On 4th February 1996 the most noticeable change arising from privatisation of Britain’s railway was the start of services by South West Trains, the first private company to carry passengers since 1948.The photo above, by Andrew Butcher and taken from Wikipedia, shows a British Rail Class 444 approaching Clapham Junction railway station
The 20th anniversary of South West Trains – the first private train operating company to launch – seems to have gone unmentioned. It was not the first part of the railway to have been privatised but it was the first that passengers would be aware of.
Privatisation was - and remains - a controversial topic and the main consequence was a much greater fragmentation of the rail industry than was necessary or appropriate. Recent polls show that many of the public would ‘support’ (though polls have not asked if they ‘prefer’) a nationalised railway.
Railfuture campaigns for a bigger and better railway, regardless of how it is delivered, and is agnostic on the ownership issue. In this article Railfuture director Jerry Alderson gives his highly personal views on how little of the intended privatisation remains 20 years later, and how the original implementation could have been tweaked (and still could be) to better serve rail users and produce a more stable railway.
How much of Britain’s railway remains truly privatised?
When Britain’s railway (but not the UK’s railway since it is still totally state-owned and state-run in Northern Ireland) was privatised by the Conservatives in the mid-1990s this was a true industry-wide privatisation like the major utilities (telephony, gas, water and electrification) and in common with them it was also given a regulator, which has retained the initials ORR although it is now on its third name.
The intention was for the state to walk away and leave the private companies free to run the railway in the way they thought best to grow (or at least continue running) the business. The government retained a miniscule share in Railtrack, full ownership of a small niche freight operator (DRS) and the then Department of Transport protected passengers from exploitation by capping key fares and the axing of unprofitable services through a minimum service requirement.
Despite some passenger train operators receiving subsidy to run services and the use of franchising rather than perpetual ownership – the only distinctions from other privatised industries – the hundred-plus companies created out of the monolithic British Rail had commercial freedom to run services, just like other businesses. Rather than the railway continuing to shrink, as it had done for half a century, it expanded as most operators found that they could run new services profitably. Given that the government did not cream off those profits (other than through the normal Corporation Tax) they had real incentives to grow the business.
As will be seen later in this article not everything in the fully-privatised world went well and as a result since 2001 there has been considerable state intervention (some might say interference) with almost all of the fixed assets and network operation being re-nationalised.
As a result of the financial collapse of Railtrack, forced by the Secretary of State, the quasi-nationalised Network Rail was created out of the ashes to own and run the rail infrastructure. Staff from suppliers have been transferred in-house. Some assets that had been sold off, such as freight yards to freight operators, have been bought back. Since September 2014 it has been fully nationalised and is now ‘on the Treasury’s books’. As in BR days the government appoints the chairman.
A handful of open access operators have entered the market and have the freedoms that the original franchised operators have. However, they have to jump through so many hoops, and spend sometimes many years, to get a licence to run a new service that only a few groups have pockets deep enough or ambitions strong enough to proceed. Few open access bids are granted and often the Department for Transport is one of the objectors, arguing that it reduces the income they take from franchised operators’ profits.
Ironically, given that purpose of privatisation was to introduce private enterprise into Britain’s railway, because franchises have become less commercial many of the current operators are subsidiaries of foreign state-owned railways, with the distributed net profits (typically 3% of revenue is gross profit) going abroad. This was certainly not the Conservative’s aim in the 1990s!
Franchised train operators are no longer free to introduce new services or even change the times of existing ones. Minor changes have to be agreed by the Department for Transport, which creams off unexpected profits so that there is little incentive to launch anything new. Enormous premium payments must be paid to the government or costs reduced in order to win a franchise. Often off-peak overcrowding is created because carriages must remain in the sidings as the government will not allow costs to increase. Some deals are actually concessions with the operator running the precise service dictated by the government. Sometimes this works well for passengers (e.g. Transport for London’s London Overground service contracted out to LOROL) because service quality is the priority but not on others (e.g. Department for Transport’s Thameslink, Southern and Great Northern serviced contracted out to Govia) because minimal cost is the priority.
