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The patent absurdity and disastrous consequences of the Tory experiment in privatising and marketising the railways are well known. But it is important to understand properly exactly what went so wrong, and why.
There is little doubt that the privatisation of British Rail was one of the most ill-thought through policies actually put into practice by a British government in recent years. The idea was seized upon for ideological and short-term political reasons, its working detail devised hurriedly by ministers and civil servants as they rushed to legislation, its likely consequences barely subject to any serious assessment at any stage (34).
Insofar as there was any rationale or justification behind the policy, two basic premises can be identified:
These theories resulted in a policy that would fragmentation of the industry into a multitude of private profit-seeking firms:
This fragmented industry would then be regulated by a number of new agencies:
The extraordinary story of how this all worked (or rather, didn't work) in practice has been told in colourful detail elsewhere, and need not be recounted here (35). What is most important for our purposes is to gain a broad understanding of why it was such an inappropriate and damaging policy to take to Britain's railways.
This can be simply summarised in terms of the fundamental flaws in the two key premises of the Tory policy - the benefits of competition, and the potential of private finance. As history should already have suggested, the relevance of these Tory shibboleths to the railways was highly doubtful.
As we have seen, the railways comprise a complex system of interconnected infrastructures and activities that depend upon careful, finely judged and flexible coordination at all times to ensure their smooth running. For this reason the industry is simply not amenable to being broken down into component parts as if they could have operated independently upon one another.
The first consequence of this was that "competition" would in any case always be something of an illusion, with the result that the main effect of privatisation was to create a series of private monopolies and near-monopolies. The "track authority" was a private monopoly, Railtrack, whose charges were subject to regulation to try to keep it from abusing its monopoly position, and which could only be replaced at great cost to the taxpayer and travelling public (as we all discovered in 2001).
Competition between the Train Operating Companies for passengers along the same routes took place only at the margin, and at huge costs. The vast majority of their business took the form of the effective monopoly over a given area of the network granted under their franchise, subject again to performance and fares regulation by OPRAF, and again they were difficult to replace meaning that the withdrawal of a franchise could only be a last resort. In any case a secondary market in train company take-overs soon resulted in the majority of services being controlled by four large groups: National Express, First Group, Connex and Virgin/Stagecoach (36).
Similarly the proposed three freight companies were amalgamated into one at the point of sale; and the profit margins extracted by the three Rolling Stock Companies (which ended up in the hand of three banks - HSBC, Royal Bank of Scotland and Abbey National) have prompted increasing questions about their market power over the train operators who lease their trains.
Not only did the disciplines of "competition" prove to be largely chimerical, the break-up of existing networks of communication and cooperation in the industry would carry a huge cost which we are still counting today. The replacement of collaborative with adversarial relationships throughout the industry resulted in massive transaction costs - rocketing legal and consultancy fees, elaborate mechanisms of contract and performance monitoring, and cumbersome regulatory bureaucracies.
Moreover, none of these measures proved equal to the task of maintaining requisite standards of work and service delivery - the delivery of an efficient and effective railway service involves a constant process of fine judgement in response to changing factors and circumstances that can never be reduced to the crude and simple terms of a legal contract or output target. In the absence of a shared commitment to the overall service that a proper public service ethos can bring, there will always be ample opportunities to cut corners, sidestep difficult problems and pass responsibility or blame to other agencies.
In addition to this, one of the most devastating consequences of the privatisation process was the fragmentation and loss of industry knowledge. Running a railway - making decisions about investment, timetabling, safety, workforce deployment - requires an intimate acquaintance with changing infrastructure conditions, technological possibilities and service requirements throughout the network, that in the case of British Rail was held collectively by its workforce and managers and brought to bear upon decision-making through systems of cooperation and communication at all levels of the industry. This organisational knowledge base, never wholly centralised and much of it effectively tacit, was dissipated with the break up of the industry.
Many highly skilled engineers who knew things about the railway network that no one else did lost their jobs; some hired that knowledge back to the industry as private consultants (37). Habits of information sharing and freely given advice were interrupted by the requirements of commercial confidentiality. Hard-won accumulations of local and specialised knowledge were lost in the shift to an increasingly casualised and individualised workforce. (38)
The other key rationale of privatisation was the belief that an influx of private funding and investment would allow the Treasury to scale back public subsidy and allow private financiers to shoulder the risk. An understanding of the financial history of the railways could have shown that this was unlikely to work.
Railtrack had no interest in developing the railway network and, with track access charges fixed by the regulator, quickly saw that returns to its shareholders would be maximised by cutting back on maintenance and renewal costs. As a consultants' report to the Rail Regulator diagnosed in 1999:
Railtrack has no effective incentive to enhance and develop the network in an entrepreneurial manner [and] the performance regimes are structured to encourage focus on short run benefits rather than on long run considerations of asset condition and network capability. (39)
Demands placed upon Railtrack by the original Conservative plan were low but even then total investment was only £3.84 billion over the four years to March 2000, "still less than either expected or required" (40). Instead of investing in the infrastructure Railtrack maximised dividend payments by adopting a policy of "sweating the assets" by slowing down the rate of track replacement and modernisation. Meanwhile dividends totalling £709 million were paid out between 1995-96 and 2000-01, representing 41 per cent of total operating profits and a significant "opportunity cost in lost investment" (41).
A similar neglect of long-term investment needs in preference for short-term profitability was replicated throughout the industry, as the multitude of private contractors and subcontractors each sought to extract a surplus for their contribution. In Wolmar's words, "The railways are inherently unprofitable, and fragmentation into smaller, soi-disant profitable companies can only worsen this fundamental problem, since each entrant needs to make a profit" (42). As Gerald Crompton and Robert Jupe put it,
The structure of the privatised system had major implications for railway finances and railway investment. These may be summarised as "interface costs" and "cash leakages". Interface costs arise because many companies are involved in a supply chain, and so there is upward pressure on prices as each company aims to make a profit on its contribution. (43).
This process has been identified as a key factor in the escalation of infrastructure maintenance costs as every subcontractor looks for their mark-up. As one observer describes it, "There are so many piddling sub-contractors, and contractors are taking a 10 per cent management fee." (44).
Further drains on the public purse emerged when several train operating companies got into difficulties after winning franchises on the basis of over-optimistic bids. Subsidies to train companies were supposed to decline under the Conservative plans, but a number of firms were bailed out by the government to help them stay profitable, as a smaller price to pay than the disruption that would have resulted from the company being unable to run services. Longer franchises have been proposed to encourage operators to make their own investments, but it is clear that TOCs have little interest in long-term investment, being near "virtual companies" contracting with the government and renting trains and stations from others (45).
Wolmar summarises the situation thus:
The belated discovery by those who privatised the railway that the network is inherently unprofitable meant that any hopes for a privately led investment revolution in the railways would be stillborn. In fact, as Railtrack's chief executive Steven Marshall has admitted, there are no commercial projects on the railway. All investment on the railway had to be mostly - and now, after the collapse of Railtrack, often entirely - funded by the taxpayer. (46)
Overall we can see that the attempt to lever in extra private investment into the railways has resulted in neither service improvement, nor reduced risk, nor reduced taxpayer subsidy (in fact all these have moved in the opposite direction). As with other mechanisms to involve private finance in public services (47), the only clear beneficiaries have been the Treasury mandarins eager to keep commitments off the PSBR, and the private shareholders and financiers who have steadily drawn value out of the industry in the form of windfall profits and guaranteed returns.
