The Continuing Railtrack Saga: How the british people have paid for privatisation, as consumers and now as taxpayers

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.

[Sources:  Financial Times, Special: Railtrack, The Independent,
Guardian Unlimited, Britain: Railtrack collapse sparks political crisis, 
The Crash that Stopped Britain by Ian Jack]