For several years train operators had no say in what rolling stock could be used, although the current government now allows operators to propose certain trains as part of their franchise bids. The Class 700 Thameslink trains will have no Wi-Fi or power-points because the DfT refused to fund them, and still refuses to despite the TOCs and campaigners such as Railfuture calling for them to be added to the design and retro-fitted to the units already manufactured.
At privatisation all the rolling stock was sold off to train leasing companies. However, cost-effective financing has not always been easy to obtain and, quite sensibly, the government has agreed to directly fund some new trains such as those for the new Crossrail service.
The only part of the privatised railway that has survived intact are the freight operators, and they have been the least troublesome part of the railway, and generally successful.
One of the core objectives of privatisation has been achieved. Passenger train services are no longer subsidised by the taxpayer (the government did not allow BR to operate freight services at a loss – at one point an 8% minimum profit was required) and neither is the operation and maintenance of the network. British Rail had one of the lowest levels of subsidy in Europe but that was partly possible because it was a railway in decline and had the freedom (or was virtually guaranteed government approval) to terminate services and downgrade or close parts of the railway when they became life expired. However, given that patronage has doubled it is hard to believe that BR would have needed subsidy either. Today the railway receives considerable taxpayer support but it is for enhancements (schemes are on a scale unimaginable even a decade ago), renewals and paying the interest on Network Rail’s debt mountain accrued over 14 years of rejuvenating, modernising, enhancing and expanding the network.
It is hard to see the current railway structure as anything other than a bit of a mess. However, it will not be sorted out quickly, despite the plethora of investigations into Network Rail’s recent torrid performance.
The term ‘botched privatisation’ has been used on numerous occasions to describe the structure that was put in place in the mid-1990s. It is pretty likely that had it been done properly then we would still have a largely similar system in place today and calls for re-nationalisation would come largely from the idealistic rather than those desperate to see something better.
The depressing thing is that many aspects of privatisation were not wildly wrong and with a bit more consideration could have been tweaked to be optimal. History suggests, however, that with an opposition promising (untruthfully as it happened) to reverse the changes and with no prospects of staying in office the Conservative government opted for a rushed fait accompli.
Passenger Service – End of Cross-Subsidy
The Beeching Cuts showed that if you cut the branches then the trunk will wither, and therefore ill-considered cuts are a false economy. Since the late 1960s it has been recognised that there will always be loss-making routes that provide an essential service and need to continue.
When British Rail ran passenger services it was able to cross-subsidise so that the profitable (e.g. Intercity) services subsidised the loss-making (e.g. regional railways) services. This happened even in the pre-nationalisation days of the Big Four. Indeed then Prime Minister John Major proposed creating a small number of large franchises, but was talked out of the, arguably, very sensible idea.
Because maximum competition was desired passenger services were dispersed amongst 25 geographically different franchises. The inevitable happened, with a few franchises (such as South West Trains) making super profits, which left the industry, and others (such as these in Wales and the Borders) making losses that where larger than the subsidy provided. This resulted in a taxpayer bail-out.
As the situation got worse the Labour government tried to treat the symptoms of the illness rather cure it. From 2004 it started to introduce a concept called 'cap and collar' into franchises. The theory was simple: profits would be creamed off the profitable franchisees and given to the loss-making ones. Unfortunately, because it naively failed to consider the natural instincts of operators, it was enormously counter-productive. With 80% of additional revenue being taken away through the ‘cap’ operators had no incentive to introduce new services, and certainly no way to offset the initial years of losses when new services are introduced.
Because the additional ‘collar’ support was handed over without any conditions to operators in trouble the money was simply banked to reduced losses that year rather than change the business to get on track. This meant that once an operator was ‘on the collar’ they usually stayed on it for the rest of the franchise. Surely the money should have been hypothecated to increase passenger numbers by, for example, additional advertising and special fare offers.
