Public-Private Partnership Policy Casebook/British Rail PPP and Aftermath

This case study reviews the Privatization of British Railways as a collaborative work of Tamara Grozdanic, Fabiola Scott, and Parker Bratman. The casebook is a product of the George Mason University graduate program for Public-Private Partnership Policy course under the leadership of Dr. Jonathan Gifford.

Summary

Introduction of the Privatization

The British Rail underwent privatization in 1993 by selling shares to public stakeholders. Prior to its privatization, United Kingdom railways were controlled and owned by the government and overseen by a separate Board. From 1995 to 1997 the British railways were sold off to private entities as part of a successive Conservative administration. Prior to privatization, passenger rail travel rates began to decline and rail freight business experienced a loss of market share. In 1968, the 1968 Transport Act was issued, recognizing the government’s need to provide subsidies to support the industry; However, the level of subsidy gradually increased over time ultimately reaching 1.6 billion pounds by 1985. During this time, the government recognized that continued subsidies would be required to support the rail industry and as a result, began accepting proposals to privative the railway that culminated in dale during 1995-1997. The privatization of the railway was completed in 1997 due to a political push from the Conservative party. There was a great likelihood that the Conservative party was to lose the election of 1997 and therefore expedited the process to privatization, making it effectively irreversible.

The government’s objectives for privatizing the railway were to harness the skills of the private sector in order to better meet railway customer’s needs, provide greater efficiency and value for money, and ultimately increase the quality of services rendered. And to achieve their objectives, the government leaned on private sector competition. In 1994 the restructuring of the British Rail transferred most asset ownership to Railtrack, a company separate from British Rail, but owned by the government, which was then sold in 1996. During the restructuring of the railway system in 1996, the rail infrastructure was partitioned and reorganized into 7 maintenance and 6 track renewal companies; the rolling stock was partitioned between 3 leasing companies (ROSCOs); the passenger train services were franchised to 25 private sector train operating companies (TOCs). Furthermore, as part of this restructuring, 2 regulatory bodies were created: The Office of the Rail Regulator (ORR), whose functionality was to regulate the monopoly element of the business; and The Office of Passenger Rail Franchising (OPRAF), whose main responsibility was to award franchises and regulate TOCs. OPRAF later became known as the Strategic Rail Authority (SRA) and was primarily responsible for providing strategic direction for Britain’s railways. While the Rail Users’ Consultative Committees (RUCCs) were formulated to protect the interests of rail consumers.

Aftermath

Twenty years following the privatization of the British Rail, The Conservative Party Transport Minister Patrick McGloughlin, gave a speech which heralded “20 years of rising investment [and] 20 years of extraordinary growth on our railway,” indicating success of the privatization. While data on passenger numbers implicates success delivered by the private enterprise, the accounts of Network Rail – the company responsible for railway infrastructure after the collapse of Railtrack PLC in 2001 – report a different narrative. There was a significant growth in the debt burden shouldered by Network Rail to fund infrastructure improvements (from £9636m in 2002/2003, to £30,358m as 2012). “Consequently, the annual cost of interest payments on this debt financing increased almost seven-fold to just under £1.4bn in 2012, surpassing spending on track maintenance which fell below £1bn that same year.”

“A key promise of rail privatization was the elimination of public subsidy followed by a net gain for the taxpayer in the form of franchise payments levied on the TOCs a state that was expected to be achieved by 2005/2006. Under the Network Rail regime, TACs were lowered as passenger journeys increased and ticket prices rose above the rate of inflation. This improved the fortunes of the TOCs to the extent that the Department for Transport became a net beneficiary of rail franchising in 2011/2012. Net subsidy to TOCs transformed from over £1bn at the formation of Network Rail in 2001/2002 to a small net gain for government from 2011 onwards as franchise payments made by TOCs exceeded direct subsidies. This has however coincided with large increase in direct state subsidy for the infrastructure company. Thus, while subsidy to the TOCs as a percentage of passenger revenue has fallen the direct subsidy to Network Rail has remained equal to around 50% of passenger revenue. During the first decade of Network Rail’s existence, passenger kilometers travelled increased by some 43%, while passenger fare revenue for the TOCs increased by 48%; meanwhile, Network Rail’s revenue from TACs, adjusted for inflation, declined 12% from £1.8bn to £1.6bn. Only eight of 18 franchises received a net direct subsidy during the year whereby subsidies exceeded franchise premium payments.”

The political significance of the subsidy arrangement is reflected by key government officials and government ministers, who are enrolled in – and co-dependent upon – the appearance of success in rail privatization. Ultimately, the TOCs would be unable to be portrayed as efficient enterprises achieving independent success, and the disguising and displacing income, costs, capitalizations, and risk is used to support the political narratives that in turn generate the appearance of a successfully privatized utility.

