The
declaration to privatise the railway system in Britain
was one of the more spectacular – and symbolic
– statements of Margaret Thatcher's government.
It was seen as a confirmation of the belief that many
public utilities and infrastructure services, which
were earlier thought to be “natural monopolies,”
could in fact be privatised, and subjected to competition
through market forces.
Of course, this was only one of the many privatisations
that occurred in the period between 1979 and 1997.
State assets were sold for a total of 65 billion pounds,
and more than 1 million workers were transferred from
public to private sector. But even within this massive
shift, the privatisation of the railways in particular
continued to attract much interest, and even served
as a model for subsequent attempts to privatise public
transport infrastructure in several other countries.
It is therefore instructive to consider the fate of
this particular experiment.
British Rail was sold by John Major's government in
1996, for a total of 5 billion pounds, after it had
been broken up into a number of different entities
that were to operate in competition with each other.
The plan was as follows : passenger trains were to
be run by 25 Train Operating Companies on franchises,
the trains would be owned by three Rolling Stock Companies
and the railway signaling, the tracks, bridges, stations
and other stock infrastructure by a company that would
be known as Railtrack. Railtrack was sold for 1.93
billion pounds in a public flotation in 1996.
For the first four years, the company made a profit,
its share prices rose steeply and the shares paid
growing dividends. Much of the profit came from rent
and sale of property which the company had so cheaply
acquired. But the main source of income was the track
access charges paid by the train operators. These
charges were fixed by the government-appointed Rail
Regulator, who was also responsible for monitoring
efficiency and safety inside Railtrack.
Attempts to increase profit meant reducing expenditure
on maintenance, repair and related activities. Repair
work was farmed out by Railtrack to contracting firms,
all of whom competed with each other to minimise costs.
This in turn had effects not only in terms of delays
and congestion because of the poor condition of some
tracks, but also in terms of the safety of travel
and increased accident rates. Investigations into
the fatal Hatfield train crash on Oct 17, 2000, that
brought Britain's rail system to a halt, and into
two other rail accidents (Southhall in 1997 and Ladbroke
Grove in 1999) have revealed that the number of workers
had fallen by over 60,000 from 159,000 in 1992, even
though the number of trains had increased.
Such accidents and delays were not just bad for passengers.
They were also expensive for Railtrack – Hatfield
alone is estimated to have cost Railtrack 1 billion
pounds in compensation. In addition, for the benefit
of passengers, the Rail Regulator set targets for
punctuality. As aggressively competing railway companies
increased the number of trains, this meant more traffic
congestion and more delays. Railtrack was fined by
the Rail Regulator, for every delay judged to be its
fault (that is, resulting from track repair work or
emergency speed restrictions because of poor track
conditions). In 2000, this meant a fine of 10 million
pounds. Railtrack also had to compensate train operators
for each delayed train.
These unforeseen expenses substantially increased
Railtrack's costs, even while they were part of a
privatised system that was providing deteroriating
services, in terms of reduced lines on non-profitable
routes, more delays on almost all routes, and worse
safety performance. After the Hatfield crash, and
with slower aggregate economic growth, private investment
in the railway system collapsed. This called into
question the Blair Government's much-touted “public-private
partnership” in the new Transport Policy, which
had envisaged the private sector contributing 70 per
cent of the anticipated investment of 50 billion pounds.
And for Railtrack, it meant that accumulated losses
made it first difficult, and then impossible, for
it to service its growing debt. Finally, in October
2001, when the Blair Government decided it would no
longer release any more public money to keep Railtrack
afloat, the company was forced into administration.
The Transport Secretary, Stephen Byers, announced
the government's intention to set up a not-for-profit
company limited under guarantee (Network Rail) to
run the rail network thereafter.
Obviously, this bankruptcy meant a collapse in share
value. Shareholders who had paid 390 pence a share
at flotation found their holdings suspended at 280
pence. Many would argue that such risks are part of
market investment activity, and must be borne by the
investors, but the shareholders wanted at least 360
pence a share and even threatened legal action against
the government. This, in addition to the huge costs
(estimated at a minimum of a million pounds a week
just in accountancy fees) of keeping Railtrack in
administration, has put pressure on the Government
to come to a resolution.
The latest proposal (in March 2002) involves using
taxpayers’ money to bail out the shareholders.
The government has offered a compensation package
of 500 million pounds, in addition to 375m pounds
offered by Network Rail and another company backed
by the government to buy out Railtrack's rights to
operate the high-speed Channel Tunnel Rail Link (CTRL).
300 million pounds of this would be in the form of
a grant from the Strategic Rail Authority, a government
agency. The other 200 million pounds would be funded
by debt, as a “bid premium” to speed up
the process of liquidation and attract Railtrack's
top management. The offer has pushed the market price
of shares up to 245 pence, with another 10 pence to
20 pence worth of assets salvaged by the parent Railtrack
group.
The new rail company is also going to buy out Railtrack's
bondholders and a loan of about 4 billion pounds is
being arranged to cover bills during administration.
In early April it made a 500 million pound bid to
take over Railtrack Plc, with the promise to pump
in a further 8.5 billion pounds of City-funded loans
to take on the business's spiraling 6.5 billion dollars
of debt and to inject working capital. In addition,
Network Rail together with London & Continental,
both government-backed companies, are offering to
acquire and run Channel Tunnel Rail Link 1(CTRL 1).
They have made a joint offer of 375 million pounds
to Railtrack to buy out its rights to operate the
highspeed CTRL.
All this amounts to an effective renationalisation
of the rail transport system, at least in terms of
the track and station network. But the entire process
is likely to turn out to be very expensive in terms
of the use of public funds. It could easily be asked
whether it would not have been more efficient use
of resources to have avoided this costly experiment
altogether, and instead spent this much money as direct
public investment to improve the publicly owned services
of the former British Rail.
April 18, 2002.
[Sources: Financial Times,
Special: Railtrack www.ft.com,
The Independent http://news.independent.co.uk,
Guardian Unlimited www.guardian.co.uk,
Britain: Railtrack collapse sparks political crisis
www.wsws.org,
The Crash that Stopped Britain by Ian Jack] |