For a while it looked as if a smaller number of larger franchises would be introduced (e.g. Greater Anglia, Great Western and TSGN) but now the talk is of smaller franchises once again, which will ultimately increase administration costs through duplication and lack of scale.
Franchising – Short-termism
Given that the government sold off the track, signals, stations plus all of the passenger and freight rolling stock lock-stock and barrel, leaving no physical assets remaining in state hands, it is unclear why it decided to let out passenger franchises over a short term (typically even years) rather than sell them off as well. Whilst some operators invested in new trains (e.g. Chiltern Railways – which ordered the first new passenger trains in Britain for three years) few did. There was little incentive to invest or take risks over a short period when the successor was most likely to reap the rewards – the franchise system gave the incumbent no right to a renewal or preferential selection in a future contest. Twenty years later this situation has not changed with plans for long franchise (e.g. 20 years, as Chiltern Railway received in 2001) having been abandoned.
Franchising – Changing the owner but keeping the rest the same
Some forms of outsourcing, such as IT, allow a new supplier to replace then incumbent using entirely new facilities and staff. That will never be the case with the railway where the stations are fixed and staff replacement is difficult. In reality when a franchise changes hands only the very senior management will change hence (assuming the franchise boundaries have not changed) 99% of the staff will remain continuing in the same roles but have a new contract of employment for the new operator. With the huge admin effort involved, for no benefit whatsoever, one might ask why the operating company should not stay the same with just the shareholders changing from the old owning group to the new one.
Fare Regulation – Tail wagging the dog?
The government rightly realised that with monopoly franchises being created (there were few journeys on which a choice of operator was possible) then passengers could be forced to pay increased fares in order to get to work, which would harm the economy. It therefore identified those fares that were unlikely to be discretionary for most passengers (e.g. season tickets for those travelling to work at peak time, and some off-peak fares) and capped fare increases to inflation. At various times the government has set the cap at RPI, RPI-1%, RPI+1% and even RPI+3%.
Because the cheapest rather than the most expensive fares have been capped the result is a massive widening between the cheapest and dearest fares. This has not only made peak-time walk-on fares on certain routes almost prohibitively expensive (some have claimed that a taxi or even a chauffeured limo would be cheaper) the capping of season tickets in conjunction with a surge in property prices has distorted the travel-to-work market so that it can now be much cheaper to live far from work and commute in. Because many of the railway’s costs are incurred supporting the morning and evening rush hours (much rolling stock is used only a few hours a day) providing more trains and enhanced infrastructure (such as longer platforms) for a narrow market has harmed not improved the railway’s finances.
Fares expert and Railfuture Vice President Barry Doe has suggested that the government should instead set the maximum fare, which should help ensure that no fares become unaffordable. The train companies would have more freedom to adjust lower fares according to demand and would then have an incentive to introduce optional add-ons to fares to generate more income, such as refreshments and on-board facilities, or lounge access.
Unfortunately, one thing the government did not consider was capping car parking fees. Train operators have often hiked these to generate income, which they have also argued should not be caught under the ‘cap’ mentioned above.
Rolling Stock Sell-Off – High leasing charges for paid-off trains
The government sold off the trains not to the franchise winners but to rolling stock leasing companies (ROSCOs). This has been a sore point ever since with the government having accused the ROSCOs of making unjustifiably large profits on old trains where BR had already written-off the cost (although the accusation was later quashed). The high leasing costs have made it more difficult for operators to run more services and because of Britain’s uniquely limited loading gauge operators could not buy redundant trains from abroad.
Since the government would no longer be financing the purchase of new trains the ROSCOs, who were mostly owned by banks, were a suitable venture for funding and taking the risk on building new trains. However, many would argue that the leasing charges for BR’s old stock should have been capped or the train operators should have been given the option to purchase it.
This is now a dead issue as from 2020 old BR stock will not be able to be used without modification (and therefore investment by the ROSCO) to ensure that it complies with accessibility regulations.
