Long Version

Introduction
The main railway system in Great Britain is privatised, but its largest single component, Railtrack, is bankrupt. Depending on one’s political point of view, this has either been a disastrous experiment, or an essential and progressive step from which we can now go forward. Either way, no-one is seriously suggesting re-nationalisation.

In 1993, the British Government published its formal intention to privatise British Rail, the state owned railway operator responsible for all main-line railway operations in Great Britain. For many years British Rail had been criticised for being expensive and inefficient.

The privatisation was implemented in 1994-6 with an infrastructure owner, Railtrack, as the largest single entity, a large number of Train Operating Companies, and numerous support contractors. All of these units were in the private sector, with private shareholders.

At first, public opinion generally approved of the new structure, and was supportive of the efforts of the new companies. However, this mood soon turned negative, and many objective measures of performance appeared to support the opinion, that things were now worse than before. This was true of the daily travel experience, but also of safety management, and commercial issues like good targeting of capital. By 1997 the public generally were hostile to railways, at a time when railway usage was growing rapidly. The railways were believed to be failing to perform, at a time when there was more demand than ever before.

As the infrastructure owner, Railtrack carried out all of its maintenance and renewal work on the track and signalling equipment by contract. A number of railway accidents drew attention to the view that Railtrack was not managing the upkeep of the infrastructure properly, and that communications with its contractors, and with its customers, were deficient.

On the 7th October 2001, a socialist Government minister forced Railtrack into administration, a special form of bankruptcy provided for in the Act of Parliament. The feeling now was that an error had been committed by the previous Government. Yet six months later, there is no new structure in place, and many commentators say that Government proposals do not address the intrinsic challenges facing the railway network in Great Britain.

This paper examines the factors in this episode, and offers some explanations.

Why the Government Privatised British Rail
The right wing Government in power in Great Britain in the 1980’s had implemented a number of radical social changes, including the privatisation of several major state-owned industries, and opinion was widespread that this had been successful.

Railways were regarded as very difficult to privatise, but declining performance and seriously escalating cash requirements sharpened the political resolve to deal with this, the most difficult privatisation of all.

As well as the practical issues surrounding management achievement, the Government wanted to find ways of bringing private capital into funding the railways for fiscal reasons. In addition, it hoped to depoliticise railways, to stop the habit that every citizen who had some complaint about the railways would write to complain to his Member of Parliament.

Political Objectives
There is no doubt that the privatisation process was motivated by political objectives. The initiative was supported by the public because of universal loss of confidence in the nationalised industry to deliver what the public wanted, but there was little debate about the means by which the political initiative would deliver the improvements to the daily travel experience that the public wanted.

These then were the objectives sought by Government ministers as railway privatisation firmed up in 1993:

• Introduction of competition
• Use of private capital for major new works
• Introduction of private sector management thinking
• Weakening of the power of traditional Trade Unions
• Removal of railways from politics
• Elimination of the deficit (the loss of money in annual operations)
• Substantial improvement in punctuality, reliability, responsiveness, value for money

Two points require amplification:

1. Competition was intended to exist throughout the network, with totally open access for train operators in full competition on the same routes, for example.
   
   
2. It was a point of policy that Railtrack would not be permitted to carry out its infrastructure work by its own employees, but this would have to be done by contractors. It fact it was considered desirable that all support services should be procured in this way so far as possible for all companies in the industry.

Privatisation Process and Structure
Railtrack, forming about one-third of the business of British Rail, was prepared for privatisation by flotation on the Stock Exchange. The remainder was separated into a number of subsidiary businesses, each of which was sold by trade sale over a period of two years.

Political changes in the UK meant that the timetable for formulating the new railway structure became very rushed. A number of different proposals for the new structure were put forward and each had its own supporters. Discussion of their merits was curtailed, and as time passed the time pressure often limited the proper planning of the new structure. In this most complex industry, this was particularly difficult, as there was no previous model that could be used to predict the effects of untested ideas.

As the process was debated, it became clear that a number of earlier political assumptions were not capable of being put into effect.

The competition idea quickly ran into difficulty. It had been assumed that the public would support this: but competition could not exist if multiple operators on a route operated a pooling arrangement and shared receipts. The philosophy could not permit the operators to collaborate.

So, as an example, this meant that a commuter with a season ticket for travel with train operator A could not travel on a train of operator B or operator C. So if a certain route could support a train every 20 minutes (say), the new arrangement would restrict the passenger to travel only on one in three of the trains actually running: an hourly frequency: public opinion did not perceive this as a beneficial change.

