The Privatization of Railways in Britain Bill Bradshaw

S Restructuring Railways (part 2)

pecial Feature The Privatization of Railways in Britain Bill Bradshaw

The privatization of British Rail (BR) will ers to take a considered view of the busi- parts of BR have been sold to the private be completed by early 1997. This very nesses that they have purchased or for the sector, for example, hotels in 1982 and complicated and controversial measure experience of one stage of the process to ships and harbours in 1984. However, has been put into effect since the Prime come into effect before the next stages the railway itself remained as a self-con- Minister, John Major, won the General have begun. tained operation. Now BR has been split Election in 1992. The proposals for the BR was formed in 1948 when the four into almost 100 different companies. In- industry were contained in a White Pa- private railway companies, which had stead of one organization operating with per - “New Opportunities for the Rail- been under a form of public control dur- one Board of Directors and a single chain ways” published in July 1992. A Railway ing WWII, were nationalized. BR was of command, there is now a contractual Bill was put before Parliament in the same vertically integrated meaning that it structure where relationships are deter- year and became law as the Railways Act owned and maintained its own track and mined by legal agreements. Each of the in November 1993. trains as well as being responsible for new companies depends on many others The task of privatizing the railways has operations. At that time, BR also built in order to provide service to the customer. been very hurried. Government has re- trains, owned hotels and ships and ran a The structure of the new railway is well lied for assistance and advice on very large large fleet of lorries to deliver freight. In illustrated in a diagram produced when numbers of consultants who have worked the late 1960s, a Labour government di- Railtrack, the company owning the infra- under great pressure. Many of these ad- vested the lorry fleet from BR along with structure, was floated on the Stock Ex- visers were involved in the privatization the responsibility for small freight consign- change (Fig. 1) of the rest of Britain’s nationalized indus- ments and vested this in another nation- tries and drew on that experience. The alized industry, the National Freight Cor- speed of the privatization of the railways poration. Since the Conservative Party has not allowed an opportunity for buy- came to power in 1979, various ancillary

Figure 1 Structure of Privatized Railway Industry

Franchising Director Rail Regulator (awards franchises (approves access and pays subsidy) agreements)

Passenger train operating companies (run passenger trains) Infrastructure maintenance companies Lease Provides Provide rolling-stock access to (maintain infrastructure) network services Rolling-stock companies (own rolling-stock) Provides access to Provide Other passenger RAIL TRACK Track renewal Provide Provide network services services services train operators (owns railway companies (run passenger trains) infrastructure) (renew track)

Heavy maintenance suppliers (maintain rolling-stock) Provides access to network Provide Freight services Other service operators providers Provide (run freight trains) (e.g., telecommunications) services Provide materials haulage

Source: Railtrack Pathfinder Prospectus, April 1996, SBC Warburg

ties although some services like archi- tecture have been closed. - Train and station catering

The only part of British Rail that has been the subject of a flotation on the Stock Ex- change has been Railtrack. This company owns all the track, stations, light maintenance depots and operational land. It is also responsible for managing the timetable, for the operation of signalling and control of trains and for the overall supervision of safety of the train operations. Railtrack plans the development of the IC225 at Leeds Sation (T. Suga) network. Railtrack does not undertake engineering work using its own staff. It ing passenger train services. When the has contracts with the various engineer- The Sale of British Rail rolling stock was offered for sale, each ing companies that have been sold to the ROSCO had a fleet of vehicles and a guar- private sector and which undertake work The sale of BR has been organized in three anteed rental income flowing from the on the track. Railtrack relies for most of different ways. Some operations have leases. Since there was no surplus rolling its income on Track Access Charges paid been sold outright. The infrastructure has stock available, the lease rentals repre- under contract by the passenger and been the subject of a stock market flota- sented a very secure investment. Apart freight train operating companies. Some tion. The operation of passenger train from the sale of the passenger rolling stock income also comes from property that services is in the course of being fran- other important sales included: Railtrack owns and from retail activities chised—a process due to be completed at stations. It was the intention of the gov- in March 1997. In all cases, the sale to - All civil engineering, signalling and ernment at the time the Railways Act was the private sector has involved the trans- electrical traction current supply work. passed into law, that Railtrack would not fer of assets and of contracts negotiated This work was divided between com- be floated on the Stock Exchange until the before the sale. Some contracts have a panies specializing in either mainte- rest of the railway activities in Britain had number of years to run. These provide nance or renewal work. been sold and all the operation of the pas- the purchasers of the new companies with - Maintenance workshops for rolling senger trains had been franchised to the the certainty of a future income until their stock. The passenger and freight train private sector. The government changed contracts expire. Staff have been trans- operating companies undertake day-to- its mind about the order in which the dis- ferred to new owners with some limited day light maintenance and repair of posal of BR was to proceed when it an- protection of their employment rights. their own trains at depots that they lease nounced in November 1994 that Railtrack Other staff have chosen to leave BR un- around the country. They rely on the would be floated in the lifetime of the der schemes of early retirement and re- maintenance workshops, now owned present Parliament (i.e. by May 1997 at dundancy. by private companies, to undertake the latest). This change of mind was prob- The most important element of the direct major overhauls. ably the result of two factors: the desire sales has been the disposal of the whole - All freight operations including the fleet to make it very difficult and expensive for fleet of passenger rolling stock—locomo- of locomotives, wagons and carriages any future Labour government to reverse tives, coaches and diesel and electrical used for the conveyance of mail and the process of privatization, and the fact multiple units. This fleet was divided into parcels. The freight companies also that the proceeds from the sale of Railtrack three pools, each with a variety of stock. supply the locomotives and wagons would be available to the government Each pool was formed into a Rolling Stock used for engineering trains required in (possibly for tax cuts) before the next elec- Company (ROSCO). Leases were drawn connection with track repairs. tion. up between these ROSCOs and each of - Various technical design, testing, pro- The passenger train operations of BR have the 25 companies responsible for operat- curement, training and research activi- been split between 25 separate compa-