Rail-freight has been the undoubted success of privatisation, certainly to the extent that none of the freight customers would prefer it to be re-nationalised. It is probably the only rail sector where privatisation has got better over 20 years, as new freight operators have entered the market and service quality has improved considerably.
There is a universal truth for every business. The customer (the business) wants to be in control of its suppliers rather than its suppliers being in control of it. Road haulage is highly-completive and customers can change suppliers easily and quickly. British Rail was a monopoly supplier and had a ‘take it or leave it’ attitude (not helped by government demands for a certain rate of return). Because of the need to invest in wagons and facilities deciding to use rail-freight is a major gamble for customers compared to transporting goods by road, and BR’s attitude was a major turn-off, whereas having multiple rail-freight operators in competition with one another created a more level playing field with road.
The freight sell-off didn’t start well. Despite the BR rail-freight sector having multiple divisions only two buyers were found: Freightliner for container traffic and EWS for everything else – hardly a good start for competition. Worse still, all of BR’s freight yards and facilities were sold to those two companies as well. This made it exceedingly difficult for new entrants who could lease new trains and win new customers but would have nowhere to stable and service their locomotives and wagons.
New operator GB Railfreight was only really able to operate because its first and major client was Railtrack, providing the infrastructure trains to renew railway tracks. A few other smaller operators have entered the market usually based around one customer, but there has been a high level of business failure. The good news for the rail-freight market is that, because the operators wished to realise asset value, Network Rail has been able to re-purchase some of the freight yards and offer them to all operators.
With fingers crossed we can say that rail-freight should be left alone to get on with the job, but it is vulnerable and needs to keep innovating and growing its market share.
Railtrack Sell-Off – Focus on property rather than the railway
The most ironic part of rail privatisation was Railtrack. The government originally had no intention to sell-off the railway network and stations. However, it accepted that there had been a sustained severe lack of investment over decades and enormous funds would be required to provide capacity for new services if there was a market for them. (Whether there was a market was uncertain as the government had considered the railway to be in terminal decline.) It was unwilling to fund enhancements and was persuaded by senior people within British Rail that only a privatised Railtrack would be capable of raising the necessary private investment. The irony is that today the government is providing almost all of the funding for rail enhancements, having ‘seen the light’ and realised the contribution that the railway makes to the economy and the huge demand for it.
Therefore Railtrack was fully privatised. It turned into a disaster, not necessarily because a private ownership of the network was inherently wrong (indeed it works well in other countries) but because Railtrack had completely the wrong attitude. It saw itself as a property company and not a rail company. Some may consider this inevitable. Substantial profit could not be made from running trains, and the share price would not be raised sufficiently for the capitalisation of the company to support large loans. Therefore it focused on being a property owner, and neglected its stewardship of the rail network. It was brought down by its failure to ensure the track was safe, tragically proven by the Hatfield disaster, and its enormously ambitious and misguided plans to enhance the West Coast Mainline using moving-block signalling that had not been used on a heavily-used mixed-traffic mainline anywhere else in the world.
What next for Britain’s railway?
One may ask why rake over the past. In fact the railway is at a junction. In the next few years the passenger service could be fully re-nationalised, if Labour is elected in 2020, or Network Rail might be returned to the private sector if that becomes a recommendation from the Shaw report.
What is clear to Railfuture is that the passenger and the freight customer must be at the heart of any decisions taken to restructure (yet again) the railway system.
Read previous articles by this writer: Mountain of Ideas, Sent to Coventry, Fare Rises - RPI vs CPI, New Year, Better Railway, Nine-Days-Rail-Surge, Tube Usage Hits Record, Passenger Growth Future?, Felixstowe Cut-Off, Passenger Priorities , Passenger Frustration, Accessible Travel, Eurostar Snapshot Survey, Stansted Experience, Widening the NET, Lacklustre Busway, Expand Eurocity network, Government backs Wi-Fi, Cheapest fares by law?, Bring Back BR?, Public Sector Franchises, Fare Increase Viewpoint and Tube Staffing.