Therefore management structures must be in place which continuously fight the consequences of the monopoly structure.
First, people doing the supervision must be separated from those running operations – otherwise there will be not only a monopoly but a supervisory system hiding management mistakes.
Second, monopolies thrive on bureaucracy. Therefore the management command structure must be as "flat" as possible, with the minimum necessary number of layers.
Third, state managers of such a hugely capital intensive monopolistic operation must be the best available, and without temptation from corruption, given they have huge responsibilities – single decisions can lose hundreds of millions or even billions of dollars. The head of London's integrated transport system, who had held a similar New York job, and who successfully set about overcoming the problems created by the earlier erroneous policies, was paid $2 million a year. Similarly the company for infrastructure construction of the 2012 Olympic Games, which was also a monopoly, but which delivered on time and to budget, was led by very highly paid and experienced managers. Not only do these secure the best leadership but with such salaries there is no significant temptation to corruption. Singapore uses a similar system in its famously non-corrupt administrative structures.
Fourth, these managers must have no security of tenure, so if they make mistakes they can be removed immediately – a quid pro-quo for high salaries and essential for fighting bureaucracy. The London Mayor removed a previous transport system head by walking into his office at 8 am, sacking him, and instructing him to leave the building immediately.
Naturally more issues could be discussed. But these points illustrate the fundamental issue: success came where the consequences of the necessarily monopolistic character of railways were faced up to, failure came where illusory attempts were made to deny them.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/johnross.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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