We Can Save the World with Public Transportation and Not Electric ...
Environmental News, Data Analysis, Research & Policy Solutions. Read Our ... environment are universal, public transport systems are often not. Take ...
privatisation of the UK rail system
Take the United Kingdom for instance. Transportation costs UK households approximately 13% of their annual income, with public transportation being one of the most expensive in the world. The <anchor>privatisation of the UK rail system</anchor> in the 1980s saw prices rise and government subsidies significantly increase. Providing a free or low-cost public transport system would open the door for those who are unable to travel for work or leisure without breaking the bank. Establishing a wide network of services, connecting villages, towns, and cities across the UK would support the equal distribution of economic activities, and reduce the isolation experienced by many towns, which have been left behind since Britain’s deindustrialisation at the end of the 20th century. In addition to fairer economic distribution, this system would provide greater convenience and accessibility for its residents, as well as alleviate traffic congestion in urban areas.
Why the system of rail privatisation in the UK has been a disaster | British Politics and Policy at LSE
Search for:

### Blog Admin

### June 26th, 2013

# Why the system of rail privatisation in the UK has been a disaster

Estimated reading time: 5 minutes

### Blog Admin

### June 26th, 2013

# Why the system of rail privatisation in the UK has been a disaster

Estimated reading time: 5 minutes

26
Shares

OLYMPUS DIGITAL CAMERA Michael Moran , one of the authors of a report on the system of rail privatisation in the UK, discusses its findings. Some important issues he raises are the manipulation of the licensing system so that public subsidies are essentially paid out to shareholders as dividends and Network Rail’s large and unsustainable debt, which has negative consequences for physical infrastructure and likely means that rail will one day have to be bailed out by the public. The core issue is the longstanding problem that rail cannot operate without some £10 billion of (direct and indirect) public subsidy because passenger income is insufficient to cover costs. Capturing the externalities of public transport lines on land and property values via taxation is a potential policy solution to the broken business model but is politically difficult and actively opposed by well organised lobbying efforts.

A troublemaking report from the Centre for Research in Socio-Cultural Change (CRESC) has been upsetting the powerful again. The Great Train Robbery: rail privatisation and after has a great deal to say about the business models that now underpin the disastrous system of rail privatisation in the UK, but it also reveals a pattern that will particularly interest the readers of a politics blog. It shows that the initial vision offered by privatisers of a transparent and democratically accountable set of privatised markets has turned out, in reality, to be something very different: the politics of rail privatisation involves backstairs lobbying, manipulation of the terms of public debate by well resourced private interests and a blurring of the divide between the public and the private.

Some of the problems of the privatised rail system are well known. Perhaps best known is the systematic gaming of the train operating franchise system. Franchisees – as in the catastrophic case of the East Coast Line – can walk away from the franchise without serious penalties when the ludicrously unreal projections that won the contract in the first place turned out to be fantasies. Less known, and systematically documented in the CRESC report, is the extent to which the train operators have been able to manipulate the licensing system so that they effectively pay dividends to shareholders from direct public subsidy; between 1997 and 2012 on the West Coast Mainline, Virgin Trains paid out a total of £500 million in dividends and received a direct subsidy of £2.5 billion.

Worse still, the report highlights the large, hidden and indirect subsidies to train operating companies which have completely wrecked the balance sheet of the quasi-public Network Rail company that provides infrastructure. Train operating company profits are politically constructed through a hidden subsidy of low track access charges levied by Network Rail. These have fallen from £3.2 billion at the start of privatisation to £1.6 billion today, despite the increased demands on the infrastructure made by increased train and passenger numbers: in the age of privatisation the state is keeping the trains running.

The end result is a shocking and largely undiscussed increase in public liabilities. Network Rail (NR) is not only failing to recoup the real cost of operating the infrastructure but also spending an extra £5 billion a year on capital investment in improving the network. This is largely financed by issuing private bonds which are publicly guaranteed. Network Rail’s position is increasingly unsustainable because it is burdened with huge debts. The cost of servicing that debt is now greater than spending on track maintenance: in 2003 NR spent more than £1.5 billion on maintenance and £256 million on debt interest; in 2012 NR spent £968 million on maintenance and over £1.5 billion on debt interest. The financial consequences for the taxpayer are considerable because repayment of principal is publicly guaranteed and Network Rail has an accumulated debt which now stands at £30 billion. The consequences of this kind of financial regime for the physical infrastructure, on which the promise of an efficient rail system crucially rests, are economically catastrophic. The consequences of the accumulated debt burden for the public purse are equally politically dire because rail is going to need a bailout.

