An example not to follow

It is ten years since the first privatised train travelled from Twickenham, home of the famous rugby ground in the south London suburbs, to Waterloo in the early hours of February 4 1996 marking the most revolutionary change in the railways in Britain since nationalisation nearly 50 years previously.

In that time, this amazing experiment with a major industry which is a vital part of the nation’s infrastructure has seen an almost continuous series of changes and unexpected developments which continue to unfold. It is remarkable that the British government and the rail industry put forward the British model of rail privatisation as one which other European countries should follow when it has proved to be a very costly exercise which has delivered very little other than extra costs, a bureaucratic structure that few understand and a looming financial crisis.

The privatisation of the railways in the UK was both extremely radical and very swift. The Conservative government of 1992-7 embarked on a full scale privatisation, breaking British Rail into over 100 component parts, which all had to be carried out within that Parliamentary term as ministers wanted the process to be irreversible.

Indeed, the privatisation has proved to be impossible to reverse, but there has been a series of changes in the past decade to the structure because the original design was flawed and impractical. At the core of the initial new structure of the railways was the separation of the infrastructure from operations, leading to the creation of a separate infrastructure company, Railtrack. The Tories suggested that this model was required by European legislation when, in fact, only accounting separation to allow open access was specified by the Commission. It is this separation, enforced rigidly and without regard to traditional railway practice, that has been at the root of most of the subsequent problems.

The separation was specified by the Treasury, which was the moving force behind privatisation, because it wanted to encourage on-rail competition between different operators. Such was the ideological fervour of the Treasury, which in Britain is far more powerful than traditional finance ministries in other European democracies, that at one point its civil servants actively considered the idea of having a monthly auction for every train path on the network until they realised it would be a bit impractical!

In fact, on rail competition with open access to all operators was always incompatible with the other notion behind the privatisation, the franchising out to private operators of services divided into 25 separate businesses. Had the franchises been let with the constant threat of open access competition, the bidders would have required far more subsidy out of fear that their best services would be ‘cherry picked’ by competitors, or, more likely, they simply would not have bid. Yet, the legislation was framed with this contradiction at its heart and it was the first regulator, John Swift, who prevented open access operation.

So the model was based on a concept that was unworkable right from the start and therefore it was hardly surprising that it got into trouble. At first, it had been envisaged that Railtrack would stay in the public sector until the franchises had been let but the government, keen on making money from the railway’s largest asset, changed its mind and sold the company to the public in the spring of 1996. That was to prove the worst of a series of mistakes.

A complex regulatory framework was put in place. The rail regulator had the task of overseeing Railtrack and ensuring that it offered its customers, the train operators, a fair deal. The main task of the regulator was to determine the price Railtrack paid for track access, which meant that effectively he set the company’s budget which is subject to a quinquennial review process. A second regulator, the franchise director, who was head of the Office of Rail Passenger Franchising was responsible for letting the franchises and policing them.

In administrative terms, the privatisation was a remarkable success with all 25 franchises sold by the time Labour won the election in May 1997 and to ensure there were sufficient bidders, operational subsidy increased from £1bn to £2bn annually, with the notion that this would reduce to £800m over the next seven years, the length of most franchises. All the rest of British Rail including three rolling stock companies, 13 engineering units, and five freight operations had all been sold by then too.

The Labour government elected therefore inherited a railway that had been changed so fundamentally and sold off so cheaply that it would have been impossible to renationalise. Oddly, the Prime Minister, Tony Blair, while in opposition had promised to recreate a ‘publicly owned publicly accountable’ railway but made no efforts to do so when he was elected.

At first, it all seemed to work well. According to railway workers and managers, that was principally because everyone still felt they worked for one railway. Even the share prices of the various companies rose, including Railtrack whose stock market valuation, briefly, quadrupled.

But things started to go wrong with a series of serious train accidents – Southall in September 1997 in which seven people were killed, and then Ladbroke Grove (31 dead in October 1999), both caused by trains going through red lights, and Hatfield in October 2000. While only four people died in Hatfield which was caused by a train derailing at 185 kph when a poorly maintained rail broke, its effect was far reaching. Railtrack executives, lacking the necessary engineering experience, panicked, imposed a series of unnecessary 30 kph speed limits and brought large parts of the rail network to a virtual halt. The accident highlighted the lack of co-ordination between the railway infrastructure company and its maintenance companies, which had been forcibly separated from Railtrack and sold off at privatisation. The speed limits proved to be unnecessary as no other part of the track was found to be in such a bad condition, but they caused losses of £500m for the company which was then forced into administration a year after the disaster.