16 Japan Railway & Transport Review • September 1996 Copyright © 1996 EJRCF. All rights reserved. nies. There are three broad groups: monopoly of supply to domestic and in- title “Organizing for Quality” under which former long-distance InterCity passenger dustrial customers. The government all engineering costs had been brought trains, commuting services around Lon- agreed with the company to sell the whole under the control of the three Managing don, and regional services including com- as a vertically-integrated business, al- Directors of these principal passenger muter services and those serving the more though a regulator was appointed to over- businesses. remote areas of Scotland and Wales. The see the company’s pricing policy and pro- Freight is a small part of the railway busi- operations of these 25 companies are in tect consumers from abuse by a monopoly ness in Britain. Freight managers would the course of being offered as franchises. supplier. The sale of British Gas shares have paid the costs of the assets that they Each has been allocated a pool of rolling was the first popular privatization where used exclusively, and a contribution stock with contracts already in place with shares were offered to the general public. (known as avoidable costs) towards the the Rolling Stock Leasing Companies. Purchase was made very simple. As well extra costs that arose on the passenger Each also has an Access Agreement with as a low initial share price, incentives by railway as a result of freight activities. Railtrack which provides for the use of way of discounts on gas bills were given. Neither of these options—the geographi- track, stations and light maintenance de- However, many commentators criticized cal split nor the business sector split—was pots at a pre-determined price. the fact that British Gas faced no real com- accepted by the government because nei- petition. Gradually competition has been ther provided for significant competition Other Possible Options for introduced into the gas industry, but, more on the track. The government therefore Privatization importantly, when the telecommunica- became committed in the new legislation tions and electricity industries were priva- to division of infrastructure management Why was such a complicated method of tized, provision was made for competi- from train operation. It was not apparent privatizing BR chosen? In Japan and New tion at the outset. By the time privatization that the railways in Britain were experi- Zealand, the first steps towards of the railways came onto the political encing any lack of competition. Only in privatization have been a restructuring of agenda, many people argued that the in- the case of commuting into London do the railways to deal with problems of debt frastructure should be separated from the railways in Britain experience any degree and a re-organization to make the com- operation of trains so that different opera- of monopoly power which would allow panies attractive to prospective purchas- tors could compete with one another to prices to rise without an equal loss of vol- ers. This has involved revision of laws provide train services along the same ume. Elsewhere the car, the truck, express and other regulations affecting railways, tracks. For this to be possible it was said coaches and airlines, all of which oper- reducing staff, dealing with pension is- that the management of the tracks, the ate in de-regulated markets, have eroded sues, deciding how much property should timetable and the signalling should be the railway share of business and provide be sold and how much should be retained placed in the hands of an independent effective competition. by the State. Arrangements for paying for “Track Authority”. This subsequently be- Another aspect of the government’s policy passenger train services that are unprofit- come known as Railtrack. was the decision to franchise the opera- able but deemed to be socially necessary, Apart from selling BR as a whole, other tion of passenger train services. It was have also been put into place. Having options for disposal were considered. The recognized very early in the process of dealt with these problems, clearly-defined company could have been split into a few privatization that many passenger services enterprises are then available either to be geographically-discrete vertically-inte- would continue to need subsidy. It was sold or to be floated. grated companies as has been the case in thought that the amount of subsidy could In Britain, the government dismissed the Japan. An alternative was to divide the be reduced to a minimum through a sys- option of privatizing BR as a single enter- system into an InterCity network, a Lon- tem of franchising, with frequent compe- prise although this was the method of dis- don area commuting business and a Re- titions for franchisees. It was suggested posal favoured by railway executives. gional company responsible for the re- that franchises would typically last for 5 When the British government began the mainder of the passenger business. Each years and that such a short duration would process of national privatization, the gas company would have controlled all the “keep the franchisees on their toes”. With industry was disposed of relatively early. infrastructure assets over which it was the tracks open to other operators (known as British Gas was a monopoly supplier. It primary user and managed the signalling, “open access”) it was believed that com- owned some but not all the natural gas timetable and stations associated with petition to provide service and frequent fields. It owned the whole of the storage their business. In fact, in April 1992, BR re-tendering of franchises would keep and distribution system and it had the introduced such an organization with the subsidy levels as low as possible. It was