At the economic root of this lies a long standing problem about the business model of recovering costs by charging passengers: rail cannot operate without some £10 billion of (direct and indirect) public subsidy because passenger income, even with some of the highest fares in Europe, cannot cover costs. Indeed the importance of passenger revenue has declined under privatisation: in the last ten years of British Rail passenger income  averaged just over 64 per cent of total revenue whilst under privatisation’s first ten years it averaged just over 55 per cent. That explains also why the privatised system is more heavily subsidised than was British Rail.

The  predatory profits of the Train Operating Companies are a problem, but they are not the most serious part of the problem. Demonising dividends and value extraction by operators like Richard Branson certainly fixes on a problem with the politics of the privatised system. But it is akin to the demonization of individual bankers after the financial crash: it fails to fix on the fundamental faults of the system. The biggest fault is the determination, under the privatised system, to operate a for profit rail network with not enough money in the fare box; and behind that, the business model of charging users which does not capture social functions and external benefits like land and property values. A simple example which anyone can verify from their own experience is the way investment in new public transport lines can transform house prices of  property with access to those lines. For instance, the investment in Crossrail, which cost £16 billion, is projected to boost property values within one kilometre of the project by £5.5 billion.

Any attempt to reshape rail policy so as to capture these externalities – for instance via property taxation – will be politically explosive. More insidiously, the whole well organised constellation of interests created by rail privatisation now operates a smoothly oiled lobby so that the Train Operating Companies now define the agenda of reform; that suits them but is not in the public interest. The Association of Train Operating Companies creates a distinctive public narrative: each successive inquiry into the malfunctioning of the system (such as that into the West Coast franchising renewal fiasco) is told as a story of minor glitches in a fundamentally well-functioning machine where the first priority is to get the franchising system back on track. The problem of Network Rail’s debt and the inadequacy of the business model do not figure in public discussion.

At the dawn of privatisation we were promised not only a new business model, but also a new political model: one where backstairs manipulation of policy (for instance by Ministers) would be replaced by the transparency of open contractual competition and public regulation. Instead we have a mixture of crony capitalism, a world populated by well paid lobbyists and well networked insiders, and smoke and mirrors accounting which makes it impossible for normal citizens to penetrate what is going on. In this sense, rail privatisation has indeed proved a model; a model of how things are now done in the post-privatisation state in Britain.

Note: This article gives the views of the _author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our  comments policy before posting. Featured image: Castlerock station, Northern Ireland, Aubrey Dale (CC BY-SA 2.0)._

About the Author

Michael Moran is an affiliate of CRESC, an ESRC funded Interdisciplinary Research Centre jointly run from the University of Manchester and the Open University.  He is a co-author of The Great Train Robbery.  The full report can be downloaded here.

Print Friendly, PDF & Email

### About the author



### Blog Admin

Posted In:
Uncategorized

## 14 Comments

1. Joan Nash says:

   June 16, 2017 at 3:13 pm

   It is quite clear that railway privatisation IS failing and continues to do so, certainly in the south and south-. east. Bizarrely, watching the slow inexorable collapse of absolutely everything that I took for granted as perfectly alright [even if it was only okay], has just politicised me. I can’t be alone. The railways are just an example of this.I am hoping that industry can be revived as well as the railways re-natioalised. I would really rather leave the country as good as I found it, not falling apart as it seems to be.

   Reply

2. Pingback: The Tory “magic money tree” argument is BS! - MagicTricksVideos

3. Pingback: Why do people oppose Corbyn so vehemently? – Patrick Green

4. Chris Manners says:

   March 5, 2017 at 11:20 pm

   Oh yeah.

   Railtrack was renationalized (rightly) in 2000. So by far the biggest part of the railway was state owned for half of the period you compare unfavourably with the earlier one.

   Reply

5. Chris Manners says:

   March 5, 2017 at 11:08 pm

   A few points.

   1) What’s the problem, in principle, with companies making profits and getting subsidies? Why is eg Virgin Trains doing that any different to somebody running the leisure centre doing it?

   2) You mention all the Network Rail debt. It’s got debt because it’s doing lots of investment in new and vastly improved stuff. That costs money. Subsidy going up doesn’t by itself mean things are less efficient.

   3) Network Rail would have this debt whoever ran the trains. Why was it unsustainable? It was basically government debt then, and now it’s on the government balance sheet. Only some sort of extreme debt hawk would say it’s unsustainable.

   4) You mention predatory train companies, and East Coast making ridiculously optimistic projections. You don’t thought stress that they’re paying directly or indirectly for the franchise. They recover costs and make a profit. Lots of fares, by the way, are fixed by the government.

   5) Margins for train companies are nothing like what people think. The franchises are now dominated by companies with foreign state owned partners. It suggests that far from being very easy money (as they may have been early on) you need access for very cheap capital.


