Lessons from a Railway Privatization Experiment Bill Bradshaw
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Feature Railway Management and the Role of Government Lessons from a Railway Privatization Experiment Bill Bradshaw This article addresses three key questions. both the management of the industry and primary reason for the breakup of the Was privatization a necessary step in the the responsibility for raising the necessary system was the desire to see competition development of Britain’s railways? What investment to the private sector. Previous in train operation but ministers also has been the emerging experience of articles in JRTR have described the policy wanted to liberalize the rolling stock privatization? What should happen now debate in Britain that led to the choice of (including maintenance and major that the privatization method adopted in the mode of privatization and the overhaul) and infrastructure service Britain appears to be failing? alternatives that were considered. A markets. To provide competition in decision was made to separate supply of these services meant splitting Was Rail Privatization infrastructure ownership and many of the former British Rail (BR) Necessary? management from train operation, to sell activities into smaller parts and offering all the passenger rolling stock to leasing them for sale separately. In train This question is easily answered. It would companies, to franchise the passenger operations, franchises were let, mostly for have been difficult to argue, especially train services in 25 parts and to sell the short contract periods and in defined following the privatization of nearly all freight business. The industry was placed regions. Services with different speed the other transport-related industries as under the supervision of the Office of the and marketing characteristics on a well as the public utilities, that the Rail Regulator (ORR), an independent particular line were frequently divided railways should have remained in the government department. between different operators. Emphasis public sector. There are two main was placed upon the fact that relatively reasons for this. First, the government Was the Best Method of short contracts would keep franchisees could not but continually interfere in Privatization Adopted? on their toes. On-rail competition was what were essentially managerial advanced as another way of securing decisions, often in a way that was The method of privatization chosen by benefits for users. This was the main invisible to the public but was the Conservative government was justification for the decision to create a enormously inhibiting to efficient certainly complex. The key reason for separate infrastructure authority as the management. Fare increases, industrial this was the decision to move from a independent manager of the timetable disputes, changes in services and orders vertically integrated organization where and of day-to-day management of for new trains and equipment were all operations, rolling stock and signalling and operational control. subjects of a constant stream of phone infrastructure are the responsibility of one Competition has developed in supply of calls passing between government and company as in Japan, to the disintegrated rolling stock and which now often the British Railways Board (BRB) and solution of separate ownership of the includes maintenance contracts. But these interventions were usually designed various components of production. A rolling stock supply would probably have to protect or enhance political reputations rather than promote commercial or operational logic. Second, no government, at least in the current financial climate, would ever provide finance on the scale needed to reinvigorate the railway. There are always more politically important targets for public investment, such as schools and hospitals that push railways to the back of the queue. As other industries, escaped these cloying influences, it became clear that privatization offered a more attractive alternative than continued public ownership. But with the rail industry in need of continuing subsidy, the question was whether a mechanism could be devised to transfer Class 57 Freightliner Pioneer in service since 1998 (Milepost 92 1/2) 4 Japan Railway & Transport Review 29 • December 2001 Copyright © 2001 EJRCF. All rights reserved. adopted its present course whatever red, blue or green train to Woking with a the years leading up to privatization. model of privatization had been followed choice of fares. But with incumbent There has been only limited success in because the government was already franchisees understandably not keen to promoting competition. The myriad seeking private sector financing initiatives let in competitors and Railtrack not contractual relationships mean that any in public-sector organizations. When in enthusiastic about squeezing more paths meeting between industry parties is likely opposition and while BR was still in the into the crowded timetable, partly to include lawyers and financiers where public sector, John Prescott, the shadow through fear of the possible effects on none would previously have been Transport Minister, argued in favour of punctuality, there have proved to be few needed. Moreover, railway professionals more leasing deals for supply of rolling genuine opportunities to add competing are not blind to the huge salary stock, particularly in the debate leading services of value to the user. There will differentials between themselves and up to the closure of the rolling stock also be a temptation for potential these other professionals whom they have works at York. However, the operators to play games if the income had to teach to do the job. In addition, Conservative government at that time sharing agreements continue the privatization process was drawn out regarded these as financing deals that automatically to give a share of revenue over a long period, led to great came within the scope of the Public on a route to a new entrant. I hope this uncertainty and created a hiatus in Sector Borrowing Requirement (PSBR). distortion arising from the ORCATS investment, especially in infrastructure In the engineering field, the initial computer system, which allocates and new rolling stock. number of companies offering services revenue between operators using a But has the tearing apart benefited the such as track maintenance and renewal formula, will be removed as ticketing user? In terms of coherence and has declined to five as a result of post- systems develop. accountability, it is unlikely. With BR, it privatization mergers and takeovers. In the freight industry, ministers were was clear who was responsible. Nine different companies purchased the forced to reintegrate the three Trainload Responsibility could not be avoided and 13 infrastructure and maintenance Freight companies created by BR when even after disasters such as the Clapham companies offered for sale at they found that there was no market for crash in 1988, BR quickly accepted the privatization. Although there is still them as separate entities. Almost all of blame. By contrast, 2 years after the competition, a few more mergers may BR’s freight business was sold to the Southall rail crash in September 1997 blunt this and, as in the British bus consortium headed by Wisconsin Central victims were still awaiting compensation. industry, it is impossible to force big Transportation and now operates as Inquiries into another crash at Ladbroke players to compete if they show no English, Welsh and Scottish Railway Grove in October 1999 revealed very inclination to do so because tacit (EWS). However, there is some evidence serious shortcomings in management collusion (except at the margins) is a more that the threat of open access is keeping coordination within the industry. Many attractive policy financially. We have yet EWS’s prices considerably lower than users are simply confused about who they to see the effect of a new competition they might otherwise be and this is are doing business with and the record law in Britain aimed at controlling anti- welcomed by freight customers. number of passenger complaints is competitive behaviour. So was all the tearing apart necessary? It probably much to do with frustration It is true that, there was competition in cost huge amounts of money—some resulting from this. Train performance is the bidding for passenger rail franchises, estimate around £600 million (£1 = still poor with punctuality and reliability especially the later ones. However, some US$1.47)—just to set up the new levels now worse than in the BR days. bids have proved to have been administrative arrangements for the Initially, this occurred because of overoptimistic in terms of the potential railway and running costs are still higher mistakes made by some operating for revenue growth and cost reduction than they were under BR. Two years ago, companies attempting to cut costs by and have been surrendered and I argued that privatization should bring a shedding too many staff, and the transferred to other operators. net financial gain to the government considerable increase in services since The whole concept of on-rail competition before too long, but this was dependent privatization. Running more trains has looks like being a non-starter. It was on franchisees being able to fulfil their led to more congestion, resulting in more always difficult to accept the free current contracts. I also ignored any delays. The current régime of access marketeers’ dream of the traveller turning efficiency gains BR or a different charges gives Railtrack little