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

Rail privatisation offers a warning from history for the Government’s ‘open public services’ agenda to outsource more public services. In our previous post we suggested that rail privatisation has never been wholly accepted because the Major Government overlooked the essential ‘publicness’ of the railways. In this post we identify five specific damaging consequences of rail privatisation that should cause the current Government to consider much more carefully how it approaches outsourcing or risk repeating the same mistakes in other public services.

1. Expectations of greater efficiency from privatisation have not been realized

One of the principal expectations from privatisation was that the railways could be delivered more efficiently in the private sector because of the motive to generate profits. British Rail was already pretty lean following a cost cutting exercise in the 1980s, and in fact the opposite has occurred. The unit cost of the privatised rail industry is significantly higher than that of British Rail because economies of scale have been lost and the complexity of the industry has thrown up new costs. The public subsidy to the industry is considerably higher than it ever was for British Rail.

Chris Grayling when he was Shadow Transport Minister admitted that the way privatisation was organised “…helped push up the cost of running the railways – and hence fares – and is now slowing decisions about capacity improvements. Too many people and organisations are now involved in getting things done – so nothing happens. As a result, the industry lacks clarity about who is in charge and accountable for decisions.”

2. The rail industry has coalesced around a small group of large private sector providers who are (almost) too big to fail

The rail industry after privatisation was highly fragmented. This fragmentation has now been reduced but has resulted in a small group of private sector companies who now dominate the market. The complexity and scale of these contracts has skewed the market in favour of these large private providers who have the scale and deep coffers to absorb the risks associated with running a franchise.

Nonetheless, the narrowing of the market around this small group of providers is a risk. On three occasions, the state has had to step in and pick up the pieces because a company has pulled out of a franchise. The exit of Virgin Trains from the rail industry has further reduced the options available to government. Two of the recent new entrants to the rail market have been the national train operators of the Netherlands and Germany who have been accused of profiteering to subsidize their domestic operations. Where will the new train operators come from if another company fails or is judged to offer a poor quality service?

3. The private sector has profiteered from parts of the rail industry

To many people, private profit shouldn’t have a place in an industry that receives a £4 billion subsidy from the public every year and where consumer choice is highly limited. But there’s profit and then there’s profiteering. One of the publicly neglected aspects of rail privatisation is that running a Rolling Stock Leasing Company (or ROSCO) is a very lucrative business. Three were created as part of the break-up of British Rail and all are now owned by a combination of banks and private equity. ROSCOs have found older rolling stock to be especially commercially attractive as they can continue to generate revenue for stock even after the construction costs would have been written off by British Rail. This has also helped to inflate the fares paid by customers.

The privatization of ROSCOs is another example of the public sector selling assets at below their fair market value. The National Audit Office in a 1998 report stated that the UK Government had not realised fair market value for the sale of these assets. Eversholts Leasing later HSBC Rail was sold for £518 million in February 1996 but a year later the business was sold on for £726 million, a gain of some 40 per cent over the sale price by the Department for Transport.

More generally, train operating companies own virtually nothing, hiring most of the assets required from Railtrack and ROSCOs whilst also contracting out areas such as onboard catering and cleaning services. For this reason, Baroness Vadera, when she was a special adviser to Gordon Brown as Chancellor of the Exchequer, described the privatized passenger train operating companies as ‘thinly-capitalised equity profiteers of the worst kind’.

4. Privatisation led to a loss of skills and flexibility

The Hatfield disaster in October 2000 – caused by a broken rail as a result of faulty maintenance procedures – illustrated the loss of skills and flexibility from the rail industry as a result of privatisation. Railtrack, which had responsibility for rail infrastructure, had outsourced almost all of the maintenance and renewal of track. Outsourcing maintenance and renewal both removed flexibility (unless it was already included in a contract) and led to a drain of skills and knowhow from Railtrack. In the aftermath of the disaster, thousands of speed restrictions were imposed unnecessarily across the network because Railtrack did not have the expertise to know whether other parts of the track were also at risk of an immediate tragic failure. Railtrack was a disaster waiting to happen according to Christian Wolmar in his book On the Wrong Line: how ideology and incompetence wrecked Britain’s railways; the system it operated in was brittle and not designed to cope with sudden challenges. Hatfield sealed its demise and replacement by Network Rail, which has taken a different approach to maintenance by bringing some of this in-house again.

5. The views of users and frontline staff were sidelined

British Rail argued that if it was to be privatised then the rail network should be privatised as one entity. Instead the Treasury, under the influence of the Adam Smith Institute, advocated for the creation of 25 passenger railways franchises as a way of maximizing revenue. The effect of this was to create a complicated system with over 100 different companies delivering bits of the rail system, which made it difficult for the views of users and practitioners to be heard. Passengers were unclear on who was responsible for what or who to direct their questions or complaints to. Public accountability suffered as a result.

The views of passengers have also been neglected in franchise decisions. Passenger satisfaction targets in franchise agreements don’t carry sufficient clout. According to Passenger Focus, only 42 per cent of rail passengers are satisfied with value for money, yet increases in rail fares have continued this year despite the concerns raised by passengers. Given the amount of public money invested in the rail industry last year, as well as the cost of fares, surely the views of passengers should be at the forefront of rail policy?

The nationally-owned British Rail was far from perfect, but most people think that rail privatisation has been a relative disaster for the reasons discussed here. Rail privatisation represents a warning from history for a Government that seems intent on outsourcing more of our public services – will it learn the lessons?



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