THD

I can only describe how the model doesn’t work! Or at least, how it doesn’t work in the public interest. What it does do is transfer public and individuals’ money into private hands on a mass scale.

The first thing to recognize is that the 1993 Railways Act turned a relatively straightforward institutional structure, with one publicly owned company responsible for the operations of the railways, into over one hundred separate private entities all needing to make a return to shareholders.

To simplify, there are three levels to the structure. At the bottom is the publicly owned Network Rail, which manages the physical infrastructure of the railways. This replaced the shareholder-owned Railtrack in 2002, which collapsed after a fatal train crash at Hatfield in 2000 caused by its failure to properly maintain the track. At the top are the train operating companies (TOCs), which manage passenger rail franchises. A franchise runs for a given amount of time, and gives TOCs the right to run services in specific geographical areas of the rail network. In the middle are three privately owned rolling stock companies (ROSCOs), which I’ll explain shortly.

TOCs vie against each other in government-sponsored franchise bidding competitions, with the winners being, effectively, those that promise the greatest savings of government subsidy. TOCs are “special purpose vehicles,” which means that they are allowed to distribute dividends to their parent companies, but their parent companies are protected from having to rescue TOCs in case they run into financial difficulties — a relationship that has been described as a case of “heads they win, tails we lose.”

Overbidding by TOCs in franchise competitions has seen them subsequently walk away from contracts or be injected with additional state funds. TOC owners have very little capital tied up in their operations. As well as leaving fixed infrastructure management to Network Rail, they also hire their trains from one of the three ROSCOs, which are owned by banks and pension funds. These are the most lucrative part of the railway for private investors, producing extraordinary returns on capital employed. It has been estimated that the high hiring charges mean that the cost of building new trains is recovered by ROSCOs within five years. Despite this, ROSCOs will continue to charge TOCs exorbitant rates during the useful life of the stock, which is usually about thirty years.

One of the main arguments for privatizing British Railways was that it would create economic efficiencies, and thereby reduce public subsidy and create attractive fares. However, public subsidy to the railways is now approximately double what it was in 1993, in real terms. This calculation excludes the £38 billion of “private” debts racked up by Network Rail. These have now been reclassified as public debt, which effectively has meant that government subsidies have been in recent times more like four times those paid to BR. It’s a similar story with fares: these have increased by nearly 25 percent in real terms since 1995. Overall, this suggests that the amount of money going into the railways is much higher than under public ownership.

Supporters of privatization counter these figures by pointing out that the number of people using the railways has increased massively in recent years. However, this increase actually began in the 1980s, sometime before privatization took effect. Moreover, official figures show that the money going into the railways as a proportion of journeys made is now the same as it was before privatization. In an industry with high fixed costs, one would expect to see individual journey costs dropping as the utilization of the infrastructure increases. And this ignores the extra subsidy given to the railways in the form of Network Rail debt, as I have already mentioned, which when taken into consideration would make this picture look significantly worse.

So, what accounts for these increased costs since privatization? Studies by accounting scholars such as Jean Shaoul show that railways in Britain have been loss-making for a very long time — probably since at least the 1910s and 1920s, whether in public or private ownership. Because of this, they have been reliant on state subsidy.

Privatization introduces additional “stakeholders” to the railways, namely shareholders and private providers of loans, who have claims on revenue generated. In order to meet these additional claims in a loss-making industry, other stakeholders must lose out — meaning taxpayers, in the form of extra state subsidies, and passengers, in the form of fare hikes and/or degradation of service. This is not to argue for a reduction of subsidies, but that these subsidies could be much more usefully employed improving services and/or cutting fares rather than being distributed to shareholders and financial investors.

During its last years, British Railways had become probably the most economically efficient of the European railways, even though it had been deliberately underfunded by successive governments. Therefore, any form of privatization was destined to disbenefit passengers and/or taxpayers. These disbenefits could have been reduced with a proportionate reduction of private interests, but in an inherently loss-making industry, only a fully publicly owned system reduces leakages from the system to zero.

Altogether, the renationalization of railways is a hugely popular political demand, which even commands majority support from Conservative voters. Since it has failed both technically and politically, this begs the question: what is the point of privatization?