British Railway Privatization

Privatization is changing something from state to private ownership or control”. (Princeton University, Word web dictionary, 2005)

The railways had inherited old established working practices, which raise costs and needed to be got rid of some employees could enable the railways to fulfill its true potential. The structure of industry which was adopted was designed to reduce costs and improve quality through incentivising the various parties to do so. The railways were heavily subsidized as the other nationalized industries were not. Privatizing an industry which could continue to need large subsidies itself raised major problems. The early privatizations had shown the supreme importance of introducing as much as competition as possible while privatizing. Because of the structure of the industry was very complicated the need was for new structure would strike a balance between maximizing competition and practicality.

Although the British rail ran “one of the most efficient railways in Western Europe” (Gouvish and Terence, British rail, 1974-1997 from integration to privatization), most of its passenger operations still made heavy losses. Many of BR’s routes, although unprofitable, were seen as socially and politically necessary and any method of sale would need to maintain pre-privatization service levels and therefore incorporate a means of providing private-sector rail operators with continuing subsidies from state. Furthermore, those in government – particularly Margaret Thatcher – were aware of a peculiar attachment the British people felt towards their railways and that any policy designed to tamper with structure of BR would most likely be met with stubborn consumer resistance.

The privatization program undertaken by the 1979-97 conservative governments was very extensive. During the Thatcher and major administrations, “two-thirds of Britain’s state industrial sectors – some 50 major businesses – were sold raising over £65 billions; around one million jobs were transferred from the public to the private sector; and almost one in four adults, compared with one in ten in 1979, had become shareholders as a result of privatizations” (Palgrave Macmillan, Work identity at the end of the line? Privatization and culture change in the UK, rail industry, 2004)

BR behaved like a monopoly, especially in major commuter areas such as London, and was fully persuaded by the case for vertical separation. In the case of BR, the potential for reducing government subsidy would all automatically follow. Privatization was seen as an opportunity to experiment further with vertical separation.

The original privatization structure, created over the three years from 1 April 1994, consisted of: Infrastructure Owner, Regulation, Franchising, Passenger Train Operators, Train Owners, Freight Train Operators, Infrastructure Maintenance and Renewal, Specialist Companies. Since 1997, considerable changes have taken place to the original structure of privatization, of which very little is left unaltered. The structure of the rail industry has not remained static since privatization was completed in 1997. There have been continual adjustments, especially in the control of rail businesses. A prominent tendency has been the resale of units initially sold to management-buyout teams to commercial firms, with a degree of the organizational concentration, although “ownership and control of the railway system is still relatively fragmented”(All change: British railway privatization, Freeman & Shaw). With respect to regulatory control, the major change has been the emergence of the strategic rail authority, initially in ‘shadow’ form, on 1 April 1999, with Sir Alistair Morton as its chairman.

The method of privatization chosen by conservatives was certainly complex and the key reason for this was the decision to move from vertically integrated organization where operations, rolling stock and infrastructures are the responsibility of one company to the disintegrated solution of separate ownership of the various components of the production. A primary reason for the break-up of the system was the desire to see competition in train operation but ministers also wanted to liberalize the rolling stock and infrastructure services markets. This means splitting many of the former BR activities into smaller parts and offering them for sale separately. In the train operation, franchises were let, mostly for short periods of time and in defined regions. Emphasis was placed upon the fact that relatively short contracts would keep the franchisees on their toes. There has been some competition in the supply of rolling stock which now often includes maintenance deals. But rolling stock supply would probably have followed its present’s course whatever model of privatization had been followed because the “government was already seeking private-sector financing initiatives in public – sectors organizations” (All change: British railway privatization, Freeman & Shaw).

Finally privatization bought a net financial gain to the government before too long, but this is dependent on franchisees being able to fulfill their current contracts. It also takes no account of any efficiency gain BR or a different successor might have achieved. There has been only limited success on promoting competition. The myriad contractual relationships mean that any meeting between industry parties is likely to include lawyers and financiers where none would previously have been needed and railway professionals are not blind to the huge salary differentials between them and these professionals whom they had to teach to do the job. Privatization led to great uncertainty and created a hiatus in investment, especially in infrastructure and in a new rolling stock.The train performance is still patchy with punctuality and reliability levels barely improved since the BR days.

In my opinion, the track-authority model chosen by the conservatives was wrong for all the reasons. Although there are problems with the track-authority model, future policy emphasis must be placed on working within the constraints of the present system rather than a full scale reorganization of the rail industry. Primarily this is because there has been too much reorganization over the recent decades. A key reason for the present system’s weaknesses is that rail track has failed to take a strategic role in the development of the industry through its network management statement which has to be prepared each year. The task of providing coherent leadership, embracing the whole industry, will pass to the strategic rail authority, currently operating in shadow form. Privatization could work better if regulators, politicians and others continue to allow the industry to reintegrate those parts of the business where it can clearly be demonstrated that users could benefit.