On the railways: What lessons does rail privatisation offer open public services?

It’s been almost twenty years since John Major’s Government privatised British Rail, but unlike some other sell-offs the issue of who owns and runs our railways continues to attract widespread public controversy. In recent posts we’ve been looking at the tensions between the Government’s ‘open public services’ agenda for outsourcing and its ‘open policy’ agenda for greater transparency. In this post we suggest that rail privatisation has never been wholly accepted because the Major Government overlooked the essential publicness of the railways – a warning from history for the current Government’s attempts to outsource much of our public services.

Rail privatization is back in the news again with the announcement that Virgin Trains lost out to FirstGroup in its bid to continue to manage the West Coast mainline, a contract that Virgin has held since 1997. Richard Branson quickly offered up a withering criticism of the way the Department for Transport conducts its franchising arrangements for new passenger train operating companies (or TOCs). Branson has threatened that Virgin will walk away from the railway market for good, having spent £60 million on four thwarted bids, because (it says) it won’t play the game of offering up unrealistic performance targets to win business. Of course, this could just be regarded as sour grapes – but Branson is usually too savvy to let a knock-back make him seem like a bad loser. Rather, it’s best to assume he means it, and that his criticisms of the franchising process are heartfelt and somewhat accurate. If this is the case, how did we reach this point where Britain’s best-known businessman expresses so little confidence in what was supposed to be such a flagship privatization policy?

The 1993 Railways Act privatized the rail network. British Rail was broken up into over 100 different companies, with the complete separation of infrastructure (track, rolling stock, stations and signaling) from passenger train services. The latter were broken up into 25 different franchises (or contracts) leased to private sector passenger train operating companies. The number of franchises has subsequently been reduced, with a small group of private companies now dominating the market, including the likes of FirstGroup and the national rail companies of Germany (Deutsche Bahn) and the Netherlands.

Rolling stock, meanwhile, was transferred to three Rolling Stock Leasing Companies (ROSCOs), who were privatized and sold to private equity investors and banks including Abbey and the Royal Bank of Scotland. Rail infrastructure was transferred to Railtrack, which outsourced all maintenance and renewal to private contractors. Railtrack was quickly privatized in 1996 to prevent the unwinding of railway privatization by the incoming Labour administration. After the Hatfield rail disaster, Railtrack was sold to Network Rail and, remarkably, its current legal status is unclear with disagreement as to whether it is a public or private body. Franchising was also outsourced but was eventually brought back into the Department for Transport given the political sensitivities over the railways.

Proponents of rail privatization claimed it would improve quality and efficiency. While there are more trains on the network and there have been some improvements in safety, there have also been many downsides to privatization. There has been a significant rise in unregulated fares – particularly walk on tickets bought in stations or on trains. Costs have risen, since rolling stock is now leased from ROSCOs and construction costs would have previously been written off by British Rail. The unit costs of the privatized industry have risen significantly as the various train operating companies are not able to realize the economies of scale available to the previously national network. The complex nature of the industry has also watered down accountability and confused the general public (and no doubt often policymakers as well).

The numbers of passengers on the railways has also increased significantly but the start of this can be traced back prior to privatization. Factors such as the cost of petrol and increased road congestion could also help to explain this rise. Nonetheless, the public subsidy to the rail network has increased to about £4 billion in 2010/11 – down from a high of £6.5 billion in 2006/07 but far higher than what was given to the sector under public ownership. The effect of this has been to place an even greater burden on profitable routes such as the East and West Coast mainlines to return a significant dividend for the taxpayer – hence the reason perhaps that the Department of Transport has put so much faith in the highest bidders for these routes.

This faith hasn’t always been realized. Two operating companies, GNER and National Express, have handed back the East Coast franchise because they were not able to service the expected payment targets. Both providers over promised in order to win the franchise and ran into financial difficulties trying to deliver their plans. The result has been a legacy of under investment and cost cutting – which of course has ultimately cost passengers.

Richard Branson argues that the selection of the new franchisee for the West Coast mainline shows that the Department for Transport has not learnt the lessons from previous failures. The short-term political desire for a good headline has over-ridden the long-term interests of the network – and the concerns and opinions of rail users, despite active representation from passenger groups. But the broader lesson from this ill-conceived and rushed policy might be that some services need to be properly publicly accountable, even if not every aspect of them is delivered by the state. Does the current government understand the essential publicness of our public services?

One Comment on “On the railways: What lessons does rail privatisation offer open public services?”

  1. Richard says:

    Great article. We have to question the ‘market management’ skills of DfT here. We need not shed too many tears for Branson, but – the prospect for nationalisation aside – there must be a long-term detrimental impact of putting Virgin Trains out of business.

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