perhaps not appreciated at the time that companies bound together by contracts, quired by the prospective franchisee, ap- the prospect of competition from “new there has been a need to develop a frame- pears to be by far the most important con- entrant” operators under the regime of work through which these new relation- sideration in achieving success. The stan- “open access” might deter franchisees or ships can work. Services are purchased dard franchise length is 7 years although lower the value of their bids. A franchise on behalf of the government by the Fran- in some cases this has been extended to in any other business normally gives ex- chising Director. It is his responsibility to 15 years where investment in new rolling clusive access to a market in an area. This publish and consult upon a train service stock has been offered. Other quality fea- is described by economists as “competi- specification called a Passenger Service tures such as improved standards of reli- tion for the market”. The franchises that Requirement (PSR). This becomes the ability and punctuality, bus feeder services the British government were proposing basis upon which potential bidders are and station improvements appear to have were open to competition including invited to express their interest in tender- marginal influence on success. The Fran- “cherry picking” where competitors might ing for the operation for each franchise. chise Director has set a cap on the rate at offer services when there is profit to be The PSR represents the minimum service which the prices of some of the most made but leave the franchisee to operate that the potential operator must provide popular fares can rise. at less busy times. Another feature of fran- although any bidder may offer a better The Rail Regulator has been in office since chises elsewhere, such as Argentina, has service if they wish to do so. Among those December 1993. The Regulator licenses been the granting of long franchises with bidding for the first seven franchises, bus all operators of trains, stations and light a view to encouraging investment. Very companies have been very prominent. maintenance depots and has a duty to short franchises do not encourage invest- (Since the British bus industry was deregu- monitor and enforce compliance with the ment because they give virtually no op- lated and privatized 10 years ago, there terms of these licenses. He approves all portunity to earn a return on capital. has been rapid consolidation into major Track Access Agreements between groups). In most cases, the existing Brit- Railtrack and passenger and freight train The Structure of the Privatized ish Rail managers have attempted to operating companies. He sets a cap on Railway Industry mount buyouts with the backing of ven- the prices charged by Railtrack for track ture capitalists but they have met only lim- access. Among the Rail Regulator’s du- With the change from a nationalized in- ited success. The Franchise Director con- ties is the promotion of competition on dustry with a strong command structure, siders the bids. The price bid, which in the railway. This involves encouragement to an interconnected network of private most cases is the amount of subsidy re- of the provision of passenger services op- erated in competition with the franchisees. It has been agreed to constrain such competition (known as “open access” competition) until the franchising process is complete and has had time to settle down. The Regulator is also the guardian of con- sumer interests and a number of Users’ Consultative Committees covering various parts of the country report to him. It will be seen from the short description of the duties of the Franchise Director and the Rail Regulator that many responsibili- ties, exercised by government ministers in other countries, have been transferred to these agents. It is not yet clear how accountable the Franchise Director or the Rail Regulator will be to Parliament.

EMU of ‘South West Trains’ (Stagecoach)

