THE WORLD BANK GROUP WASHINGTON, D.C. TP-2 TRANSPORT PAPERS SEPTEMBER 2004 Public Disclosure Authorized Public Disclosure Authorized Privatizing British Railways Are There Lessons for the World Bank and its Borrowers? Louis S. Thompson Public Disclosure Authorized Public Disclosure Authorized TRANSPORT SECTOR BOARD Ó 2004 The International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington, DC 20433 Telephone 202-473-1000 Internet www/worldbank.org The findings, interpretations, and conclusions expressed here are those of the author and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. To order additional copies of this publication, please send an e-mail to the Transport Help Desk [email protected] Transport publications are available on-line at http://www.worldbank.org/transport/ PRIVATIZING BRITISH RAILWAYS iii TABLE OF CONTENTS ACKNOWLEDGEMENTS............................................................................ IV PREFACE............................................................................................ V EXECUTIVE SUMMARY ........................................................................... VII 1 INTRODUCTION.................................................................................................... 1 2 WHAT WAS THE PROBLEM? ....................................................................................... 1 3 WHAT DID THEY DO?.............................................................................................. 4 4 WHAT HAPPENED?................................................................................................. 6 4.1 The Passenger Franchises................................................................................................... 6 4.2 Freight............................................................................................................................... 7 4.3 Safety................................................................................................................................ 8 4.4 Railtrack ............................................................................................................................ 9 4.5 Rolling Stock Companies (ROSCOs).................................................................................. 12 4.6 The Government .............................................................................................................. 13 4.7 The Emergence of the Strategic Rail Authority .................................................................. 15 4.8 The Office of the Rail Regulator (ORR) .............................................................................. 16 5 THE FUTURE ..................................................................................................... 18 6 LESSONS FROM THE PROCESS .................................................................................. 21 7 LESSONS FOR THE BANK FROM THE U.K. EXPERIENCE....................................................... 23 REFERENCES AND BIBLIOGRAPHY .............................................................. 28 LIST OF FIGURES ................................................................................ 33 Figure A: The Serpell Scenarios ....................................................................................................... 34 Figure B: BR Under Sector Management.......................................................................................... 35 Figure C: Evolution of the BR Management Structure....................................................................... 36 Figure D: The Privatized Railway Organization ................................................................................. 37 Figure E: Data on the U.K. TOCs...................................................................................................... 38 Figure E: Data on the U.K. TOCs (continued)................................................................................... 39 Figure E: Data on the U.K. TOCs (continued)................................................................................... 40 Figure F: Map of the U.K. Franchises ............................................................................................... 41 Figure G: Originally Committed Franchise Payments ........................................................................ 42 Figure G: Originally Committed Franchise Payments (continued)...................................................... 43 Figure H: Data on the Performance of Rail Franchises in the U.K...................................................... 44 Figure H: Data on the Performance of Rail Franchises in the U.K. (continued) .................................. 45 Figure H: Data on the Performance of Rail Franchises in the U.K. (continued) .................................. 46 Figure I: Shortlisted Bidders in the Franchising Process .................................................................. 47 Figure I: Shortlisted Bidders in the Franchising Process (continued)................................................ 48 Figure J: Rail Traffic in the U.K. (000,000 passenger-km and ton-km).............................................. 49 Figure K: Passenger Service Quality ................................................................................................ 50 Figure L: U.K. Accident Risk Experience........................................................................................... 51 Figure M: U.K. Fatal Accidents Per Billion Train-km Since 1967 ........................................................ 52 Figure N: Rail Safety in the U.K. and in the E.U.(fatalities per billion passenger-km) ........................ 53 Figure O: UK Passenger-Km, Ton-Km and GDP (Index, 1994=100, GDP in constant £ 2002-2003)... 54 Figure P: Tons of Rail Purchased (000) and Km of Line Open for Traffic............................................ 55 Figure Q: Investment in British Railways (£million in 1999-2000 prices) .......................................... 56 Figure R: Changes in the Franchises ................................................................................................ 57 Figure S: Fixed versus Variable Composition of Access Charges ....................................................... 58 Figure T: The DfT Proposal, July, 2004 ............................................................................................ 59 PRIVATIZING BRITISH RAILWAYS iv ACKNOWLEDGEMENTS This has been the most difficult paper I have ever written. The restructuring and privatization of the old British Railways was enormously complex, and it touched on nearly everyone in the U.K. It had explicitly political, even ideological, aspects that ensured that its faults would be magnified and its merits devalued in the public eye: even though BR’s past performance and its situation as of the early 1990s were not acceptable, there could be no fully agreed program of changes, either. Moreover, there has rarely been a stable point in the system’s evolution at which I could feel at all comfortable in hoping that the outcome as of the writing would resemble the outcome as of publication. The deeper challenge is that there remains no consensus as to either what has happened or what should be done. Distilling an unbiased review based on a wide series of contradictory, but passionately held, professional views and comments is not a recipe for keeping friends. This is especially true when personal views are at variance with official positions. For these reasons, I cannot identify and thank individually most of those who have helped in this paper. You all know who you are, and I appreciate your help. I do want to thank one person who, paradoxically, probably disagrees the most strongly with much of what I have written. John G. (Jack) Smith is a former BR executive. He was a valued consultant on the Northeast Corridor Improvement Project, where we spent many hours discussing the right way (as opposed to the FRA and Amtrak way) of building and running a passenger railroad. Through his efforts, I was able to meet many of the BR executives during the Peter Parker and Robert Reid (I and II) eras. His ideas and perspectives were important in understanding how BR used to work and what its culture valued. His assistance on this paper was invaluable. He was, and is, a mentor on what a good railway ought to be. I thank my colleagues at the World Bank, also: Richard Scurfield for his belief that I would (eventually) finish the paper, and Paul Amos, Robin Carruthers and Simon Thomas for their review and comments, and Barbara Gregory for her usual terrific job in turning a draft into a publication. Countless evening hours on Bank trips with nothing to do but argue about railway issues with (sometimes barely) interested colleagues were also essential in formulating ideas: there are no better debating opponents than World Bank economists or engineers. Lou Thompson PRIVATIZING BRITISH RAILWAYS v PREFACE The last twenty years have been marked by major changes in the railway industry worldwide. In Latin America and Australasia, most railway activity moved to private provision. In the European Union, a new railway agenda was advanced in a series of directives and regulations aimed at revitalizing the largely state -owned industry. In Asia, rapid economic growth in China imposed physical and economic challenges on the railway system that have resulted in a burst of new