In parallel, the main freight sector of British Rail (TrainLoad Freight) was intended to be sold off in three portions, generating competition in that market sector. It quickly became clear that no purchaser was interested in such small business units, and eventually the business was sold off to a single purchaser.

For reasons of Government financing, there were heavy demands that the sale of the parts British Rail should generate a large cash income, as a purchase price. This objective took a very high precedence in determining the structure of the sale, and sometimes it overtook other practical requirements. This meant that special measures were implemented to make sure that the units for sale were attractive. This was sometimes at the expense of long term efficiency of the industry as a whole.

In the previous years, many large and small private sector companies had expressed keen interest in taking over parts of the railway business; all of them promised that they could operate more efficiently and more cheaply than British Rail.

As the sale process was structured it became clear that this did not mean that they would pay an excessive purchase price, or accept a commercially adverse environment. As each of the elements of British Rail was being prepared for sale, the commitments that had been planned for them had sometimes to be diluted in order to sustain their saleability.

Railway Structure in Great Britain in 1995
The entire sale of all of the elements of British Rail lasted well into 1995; the structure that was set up is illustrated in figures 1 and 2.

Railtrack was the largest single entity, about one-third of the size of British Rail. It had responsibility for the real-time operation of the signalling centres, and the maintenance and improvement of the rail infrastructure.

Its customers were the 25 Train Operating Companies (TOC’s), the large freight company, and several specialist units. These companies paid a toll charge to Railtrack, and this alone formed the greater part of Railtrack’s income. The level of the charge was determined by the Rail Regulator, based on his assessment of Railtrack’s legitimate financial needs.

Actual passengers and freight forwarders did not therefore have a direct relationship with Railtarck, but only with the TOC’s and freight companies.

Passenger TOC’s were only allowed to operate if they were allocated a Franchise by the Governement Rail Franchise Diredctor, and in general they then had geographical exclusivity, that is, there was almost no competition.

Fares were regulated by the Franchise Director, and as the TOC’s were loss-making, he determined a subsidy payment that the TOC’s should receive.

Successes and Difficulties
There must be no doubt that the process of privatisation was successfully carried out. The flotation of Railtrack, and the trade sale of the other elements of British Rail all took place, and the daily operation of the railway business continued.

The additional layer of Franchise Contracts, between the train operating companies (TOC’s) and the Government, were successfully negotiated and implemented. Although these involved a continuing subsidy from the State (that is, they were loss-making), most of the Franchise companies promised that they would turn profitable a few years later, and start returning money to the Government.

Of particular interest to infrastructure engineers, the contract relationship between Railtrack and its infrastructure maintenance contractors was also successfully operating. The many prophets of doom who had predicted that the structure would fail on its first day, were proven wrong.

The new managements, especially of the TOC’s, introduced new approaches to their businesses, and massive injections of new capital started to appear, and announcements of new commitments to investment were suddenly commonplace, and always well received by the public.

The powerful railway trade unions, which had been perceived as so destructive by right wing politicians in previous years, also became remarkably compliant at this time.

The popular newspapers had been especially critical of British Rail in its final years, and these newspapers were for a time supportive of the new industry structure. For a while it seemed that the big political objective, of depoliticising railways, had been achieved.

If those factors are measures of an improved process, we can also look at the system outputs: passenger travel and freight volume both rose dramatically in the years immediately following privatisation, and in fact the gross passenger kilometres travelled are said to be more now than in 1945, despite the obvious growth in road usage in that time. Freight volume too increased dramatically thanks to skilful marketing by the dominant freight operator.

However, there were some negative factors. The privatisation process had cost a huge sum of money to implement; more damagingly the gross annual cost to the State of railways [the aggregated deficit] was now much greater than before.

London passenger commuting volumes mushroomed, but the intrinsic inelasticity of the system resources resulted in massive overcrowding, as more passengers crowded onto the same trains as before.

Some of the private sector initiatives in management backfired. Famously one TOC, whose background was in bus operation, reduced the number of train drivers to the same levels as in its bus activity, incurring heavy severance costs. It immediately found that it was unable to run its full train service, and it had to recruit train drivers urgently, and also incurred penalties from the industry regulator for the shortfall.

Public opinion became uneasy about the ownership of national assets --- the railway network --- in private hands, and there were a few well-publicised instances where shortage of money resulted in the suspension of maintenance work on some high profile assets: the famous Forth Bridge in Scotland became a celebrated cause when newspapers showed photographs of rusty ironwork.