   It’s certainly a fragmented system, and could doubtless be improved. But my impression, as a layman reading a lot about rail, is that lots of the industry doesn’t want to be renationalized. Don’t pass this off as the result of “lobbying”.

   Reply

6. Stephen Morris says:

   December 7, 2015 at 12:38 am

   At the root of this problem lies a much more pernicious monopoly: the monopoly on power that attends the system of “elective” government.

   As economics Nobel laureate James Buchanan observed (in “The Reason of Rules”):

   “[S]uppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. . . . Is there any presumption that political rent seeking will ultimately allocate offices to the ‘best’ persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political office, to compete with those whose passions include the desire to wield power over others?”

   Under such conditions (and in the absence of genuine Democracy) it is perfectly reasonable to expected that:

   a) the system will adversely select megalomaniac politicians who act in their own interests, with minimal regard for the subjects they rule;

   b) such politicians will deliberately misrepresents the state of affairs to the public in their desperate attempts to secure votes;

   c) such politicians will engage in obscene competitions to hand out bread and circuses – each side seeking to outdo the other to secure power – running up unsustainable public debts in the process; and

   d) such politicians will engage in grubby auctions, buying off special interest groups and powerful lobbies piecemeal with gifts from the public purse . . . and look to receive favours in return, either in the form of support in government or employment in later life.

   Unfortunately, most professional commentators would eat glass and drink sulphuric acid rather than contemplate the one-and-only solution that has any real chance of success: genuine Democracy.

   By the way, democratic Switzerland’s rail system is excellent and Switzerland has the highest rail usage in the world. The system is partly public (SBB), partly private, and partly “semi-private” (e.g. Rhatische Bahn which is 51.3% owned by Canton Graubünden, 43.1% by the Swiss Confederation, 4.6% by private shareholders and 1% by local communities).

   The system is manifestly supported by The People who are free to change it at any time (without the consent of self-serving politicians) using the system of democratic initiative.

   Reply

7. Filby Nymous says:

   November 4, 2015 at 2:29 am

   Fascinating…privatization sucks because public officials gave away the rails in an opaque and unaccountable fashion to private parties and couldn’t structure the deal so that it would have worked. But it would have been so much better had these same incompetent public officials remained in charge!

   Reply

8. Stephen Karlson says:

   March 7, 2015 at 2:54 pm

   Restore the Grouping companies: Southern, Great Western, ‘ell of a mess, and London and North Eastern. Or bring in Union Pacific to own and run it.

   Reply

9. Pingback: A concessão da Linha de Cascais e os exemplos do Reino Unido - Mais Opinião

10. dshwang says:

    December 31, 2013 at 8:10 pm

    UK train system is the most inconvenient, the most expensive as well as the most tax-waste in the UK rail history. In my opinion, the greed villains behind scene are more wicked than simple rapist or thief. However, modern jurisdiction can not execute them. very shame.

    Privatisation is worse than opening rail system to private companies at the begin. UK rail system was constructed by tax. Private companies did not take a risk to seize UK rail system. They did not invest money to construction. Greed politician gave citizen’s public goods to them for money.

    Privatisation of rail system does not make sense. It is impossible for rail market to be free market like semiconductor or smart phone. When you go from Bristol to London, could you choose the good really for you? no way. Although the Bristol-London line is so expensive, so dirty, and so inconvenient, you don’t have any options. Buying train ticket is not buying smart phone between Apple and Samsung. It’s epic fail.

    UK gov should not give them subsidies. They will go into bankruptcy. At that time, re-nationalisation can be possible by small amount of tax.

    Reply

11. Pat says:

    October 21, 2013 at 1:04 pm

    Privatisation is good if the public controls the companies and under that direction the companies collaborate and promise to bring better service to society. A state owned enterprise can actually be a barrier for public control and workers unionism if the state government is neoliberal (as in Labor or Tory).

    Reply

12. Pingback: U kakvom društvu ćemo živjeti | ADMINISTRATIO PUBLICA

13. Pingback: The railway mountain | beleben

14. Chris Marsden says:

    June 29, 2013 at 3:26 pm

    Suggesting re-nationalisation as the only appropriate answer – but none of our neoliberal political parties has the guts?

    Reply

### Leave a Comment Cancel reply

Your email address will not be published. Required fields are marked *

Comment

Name *

Email *

Website

Notify me of follow-up comments by email.

Notify me of new posts by email.

### Related Posts

© LSE 2024

×

We use cookies on this site to understand how you use our content, and to give you the best browsing experience. To accept cookies, click continue. To find out more about cookies and change your preferences, visit our Cookie Policy.Continue