A privatisation that has gone wrong

(story to be published in tomorrow’s issue, March 13)

Over the last twenty years, Great Britain has made up for the economic ground it had lost to its European rivals, Germany and France. The secret was the remarkable opening Britain displayed in economic policies along the ’80s and the early ’90s. Large-scale privatisation, in sectors where the other West-European countries were not considering even regulation, swept swiftly across the island. In the last ten years, Great Britain has attracted a large share of worldwide foreign direct investments, outpacing its partners in the European Union, as it offered more open markets and a business environment with less state interference. Nevertheless, not all privatisation projects went smoothly. The best example was the British Rail, an industry the conservative Thatcher government dared not sell during the ’80s, but which in 1995 was regarded as the absolute priority by the Major government. Of course, the reasons were political, because the Conservative Party had to enter the 1997 elections with a solid record. Furthermore, the Labour said that once in power, they would re-nationalise the railways and return to state monopoly (which, however, did not happen). This is why the conservative government had to privatise fast so that (hopefully positive) results would be available by election time. Because selling a giant such as British Rail in one chunk was impossible, the public monopoly was broken up into many companies (around 100) and sold separately to investors. Activities were also separated: railways and stations, rolling stock, repairs, maintenance and operators were each managed by distinct companies that worked together via bilateral contractual agreements. This established a free market where competition between operators would bring better services, timelines, security and lower prices for customers. What went wrong with the railroad privatisation? The first problem was the haste in putting the former company’s assets for sale. As a result, they were bought at very low prices, and the contracts were even more to buyers’ advantage as they required no further investments in the new companies. Moreover, some of the buyers were road transportation operators, with little insight and experience in running a railway business. Train operators were the first to benefit from privatisation to a large extent. Franchises were awarded to a limited number of operators, and their activity was – and will be for some time ahead – subsidised by the state. Subsidies would gradually wither away as the companies built up efficiency. The 25 operators were awarded franchise contracts between 7 and 15 years, but most of the trains they operated were rented (from the company that held the monopoly over rolling stock) so that operators had little assets of their own. With subsidies and little personal investments, they immediately scored a strong rise in profits. Another problem has been the main company of the “orchestra,” Railtrack, which managed lines and stations – and which pledged to invest up to L27 billion ($43 billion), but so far has done almost nothing except for investments in station and line maintenance, rather than building new ones. The problem in this case lied in the way franchise contracts were signed and the way the subsidy was granted – which did not stimulate investments at all. Moreover, there have been flaws in the very contracts Railtrack had signed with operators, which included a uniform line usage toll, regardless of the number of trains used on those lines. In turn, this lack of incentives created a vicious circle. Operators based their financial projections on growing passenger numbers and revenues, which in time would replenish the void left by decreasing subsidies. But turnover could only grow if the network grew, and the network was owned by Railtrack, so this was not up to the operators. Since Railtrack was not investing enough to increase capacity, operators’ profits could only grow if they raised prices, which, in fact, was what happened. Naturally, a prise hike brought less demand. Increasingly, more passengers turned to road transportation (which explains the sustained purchasing of cars among the British in the last three years). The result: British highways are becoming affected by traffic and congestion problems, and railway operators see their revenues fall. They were forced to downsize the number of trains in circulation. Timeliness worsened, and punctuality became a promise that was ever more difficult to keep. A government report published last week in London shows that, besides the punctuality issues, a new problem has emerged, safety. Since 1996, there have been three major railway accidents that killed 37 people and injured 250, the worst of which happened last year in the Paddington station near London. There are solutions to make things up. One is for operators to further reduce their costs to win back the customers who turned to road transports. The moment is favourable, as British economy is in full swing, and roads are becoming too clogged. Unfortunately, however, at least in the short term, passengers will have to accept higher prices for train tickets. To compensate, operators will have to ensure better time management and increased safety. Another medium-term solution is to cut down on subsidies, especially those to Railtrack, because this is the only way to force the company to expand the network with its own investments. In the long run, however, the entire procedure of awarding operating rights must be reconsidered. Starting 2004, franchises will be awarded based on passenger needs. The existing conservative scheme has relied too much on supporting companies that took over British Rail’s assets and were little concerned with the adverse effects subsidies would have on companies’ investment policies and, naturally, on the customers. The recent report does not literally say privatisation has been a failure, but for an industry that over the history has built railroads on at least three continents, the situation today is at least disappointing.