18 Japan Railway & Transport Review • September 1996 Copyright © 1996 EJRCF. All rights reserved. Sale and Franchising of the existing staff and assets such as track re- and station operators. These identify risks Rail Business pair machinery. The new companies have and show how to control them to a level contracts in place to carry out work for that is as low as reasonably practical. Passenger Rolling Stock Railtrack. These contracts are mostly set Railtrack must approve the Safety Cases The three ROSCOs were established as up on a geographical basis. In 1996, the of all operators and be responsible for the public companies on 1 April 1994. They value of the contracts is about £750 mil- safe working of all of its own infrastruc- took over all passenger train locomotives, lion. When these contracts expire be- ture contractors. coaches and diesel and electrical multiple tween 1999 and 2001, the new compa- Performance regimes relating to punctu- unit trains. These were valued at the time nies will be expected to bid against one ality have been agreed between Railtrack at £4.5 million. The three companies another for work. and the Train Operating Companies pro- were sold on November 1995 for £1.8 The maintenance of the railway telecom- viding that each party shall compensate billion. The three companies are: munications network is undertaken by the other for delays. Railtrack is respon- Angel Train Company acquired by GRS RACAL, BR Telecommunications Ltd., on sible for any disruption caused on the Holding Co., a joint venture between contract to Railtrack. network, except those delays caused by Babcock and Brown, Nomura and The large Rolling Stock Engineering Works operators themselves. An operator caus- Prideaux and Associates who paid £672 have also been sold and these compete ing a delay (e.g. a train breakdown) must million for the company; Eversholt Leas- for heavy overhaul work provided by the pay Railtrack compensation and Railtrack ing acquired by a Management Buyout ROSCOs. Various rolling stock design in turn pays compensation for the delays (MBO) Team with venture capital support procurement and other technical work is caused to other operators. for £580 million; Porterbrook Leasing also provided by specialist service companies The turnover of Railtrack in the year ended bought by an MBO with venture capital created from groups of former British Rail 31 March 1995 was £2,275 million. Of support for £527 million. staff. The situation created under this £1,955 million came from the Pas- privatization is that the major participants senger Train Operating Companies in the The companies were sold with leases in in the railway industry, Railtrack, the Train form of access charges, £191 million from place (mostly for 8 years) with the Train Operating Companies, and the owners of freight operators and the remainder from Operating Companies, which produce a the passenger rolling stock, (the ROSCOs), property. The Track Access Charges are guaranteed income stream. Of this in- do not provide much “in house” engineer- subject to regulation and are at present come, 80% is underwritten by the gov- ing. Almost all engineering services are capped by a formula of RPI-2% meaning ernment. The companies also have in- purchased under contract from third par- that the cost of access must fall, in real demnity against the costs of safety modi- ties. terms, by 2% each year. This form of regu- fications required by law in the future. lation, which is common in Britain, en- The ROSCOs are responsible for the costs Railtrack sures that some of the productivity gains of heavy overhaul of trains. Running Railtrack, the owner of infrastructure and made by the regulated industry are passed maintenance is the responsibility of the the stations and controller of the timetable back to users. Train Operating Companies who lease the and the signalling, was floated on the Shares in Railtrack were made available trains. stock market in May 1996. The network for a public flotation that was substantially comprises 16,000 route km, 2,500 stations oversubscribed. The company was sold Engineering and 90 depots where light maintenance for £1,950 million. This was substantially All engineering: civil, signalling, electri- is carried out on rolling stock by the Train less than the £5,600 million valuation of cal power supplies, including design, new Operating Companies. Most stations are the assets made by the government at the projects, renewals and maintenance leased to the principal Train Operating outset of privatization. The discount on which was previously carried out “in Company using the station although the sale price was the result of the uncer- house” by British Rail technical staff, is Railtrack operates 14 main line stations tainties and complex nature of the new now the responsibility of private contrac- itself. structure of the railway industry. The op- tors. Six Track Renewals Companies and Safety on the railway is under the overall position political parties have expressed Seven Infrastructure Maintenance Units supervision of the independent Health and strong hostility to the principle of railway (Companies) were created out of the Safety Commission. Railway safety is privatization. They have pledged to in- former British Rail Engineering Divisions. managed by a Railway Safety Case re- troduce legislation which would allow These were sold to the private sector with gime. Cases must be prepared by all train instructions to be given to the Regulator

