Irish Rail has existed in a constant state of financial crisis since its incorporation under the 1944 Transport Act. This essay will examine the history of the CIE in an attempt to explain the situation that Irish Rail faces today. By using the reports, criticisms and suggestions from various investigative bodies such as the European Council of Ministers, this essay will offer an analysis as to how Irish Rail can reduce the financial crisis if not solve it. Included in the analysis will be an examination of other rail networks which have succeeded where the Irish network has failed. The final section of this essay will provide possible future policy objectives based on the past experience of CIE, recommendations from the investigative bodies and the successes of the Japanese and Swedish railways.
CIE was incorporated into the Irish Government under the Transport Act of 1944 as a result of rising financial losses by the Great Southern Railway Company. The government strategy was to let CIE manage the operation of the national rail network with occasional subsidies from the Exchequer. It was soon apparent that further capital was needed to combat the recurring financial losses. After the failure of the first policy, CIE decided to write off six million pounds of its debts with the governments permission. This was achieved by writing down the capitalisation value of the company. This strategy was aided in turn by a £1.75 million per annum subsidy which was to improve the structure and operation of the company.
This once-off attempt at debt clearance failed and a policy of recurring subsidisation was introduced to cope with the financial losses. Throughout this period, CIE defended its right to government subsidies, arguing that the welfare benefits to society outweighed the costs. An interesting argument, since the utility benefits accruing to society can not be quantitatively measured. By the 1970's the company's deficit had increased by a factor of 45 in real terms. Since the majority of CIE's deficit is incurred by Iarnrod Eireann (80% in 1991), any plans to revitalise the company must start with the restructuring of rail transport.
The 1990 European Conference for the Ministers of Transport tackled all aspects of transport. In particular they blamed the gradual decline in railways on excessive infrastructural costs:
'For many years, states as owners of the railways have failed to give them the capital injections needed. Railways have therefore been obliged to borrow from outside and most have to bear the burden of increasing debts which in too many cases means that they could never be expected to achieve balanced financial results. In particular the fact that the railways, unlike their rivals, are responsible for their infrastructural investment costs is a decisive factor in this connection.'
The costs of constructing roads has never been directly borne out by the users of the road despite road tax and toll systems. However it can be argued that people using the roads are willing to pay for rail infrastructural costs in the light of the apparent absence of costs in using roads as a result of state subvention.
The result of the 1990 Conference was a series of solutions which proposed to address the problems faced by railways:
1) Clearance of Debts.
The Ministers proposal was that each railway would take out loans to cover the deficits. The government as owners of the companies would repay both the loan and the resulting interest repayments.
2) Normalisation of Accounts.
The company was to be split into two sections. The first section should be responsible for rail transport as a necessary public service. The second section of the company was to deal with the commercial aspect of the rail company, i.e. make the company economically viable.
3) Integration of External Costs.
The external costs of transport such as pollution and an increased risk of accidents should be added to the cost of varying forms of transport.
The proposals put forward by the ministers, though, give no new insight into existing problems. CIE adopted the policy of debt clearance in 1958-1963 when the outstanding debts were written off, but by 1973 its debts had returned by a factor of 45 in real terms. The normalisation of accounts method was the approach used by the Swedish rail company. However the success in Sweden was the result of not only the normalisation of accounts but also an increase in productivity and efficiency. To simply adopt the normalisation approach without a concerted effort to improve efficiency would prove to be an exercise in creative accounting.
Rail networks are perceived as being inefficient and too expensive considering the time taken for the journey and the quality of the service provided. To raise the costs of travel by incorporating external costs would only increase the dissatisfaction already plainly evident. These costs are not to be solely borne by rail networks but by all methods of transport. For example, motor cars consume 40% of Europe's energy resources, while the combined cost of pollution and congestion account for more than 4% of GNP annually. For the vast majority of people who own or use cars, an increase in the cost of travel as a result of government legislation would make the political party in power unpopular. This unpopularity may be reflected in the ballot box resulting in the government not being re-elected. This effect is known as the 'cleaning house government model.' In this, the government is assumed to maximise their probability of reelection by reacting to lobby groups.
