The impact of rail industry restructuring on incentives to adopt innovation: A case study of Britain

This paper examines whether there are features of the structure and regulation of the British rail industry which fail to provide adequate incentives for innovation and how to overcome those found. British experience is of wider interest because Britain has gone further than any other European country to try to provide appropriate incentives through sophisticated track access charges and performance regimes and through cost- and revenue-sharing arrangements. The methodology adopted in this study started with a literature review but then followed this up with a round of interviews in Britain and a more limited round of interviews in Germany and Sweden plus reports prepared by partners on Sweden, France and Slovenia. The two main issues identified are fragmentation of the rail system, so that the organisation bearing the costs of the innovation may not receive the benefits, and short time horizons produced by franchising and regulatory arrangements. A variety of solutions have been tried in different European countries, including the holding company model, government leadership and alliances or other cost- and revenue-sharing arrangements, but all have disadvantages as well as advantages, and the best approach to take depends on circumstances such as whether there is, or could be, a single dominant operator on the network concerned.