Melike Arı
0501170101
Economies of scale and reform in railway operations
1) The general view of economies of scale in the railway industry can be explained as
follows: There is a high capital requirement for the provision of railway services.
Economies of scale are also important. For this reason, the size of the company must be
large in order to provide railway services. In the past, most mainline railways were
controlled by a single company in order to achieve economies of scale. Thus, railway
industries across Europe would be nationalized. This particular view of the railway
economy has become known as the traditional view that infrastructure and services are
part of an integrated system and economies of scale are important in both. However,
organizationally, services and infrastructure must be part of the same large company.
Therefore, in recent years, almost every European country has reorganized its railway
systems that separate infrastructure from services, both organizationally and financially.
For example, one company owns the infrastructure and operates it while another
company owns and operates the rolling stock. This is known as a vertically separated
railway. The first implementation of this in Europe was held in Sweden. While Sweden
handed over all infrastructure functions to the Swedish National Rail Administration, it
left the services with the Swedish State Operator. This distinction is known as the
revisionist view of the railway industry. In this view, the main premise is that economies
of scale are related only to infrastructure, not services. Therefore, the effects of scale will
still be exploited as long as the infrastructure is maintained as a single asset. Regarding
the size of the companies operating, this is insignificant as there are no economies of
scale associated with this activity. In the traditional view mentioned above, most mainline
railways were placed under the control of a single company, but in the revisionist view,
infrastructure and services are placed under the control of different companies. The
advantage of this is that different operators can work on the network and thus some
form of competition arises in the provision of railway services.
2) Main sources of economies of scale in the rail industry are:
 Specialization of labor
 Scheduling of inputs
 Capital inputs
 Bulk buying
 Specialization of labor: Larger firms provide more specialization of the workforce. The
business owner must assume all duties involved in running the business. As the firm size
increases, more labor can be used in specific tasks and thus become more competent in
these tasks. Productivity also increases. Increased productivity means faster transport on
railways. Thus, people use railways more than any other means of transport to save time.
This increases the demand for railways.
 Scheduling of inputs: This is similar to labor resource specialization. However, it is a
matter of planning all inputs, which is a common factor especially in the transport
industries. Plans should be made properly for functioning. As firm size increases, there
is more flexibility in how inputs can be combined. Therefore, higher overall efficiency in
both transport and freight transport can be expected. In the rail industry, for example,
there may be more flexibility in scheduling drivers to ensure that vehicle stock runs for
the longest hours possible. Having flexibility means increasing total productivity.
 Capital inputs: Some capital inputs can be very expensive to purchase. Only large firms
can spend on these inputs. However, they do this to increase productivity in the long
run. For example, upgrading a rail line from single to double track increases capacity by
four times, potentially significantly increasing the productivity of rail services. Thus, it
increases efficiency in the long run. This cost is the first subject of the capital inputs title.
On the other hand, it is more likely for larger companies to carry a larger number of
spare parts and maintenance facilities. If there is any breakdown in railway vehicles, the
equipment is immediately corrected. So downtime is too short for large companies and
higher productivity as a result. For example, when there is a problem with railway
vehicles, if it is a large company, it is solved immediately. They respond faster to people's
service requests. Productivity is also increased.
 Bulk buying: Larger firms can get some kind of discount by purchasing large numbers
of capital equipment and supplies. Therefore average costs are expected to be lower for
larger firms. For example, companies for the railway industry are large companies. If they
buy the equipment required for the vehicles in bulk, they will benefit from the discount
and the total cost they make will be less.
Specialization of labor, scheduling of inputs and capital inputs are the result of
returns to scale but bulk buying provides the cost savings. Because the specialization in
the workforce, the scheduling of inputs or capital inputs are not about the cost. But bulk
buying is done to avoid high costs. It aims to reduce the cost by buying more goods.