There were safety concerns too, when inexperienced managements decided to short-cut some established railway safety procedures. The Health & Safety Executive, the State Safety Enforcement Authority took a particular interest in railway safety standards, seeing the industry perhaps as a challenge.

Most damagingly of all, to the general public, the performance (punctuality, reliability) statistics stopped improving, and started to worsen, while the general perception of fares was that they were becoming more expensive, not falling as had been expected.

As time went on, political opinion turned ever more strongly against railways, and there were four special factors that were decisive in consolidating this:

1. There were several serious accidents in the period 1997 to 2001, and in each of these there were clear deficiencies in basic management. Many people felt that this confirmed their fears that private companies could not be trusted to manage a safety-critical business. This culminated when a passenger train derailed at speed at Hatfield in October 2000, killing four passengers; it was quickly established that the safe upkeep of the infrastructure was at fault.
   
   
2. The Government came under pressure to do something about the daily performance problems. However when Ministers called on the private companies’ leaders were called on to make improvements, they were robust in defining what they were responsible for and what they would not do. Railtrack’s new Chief Executive was especially direct in his dealings. Suddenly Ministers found that they were attracting political criticism from the public, but had less power than before to announce improvements that they were implementing.
   
   
3. Concerns multiplied about the cost of sustaining the infrastructure long term, and also of implementing the major upgrades and improvements that had been promised. There were suggestions that the State money given to the industry was being misused, and yet that more money was needed for maintenance and renewal of the infrastructure.
   
   
4. Railtrack paid a dividend to shareholders in 2001 at a time when it was unprofitable, and it had just received a large “below the line” cash grant to enable it to continue in business. At this time it was attracting most of the criticism for poor operational performance. This was a turning point in public opinion, for even right-wing voters saw this dividend payment as a misuse of public money.

These factors combined to form a public opinion that private ownership was worse than the nationalised structure, for all the faults of the latter, and newspapers started to carry headlines like “Come Back, British Rail, All is Forgiven”

Structural Weaknesses
The structure set up in 1994-5 had a number of weaknesses, that diluted the efforts of all concerned to make the industry successful. These included:

• The lack of a clear vision by Government as to what it wanted Railways to do; even when a Strategic Rail Authority, as a Government body, was set up later, its freedom to set policy and stick to it was initially limited. This prevented any long term view of railway development from being adopted, but also led to petty difficulties about whether a Sunday train service should be offered on a certain branch line, for example.
  
  
• The large number of passenger TOC’s brought massive complexity in agreeing any change to physical infrastructure or access to it; an improvement for one TOC was often a setback for another.
  This also resulted in a blame culture: there was always another participant in the equation who could be blamed for a problem. Despite high level agreements, managers often expressed this blame to television and newspapers, so that the public saw an industry fighting internally.
  
  
• The Government Regulator’s policy was perceived by some railway companies to be discouraging, and to prevent enlightened long term improvement. In other, profitable industries, the Regulator’s role is often confined to preventing uncompetitive practices, but here the Regulator had an intrusive role in determining whether spending proposals were proper. In practice, the Regulator often decided that the companies could perform better than they had offered, but that they needed less money than they claimed.
  
  
• In the case of the TOC’s, they had contracts typically for seven years, and there were high expectations that they would purchase new rolling stock in large volumes. It surprised only those ignorant of the industry when they found that the earliest date to commission the new equipment would in many cases be after the end of their Franchise period.
  
  
• Railtrack’s main income was from TOC’s, but the value was not much affected by volume of traffic. This meant that as passenger and freight volume increased, the TOC’s kept the extra money and Railtrack saw very little of it. This made it particularly difficult to undertake infrastructure improvements, as the capital outlays could not attract much incremental income.
  
  
• The absence of real competition in the industry, coupled with the lack of a clear indication of Service Level expected by Government, resulted in a culture of consolidation.

Infrastructure Management by Contractors
From the outset Railtrack determined to use contracts as the means of having its infrastructure work done. This was set up by arrangements similar to facilities management contracts, in which the desired output is specified, and the contractor is given as much freedom as possible as to how he achieves it. Naturally there are a number of mandatory procedures and standards that the contractor must comply with.

This has been successful, but it requires a very different approach to the traditional railway command culture. In particular it does not imply that the client has no responsibilities, or rights, in the execution of the work at all. Assessing the proper level of intrusion and verification by the client is a complex challenge, and one that Railtrack is at present improving.

