Government or Monopoly?

Amsterdam, Id. Apr. MMDCCLXIX A.U.C.,

Just a short note of interest: the Dutch government has finally decided to take charge at ProRail again, the company that maintains and builds Dutch train tracks. I think this is a victory for consumers, firstly because it ends the strange situation in which the Dutch government owned the holding company which owns ProRail, while not having direct influence over the company. Secondly, train tracks are a typical natural monopoly, so privatization will not yield an increase in productivity or cheaper train tracks.

To go back in history a bit, ProRail was created in 2005, as a result of the privatization of the Dutch railway operator of the 1990’s. At this time the Nationale Spoorwegen (NS) was also created. ProRail would take care of the actual train tracks, while the NS would have to compete with other companies for contracts to provide trains on certain tracks. So, railway operators would compete (although this never really happened, as NS banked on its state-ownership to pay too much to get contracts, turning over eventual losses to tax payers), while ProRail would be the only network manager. However, ProRail would remain independent from the government, making its own policies to reach targets set by the government, even though the government fully owned it.

I do not think this structure of corporate governance was optimal. Firstly, the results were far from optimal, including large deficits and many delays. Secondly, there was no reason to expect that making ProRail independent would improve its performance. The reason why privatization often improves performance is that it drastically increases competition. Increased competition, in turn, forces companies to offer better services, or cheaper services, or both. This in turn sparks innovation. In these scenarios privatization is good for consumers. In this case however, ProRail has a natural monopoly: “A natural monopoly is a type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.” In this case: there is no sense in having several train tracks from Amsterdam to Utrecht, one is clearly sufficient.

Moreover, complete privatization makes no sense either. Again, ProRail has a natural monopoly. This means it could charge prices higher than it would be able to charge in a competitive market. Of course, the prices ProRail charges can be regulated, which would not allow the future private owners of ProRail to charge prices that are too high. However, this can also be a dangerous first step to crony-capitalism, a situation in which business success depends on personal relations rather than merit. Imagine you were the future owner of ProRail, and you knew that you had a natural monopoly. Would you not try to become big chums with politicians to ‘deregulate’ the market to ‘increase productivity’ through ‘price incentives’? And maybe that politicians could, entirely accidentally of course, get a nice job on the Board of Directors after they end their political career? So, in the end, we would always have a situation in which some have a clear incentive to lobby for less consumer protecting legislation. As long as ProRail is a state company, it is very clear what the salaries of the managers are, seeing they are subject to scrutiny in parliament, and all potential profits flow back to Dutch citizens.

So, either way, the Dutch government would have to regulate this market, while not having direct influence, or it could directly manage the Dutch rail network. I think for the sake of managerial clarity, (i.e. who is responsible for ProRail, the CEO, the Board of Directors, or the Minister) it makes sense to clearly make the Minister responsible. I do not see how a fake privatization of a natural monopoly would help Dutch citizens. Moreover, full privatization opens the door to crony capitalism, which is much dirtier than than a democratically monitored state company in case of a natural monopoly. So I am quite happy to see that at least the monopolistic part of railroads is nationalized again, especially if train services are opened to more competition. Still, I am not entirely sure that railway operation is not a natural monopoly, or at least a natural oligopoly too. So maybe nationalizing the NS should be next. To be continued…

Bottom Line: Granting operational independence to a company with a natural monopoly, while still demanding it to take certain actions has been a failure. This is not very surprising. The situation is being addressed.

2 thoughts on “Government or Monopoly?

Add yours

  1. You’re right about the weakness of privatization. The only thing to worry about is ProRail becoming a “crony ministry” stuffed with useless workers and budget deficits. This can be fixed by corporatization (done!) to separate out operations and financing and *some* sort of benchmark performance indicator, to make sure ProRail is outdoing, say, other EU operators in terms of cost of service.


    1. Thanks for your comment. I agree that you cannot simply leave it here, the Dutch government should introduce *some* sort of benchmark, preferably several ones, focusing on quality and price (rather than just price, or just quality).

      Liked by 1 person

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