Meanwhile, many of the franchises were failing, too. Nine out of the 25 had to throw in the towel, because they had bid on the basis of making operational savings but discovered that British Rail had been far more efficient than it had seemed. Most were bailed out with extra cash, which meant that the high subsidies created at privatisation remained, although one, the French company Connex, was thrown out of the South Eastern franchise because the Strategic Rail Authority, which replaced the Office of Passenger Rail Franchising in 1999, was dissatisfied with its performance.

Network Rail, a not for profit company with no shareholders took over from the administrators of Railtrack in October 2002 but the period of administration proved expensive, as, again, there was insufficient railway expertise and costs soared. As my book, On the Wrong Line how ideology and incompetence wrecked Britain’s Railways shows, operating, maintaining and renewing the railway is now costing £5bn annually today, nearly three times the amount (at constant prices) which BR spent in 15 years ago (£1.8bn). While increased safety requirements account for possibly a quarter of that increase, most of the rest appears to be sheer inefficiency and a lack of control. While there was certainly British Rail never had as much money as it wanted, there is no evidence that there was a huge backlog of investment that could justify this staggering level of expenditure. Overall subsidy to the railways, if extra borrowing by Network Rail is included, is now running at about £6bn per year, three times the level ever received by British Rail.

The new structure had hardly any time to bed down when the government announced, in January 2004, that there would be a review of the industry structure. Despite much support for the idea of vertical integration, bringing back together the operators and Network Rail, the review proved to be less radical than expected and resulted instead in the abolition of the Strategic Rail Authority, created only five years previously to coordinate investment and operations in the industry. Its functions have now been handed back to the Department for Transport, the first time in history that the ministry has had such direct control over the railways.

Oddly, this means that the state has far more control over the railways than in the days of British Rail. Network Rail is effectively a state run company, as it can borrow money with government backing, and it has now taken back the previously privatised maintenance work back with its 18,000 workers back in house. Moreover, the civil servants in the Department for Transport make both detailed and strategic decisions over the railway, such as the allocation of franchises. The British rail network is thus now left in a very strange position of being semi-renationalised while ministers claim that it is still in private hands.

To mark the 10th anniversary of privatisation, the Association of Train Operating Companies issued a press release suggesting that there had been ‘10 years of positive change for Britain’s railways’. There are, indeed, a few things to cheer about. Passenger numbers have grown by nearly 40 per cent but largely this is because there has been a period of unremitting economic growth in Britain during that period, and the railways have always been heavily used in boom times. The major part of the growth has been on the suburban rail network serving London’s job market.

Safety, too, after the earlier accidents, has improved, too, with fewer minor incidents and with no rail industry caused accident since May 2002 (when 10 people died at Potters Bar due to faulty points). However, this safety record came at a price because the series of four major accidents between 1997 and 2002 were all entirely or mostly by the way the industry had been privatised. Of course under British Rail safety had been getting better but the rate of improvement has increased slightly since then.

In the area of information, there has been enormous improvement thanks to the creation of a National Rail Enquiry Service and, of course, a very heavily used website. There has, too, been investment in rolling stock with the age of the fleet having come down by three years but with no plans for much new rolling stock in the next few years, this will quickly rise again.

But all this has to be set against the enormous cost of the industry today, and the billions of pounds that have been spent on restructuring the industry. Moreover, the model is still, however, in a state of flux. The new model following the abolition of the Strategic Rail Authority is only just bedding down and already faces a crisis in 2008. Ministers are supposed to draw up a High Level Output Specification, which will say what services and timetable it wants Network Rail to provide. It will also provide a statement setting out finances available. It will be up to the regulator to work out whether he thinks that the two can be matched and that is where problems are likely to arise. The Department is under great pressure to reduce spending on the railways but shutting down lines would be politically unpalatable. A likely compromise is that the railways will be given more money, possibly out of a special ‘innovation fund’ being created to encourage road pricing initiatives or from the roads budget.

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