to force Railtrack to invest a large propor- There is no spare rolling stock available duced now and trucks have captured most tion of its income. at present. Companies wishing to increase new types of freight traffic. The former services will either have to re-organize the freight business of BR was divided into Passenger Train Franchises existing service or order new trains. Many Trainload Freight which mostly hauled The franchising of passenger train opera- season ticket and other popular fares are bulk materials such as coal, oil and stone. tions is well advanced. In June 1996, the strictly controlled. This was profitable. Railfreight Distribu- last five companies began the process Each franchisee has fixed contracts for the tion handles international traffic which is leading to their eventual sale. It is antici- cost of leasing rolling stock and with now increasing with the opening of the pated that franchising will be completed Railtrack for access to the track and to sta- Channel Tunnel and automotive products. by March 1997. The companies vary con- tions. These charges, which comprise, in This company abandoned wagonload traf- siderably in size and geographical com- a typical case, 60% of an operator’s costs fic from individual consignees some years plexity. must be paid even in recession. When ago in an attempt to reduce its chronic There has been keen competition in the BR managed the whole railway, it was unprofitability. Freightliner hauls contain- bidding for franchises. Apart from man- common for maintenance and investment ers mostly to and from ports. It was also agement buyouts and at least five bus in infrastructure and rolling stock to be loss making. Finally Rail Express Systems companies, other bids have come from a reduced in times of recession. operates trains for the Post Office. French-based utility company, and a ma- Franchisees must operate trains punctu- Following a consultant’s report, the gov- jor shipping company, and interest has ally and reliably. They must also provide ernment asked for the profitable Trainload been expressed by airlines. The compe- information about all train services on the Freight to be split into three geographi- tition authorities have not intervened to entire network and sell through tickets to cally-based companies before sale so they stop a bus or coach company bidding to other areas. Failure to operate within could compete with one another. The operate a line serving the same area. agreed levels of punctuality means that three companies: Mainline, Transrail and The new companies take over businesses compensation must be paid to customers. Loadhaul were, however, sold together to where the train service is largely fixed a new company, English, Welsh, and Scot- under the terms of the franchise. Changes Freight tish Railways. This was formed by Wis- to the timetable must be negotiated with The amount of freight carried on the rail- consin Central which had already pur- Railtrack which in turn must negotiate ways in Britain has declined over the last chased Rail Express Systems. Wisconsin with other operators who may be affected. 40 years. Much less coal and steel is pro- Central is the North-American company that purchased, in association with others, the New Zealand railway operation Transrail. Wisconsin has announced that it intends to revive the wagonload business and has ordered 250 new diesel-elec- tric locomotives from General Motors of the United States. Unlike the passenger companies, the freight operators own their locomotives and some of their wagons. Under the new legislation “open access” rights for operation on the railway are available to any freight company as well as to passenger operators. Two organiza- tions: National Power (an electricity gen- erator) and Direct Rail Services (in the nuclear power industry) have entered the market in a small way with their own locomotives and train crews hauling their own traffic.

Rail Link Bus of South West Trains (Stagecoach)

The government has set no success crite- ria for the railway in terms of the target market share it should aim to achieve or improvements in quality of service it should aim to provide in terms of fre- quency and speed. There is no clear set of purposes behind the policy of subsi- dizing railways. Apart from whether the system costs the taxpayers more or less money it will be difficult to say whether the policy has been successful. Some commentators have argued that targets should be set for the transfer of passenger and freight traffic from the roads to the railways, principally on environmental Class 60 Freight Locomotive (English Welsh and Scottish Railways) grounds, but also to reduce road conges- tion. So far, the government has rejected Effect on Public Funds panies will not flow back to government such arguments. It is impossible to be sure what will be and receipts from sales will dry up. Vari- the long-term financial effects of railway ous estimates have been made of the con- privatization. There have been very high tinuing liabilities of the government in the transitional costs in setting up the com- form of the cost of paying franchisees. It plex structure. There have also been sig- is suggested that by 1997-98, the cost to nificant costs of redundancies and pen- the taxpayer will settle down to about sions for staff accepting early retirement. £1,700 million, still considerably more Substantial levels of debt have been writ- than it cost to subsidize BR. ten off. It is clearly costing a good deal Supporters of privatization suggest that a more for the Franchise Director to pur- long-term view is necessary arguing that chase services under the new financial private-sector disciplines will so increase regime than it cost the government to sub- efficiency that the need for public subsidize BR through the previous proce- sidy will fall. Such proponents also point dures. For example the total cost of buyout that the private sector will now have ing services from BR in 1993-94 was to raise money for investment in the pri- £1,143 million. In the year ending 31 vate capital markets which will reduce March 1995, this has risen to £2,009 mil- public sector borrowing. lion. However, some of this money flowed back to government as profits from the ROSCOs, Railtrack and the Train Op- erating Companies while these organiza- Bill Bradshaw tions remained in public ownership. During the period while the industry is Professor Bill Bradshaw joined British Railways in 1959 as a Management Trainee after graduating in being sold there will also be receipts from Political Economy. He was appointed Director of Operations in 1979, Director of the Policy Unit in 1981, and General Manager of the Western Region in 1983. Following injury, he took sabbatical leave the sales themselves. at the University of Oxford and was appointed Professor of Transport Management at the University However, the new contracts stretch for- of Salford in 1986. He became Chairman of Ulsterbus and a Fellow of Wolfson College, Oxford in ward for several years during which time 1987. He is also a specialist adviser to the Transport Committee of the House of Commons. the profits of the newly-privatized com-