The State and its role - Transport Policy and Planning in Great Britain - page 147

4) Natural monopolies
Transport operation tends towards monopoly provision because of economies of scale
and the benefits of an integrated network. This was evident in the amalgamation of
railway companies in the 19th century. More recently there have been acquisitions
and amalgamations of companies formed out of the transport privatisations of the
1980s and 90s, particularly in the bus industry. In such situations intervention by the
State is necessary either to prevent monopolies from forming (and hence maintain
a competitive operating environment) or alternatively to permit the formation of
monopolies but to regulate their operations so as to prevent exploitation of users.
Locally monopoly provision can arise because of the size and 'lumpiness' of
investments. For example there is only likely to be economic justification for one main
road or railway between many towns, or one toll bridge across an estuary. If there is to
be such provision it will be important for public agencies to regulate the charges and
travel conditions which are applied.
In the case of service provision an operator may only be prepared to tie himself to
restrictive conditions if he is protected from possible competition by another company.
This was the situation which arose when the franchising of passenger rail services
began in the mid-1990s. Commercial train operating companies acted together to
prevent the Conservative Government introducing the 'open access' free-for-all it
would have preferred.
Local monopolies arise in bus operations partly because of economies of scale, for
example the ability to serve a town from a single depot, or to inter-work vehicles
between services so as to maximise their utilisation. They also arise because large
operators can use their dominant position to offer travelcards, return tickets and
the like (on their services only) in a way which disadvantages smaller operators with
whom they may be in competition on individual routes. In this situation not only does
competition on the individual routes suffer but also the public interest in securing
genuine area-wide travelcards and other network benefits may be inhibited. It was
these circumstances which led to the Government taking new powers in the Transport
Act 2000 (see 13.5).
5) Very large investments
The scale of some transport projects (e.g. a new airport or high-speed rail line) presents
difficulties for provision through the commercial market because of the 'lumpiness' of
the investment required. Investors faced with a range of project opportunities, each of
which had the same prospective rate of return, would normally prefer to spread their
risk over a number of smaller projects rather than concentrate it all in one. In effect
therefore large-scale investments are discriminated against. It is for this reason that
very large projects - even potentially commercially viable ones - have traditionally
been undertaken as public sector investments, although the extent of non-user benefits
may also be a factor.
It is against this background that the insistence of Mrs Thatcher's Government for
the colossal Channel Tunnel project to be funded by a private sector consortium was
of such symbolic political importance. (The scale of risk was countered by spreading
funding over some 200 banks in addition to equity shareholders.)
The strategic significance of such large-scale investments also raises questions
over whether a Government can permit the possibility of their commercial failure.