Of particular importance is retaining the expertise in the behaviour of the assets, so that Railtrack staff are at least as well-informed as the contractor’s staff whom they are supervising. Proper levels of reporting are essential. This requires a culture of considerable openness, and the provision of a strong asset management team in Railtrack.

A particular challenge is sustaining a good supply market among infrastructure contractors, and Railtrack has found it difficult to encourage widespread participation by new players in this highly specialised field. Mnay potential contractors saw the entry barriers as too difficult and the commercial environment too aggressive, and decided not to enter the industry.

Railtrack’s Control of the Infrastructure
As well as the issues just described, Railtrack suffered other problems.

There was increasing frustration at Board level within the company at the continued high level of costs and poor performance levels. Very strong incentives to achieve these targets were set within the company, and this led to extreme pressure being put on those responsible for asset stewardship, to reduce costs and to perform better. This encouraged a trend that discretionary expenditure should be deferred or eliminated and that any redundancy in the system was not justifiable.

From time to time, Railtarck became aware of some particular unsatisfactory and hazardous maintenance condition, perhaps as a result of a mishap. Often, its response was to demand that the Chief Executive of each maintenance contarctor should personally guarantee that the situation did not exist anywhere in his area of responsibility.

From Railtrack’s point of view this seemed a proper procedure to ensure elimination of a hazard, but the Contractors found it most arduous, especially if past custom had condoned the existence of the newly-prohibited conditions. The responses varied, but often involved the widespread imposition of precautionary speed restrictions, sometimes believed to be an over-reaction. In some cases the Companies reported to Railtrack that large numbers of the prohibited conditions existed, and asked for instructions and priorities.

In many cases it was impossible to eliminate the bad conditions in the short term, and palliative measures had to be put in place, often involving special frequent inspections to detect deterioration, speed restrictions, or other special arrangements. In turn this led to unclear responsibilities, and increased the feeling that there were large numbers of unsatisfactory conditions in existence that were somehow being tolerated.

Railtrack in Administration
As Railtrack’s operational costs climbed and its regulated income fell, it became loss-making and relied on State grants to continue in business. A further request was made in October 2001 and on this occasion it was declined.

On Saturday 6th October 2001, the Secretary of State for Transport put Railtrack into administration, a special form of bankruptcy provided for in the original Transport Act. Amazingly, this did not reach the front pages of the newspapers. Administrators were put in place, but the entire management team of Railtrack continued their work, and little change was observed on the working railway.

Inevitably, performance declined over the ensuing months. Predictably, any long term Railtrack forecasts of major project costs, or performance targets achievable, have been revised to be more cautious. The fees payable by Government to the administrators are reported to have vastly exceeded the grants that Railtrack had sought in October.

Government proposals now are to put in place a successor to Railtrack, a “Not for Profit Company”. Naturally the prospective managers of this company are insisting on information being made available to them that will disclose the extent of their liabilities in a rigorous way, and at present that process is continuing.

The fundamental structure of the railways in Great Britain will, however, remain unchanged, with the Not for Profit Company simply replacing Railtrack. Railtrack’s problem was that its commitments exceeded its resources, and it has not yet been made clear how this will be resolved.

The Future
Although the structure of the industry seems set to be little changed, there are a number of brighter stars. In particular the Strategic Rail Authority has made a number of policy statements that indicate a longer term view of railways being taken by it. Longer, and better constructed, Franchise Contracts are being allocated to TOC’s. Commitment to (and public demand for) major infrastructure improvement schemes is much stronger. Volume growth continues, and is predicted to keep growing for decades.

Conclusion
This paper has not been an examination of a major mistake. Many changes have been made with a beneficial effect. Although the headline fact, the financial failure of Railtrack, is of course negative, it has been a failure of practice rather than principle. Railways remain a treasured national asset. What Great Britain needs to put in place now is a clear vision of what it wants from railways, and how it intends to pay for what it wants. I hope that the political process is now formulating those policies.

The fundamental failings of the 1994 environment were

• Absence of a clear vision from Government about what it wants from railways, now and in the future
• Lack of funding to match the demands
• A complex industry structure in which too many participants have incentives that are not consistent with the good of the whole industry.

Successes of the structure are:

• Injection of large amounts of private capital
• Transparency, especially of the cost of projects and the true demand for them
• Much better attention to consumers’ requirements, especially when they are revenue generating
• Streamlining of old industrial practices, on the part of both workers and managements.

We can now look to those who are structuring the successor organisations to build on those strengths and eliminate the weaknesses.


Nigel Ogilvie
April 2002