Assuming that none of the recommendations of the 1990 Council are of any real relevance to Irish Rail's predicament what then is the solution? The most obvious answer is to reduce the overall deficit. One method of reducing the deficit is to gradually privatise Irish Rail. Complete privatisation should be avoided as this would result in the closure of all non profitable lines. An open market approach similar to that operating in the British Bus sector would ensure that the rail companies would have to compete, resulting in benefits to the public, i.e. reduced fares and a better service overall.
A good example of this approach is the policy adopted by Sweden. In 1988 Sweden introduced an act which divided Swedish State Railways into two companies. The traffic transport company Business SJ was responsible for operating railway services as a viable commercial business. The second company Swedish National Rail (BV) was responsible for the maintenance and construction of the infrastructure. BV remained as a monopoly with the aid of barriers to entry imposed by the government. BV continued to receive funding from the government in terms of infrastructural needs and continuing maintenance. The Swedish state pre-empted the proposed solutions of the 1990 Council and split the national rail company. The 500 million crowns loss of 1987 was converted into a profit of 300 million crowns by 1991. The commercial company SJ managed such an impressive turnaround by increasing productivity and reducing costs, essentially making the quality of the service better and hence attracting more customers. BV, the infrastructure company, continued to make a loss but in the long run it is estimated that increase in the general usage of rail would result in less profitable lines becoming more profitable.
The Japanese approached their rail problem in a fashion similar to the Swedish approach. The initial policy employed by the Japanese was to raise fares and reduce the total workforce; the result was a backlash from the public because of the fares and from the unions because of the redundancies. Realising that further measures were drastically needed, the Japanese National Railways (JNR) was split into seven networks. The first six dealt exclusively with passengers in their appointed region, with the seventh section being solely responsible for the nation's freight capability. With typical Japanese acumen a liquidation company (JR Settlement Company) was established to control the debts, excess resources and the prickly problem of the unions and the redundant workers.
The results are impressive. Of the initial workforce of 90,000 more than 98% of them were made redundant, however almost all of them were reabsorbed into the private and public sectors as a result of the exhortations of the JR Group. Some of the smaller rail networks are still making a loss, but this is easily compensated for by the success of the larger networks. Pivotal to JR's success is its ability to manage the company without governmental interference, especially in matters such as the closure of unprofitable lines. Perhaps the best evidence of JR's success is the conversion of a trillion Yen per annum loss into a 480 billion Yen per annum net profit.
Given the success stories of the Swedish and Japanese rail networks, what then can Irish Rail do to improve its situation? The most obvious parallel between the Swedish and Japanese approach was that the solution was radical and once implemented it was completed. Broadly, for Irish Rail to improve its situation four objectives need to be reached;
1) Reduce the dependence on state subventions.
2) Raise the quality of service, perhaps by privatisation.
3) Increase the freight and passenger use of rail.
4) Reorganise the structure of the company - improve the efficiency and output.
The Japanese model of total privatisation may not suit Ireland as the majority if not all lines would be shut down due to a lack of profitability. Judging by the IDA's poor performance in creating regional employment, perhaps the splitting up of Irish Rail into provincial companies is not a good idea either. However the option to close some unprofitable lines should be open to Irish Rail.
Given the current structure of Irish Rail, perhaps the Swedish system of a government owned track authority and a private traffic company may be better. Whatever the choice, the policy must be firm and decisively implemented with the main target being the reduction in the deficit via an improvement in output and efficiency.
Bibliography
Barrett, S. (1982) Transport Policy in Ireland, Irish Management Institute, Dublin
CIE (1991) Annual Report, 1991
European Conference of Ministers for Transport (1989) Rail Network Co-operation in the Age of Information Technology and High Speed, E.C.M.T., Paris
Institute of Civil Engineers (Infrastructure Policy Group) (1992) Rail Privatisation : Deregulation and Open Access, Thomas Telfork Services Ltd., London