Power & Market

The Failure of Britain’s Railway “Privatization”

It is no surprise to the daily English commuter that British Railway has always fallen short of providing adequate services to it’s customers. Dissatisfaction is at an all-time high, with high ticket fares and poor timing schedules. Rail user satisfaction at 10-year low. To avoid bankruptcy, the state provides subsidies and security bonds to prevent job losses – albeit bonds incur debt that will have to be paid off - and there has been a conscious effort on successive governments in terms of pushing up ticket fares, so that the burden of taxation does not fall entirely on the taxpayer.

This disaster is the offspring of the botched “privatization” of rail which has since evolved into a monopoly of the railway system in Britain. Privatization is only effective if there are other players on the market competing against each other—or at least the possibility of entry for other firms into the market. This helps to keep prices down as the possibility of competition drives providers to better serve customer needs and wants.

With the introduction of the 1993 Railway Act, the Conservative government at the time initiated the privatization of rail by establishing Railtrack, becoming the sole owner of infrastructure in the entire country, laying out the rules for train operating companies. Train companies – national or international – would own and deploy various rail franchises. Rolling stock operating companies provide the necessary locomotives, and freight operating companies, whose primary responsibilities include transporting cargo across the national network.

The main problem holding the industry back however is the lack of competitive infrastructure, for not only does a geographic monopoly exist, but also an overly complex, fragmented system interdependent on a myriad of factors, a tight, bureaucratic labyrinth that drowns out competition. All signals, levels crossings, bridges and tunnels are held on a leash by the Leviathan of rapid transit: Network Rail – the successor to the unsuccessful Railtrack - a public company answerable to the Department for Transport, financing and maintaining the rail tracks by redirecting profits and dividends earned during the year for reinvestment. Strictly speaking, despite privatization, the state reversed their decision and have a final say on how British tracks should be run. The dictum “meet the new owners, same as the old ones” can justly be applied here.

Trains in less dense routes and stations are split into various rail franchises, beginning with a private company placing a bid to secure contracts that allow them to operate on specific routes, as stipulated by the contracts complying with public law regulations. The government takes into consideration each candidate in terms of which company can provide the best passenger satisfaction, as well as optimistic projections of future revenue. The winner, before being awarded the contract, must pay a premium to the government and the projections forecast for the future also increases the premium. Each area has different routes and varying government specifications laying out the ground rules, including train services and station upgrades. However, many of these contracts end up becoming unprofitable due to a lack of demand in certain regions of the country, and private companies owning the rail franchises default, being liquidated as a result. In areas of a less dense population, local monopolies are born, giving the companies a bargaining chip on the region.

It should be noted that various foreign governments dominate several UK rail franchises. For example, Deutsch Bahn (the franchises in question include Arriva Trains Wales, Chiltern Railways, CrossCountry, Grand Central and Northern) is financed by the German government, being the sole shareholder. Therefore, should they cut their investment on Deutsch Bahn would have the detrimental consequence of cutting down the number of trains available for usage to the British public. Other foreign governments too own majority stakes in railway companies, owning nearly all rail franchises in the UK.

Before privatization, economic liberal think tanks such as The Centre for Policy Studies and the Adam Smith institute put forward several proposals. The one eventually adopted by the Conservatives was the one put forward by the Adam Smith institute: different companies running trains. It would have been wiser had the State instead decided to heed the advice put forward by the Centre for Policy Studies, proposing that Britain should go back to the Victorian era structure of a dozen private companies controlling railway.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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