Annotated List of Actors

British Government: British Department for Transportation (Office of Passenger Rail Franchising (OPRAF), the Franchising Director supplanted by the Strategic Rail Authority, Secretary of State for Transport), Network Rail, Great British Railways.

Train operating companies (TOCs): 25 franchises

Railway rolling stock (Trains): Rolling stock leasing companies, or ROSCOs

Infrastructure companies: Railtrack, Metronet

Four freight companies: English, Welsh & Scottish Railways, Freightliner, Direct Rail Services, and Combined Transport Ltd.

Timeline of Events

• July 1992: The British government published, New Opportunities for the Railways, the privatisation of British Rail, a white paper that proposed the creation of Railtrack (run by private sector franchises) to replace British Railway.

• October 1992: The Department of Transport requested input from the government and private industry with a letter of consultation on the franchising of passenger rail services.

• November 1993: The Railways Act of 1993 initiated the disintegration of British Rail.

• April 1994: Railtrack, a government owned company created under the Railways Act 1993, was created to control the railway infrastructure.

• May 1994: The Channel Tunnel opens.

• May 1996: Railtrack is sold to the private sector.

• October 2000: the Hatfield accident, the crash recovery program cost Railtrack £644 million.

• November 2000: The Transport Act 2000.

• February 2001: Steve Marshall, Railtrack’s Chief Executive estimated a debt of £8 billion by 2003.

• October 2001: The British government decided to put Railtrack into administration

• October 2002: The Department for Transport established Network Rail, Ltd to take over Railtrack.

• May 2008: Collapse of Metronet.

• May 2018: Timetable collapse

• September 2020: The British transport secretary, Grant Shapps, announced the failure of the railway privatization model ending the rail franchising system.

• May 2021: The British Department for Transport reported the Williams-Shapps Plan for Rail and the creation of the Great British Railways, a state-owned entity that will replace Network Rail in 2021, in this new model the government will contract with private sector operators.

Maps of Locations

https://www.nationalrail.co.uk/TOCs%20v%2053NRE%20May%202021%202.pdf

Risk Matrix

Caption text

Risk Type	Public	Shared	Private
Land Availability, Access and Site Risk		X
Political Risk	X
Environmental Risk	X
Design Risk			X
Construction Risk			X
Infrastructure condition			X
Operating Risk		X
Demand Risk		X
Financing		X
Strategic or Partnering Risk		X
Force Majeure Risk	X
Quality assurance/control			X
Change in Law Risk			X
Early Termination Risk		X
Labor disputes			X
Tariff collection			X

Cost

Privatization of British Rail happened gradually as each sections of the process was franchised over time. First the individual routes were sold off to over 25 separate companies that bid on how much they were “worth” with the government stepping in to serve less desireable routes with government subsidy to keep prices affordable.

https://dataportal.orr.gov.uk/media/1548/rail-finance-statistical-release-2018-19.pdf

During the initial years of the privatization of Rail track the government offered Railtrack up for sale and expected total gross proceeds to amount to £1.67 billion. The National Audit Office (NAO) published a report on the Railtrack sale and concluded the UK Government could have raised much more. The NAO calculated that at least £600 million more and had retained 20 percent of the shares, or £1.5 billion if the Government had retained 40 per cent of the shares.

Financial Structure

Bidding was the only place where the government could expect the free market to have a competitive process. This lead to overbidding due to an overestimation from each franchise that was to operate each rail line. The government would not be paid because the franchise could not operating and the business would fail.

Privatizing the British Rail system still included financing structure the same way. A majority of yearly funding for operating costs comes from the tolls from passengers and freight, along with a sizable government subsidy. The total subsidy during the privatization years did decrease before spiking to over £8 billion during the formation of Network Rail. The Subsidy has fluctuated since the collapse of Railtrack and was last recorded at £7 Billion in 2019 with an average cost of around £5 million.

Institutional Structure

Railtrack was the first structure that was sold, it owned all rails, track, and stations.

Freight services were split into 6 distinct companies.

Passenger ridership would be privatized last. Intercity was split into 7 segments for Britain’s long distance routes, 10 for Network SouthEast, and Regional Railways was split into 8. These 25 companies make up the TOC's. However, the public relies on loss making operations for train services. Therefor, each train operating company could be balanced by subsidy to meet contractual requirements to run infividual train routes.

Many bidders were not able to be found and the government started using direct bid which is opposite from the competitive bid process originally designed. An increasing number of railways stopped operating under the franchise model by 2020 due to limited ridership where the franchises could no longer make their payments to the British Government.

Identification of Policy Issues

The government proposed a Ten-Year Transport Plan that targeted a 50% growth in rail passenger traffic, however, there was a lack of substantial investment in rail infrastructure that was indicative of failure. Additionally, the government's Integrated Transport Policy seemed increasingly unbalanced as it increased its road transport spending whilst the railway system struggled significantly to improve its capacity and reliability. The privatization of the rail system was driven by a political motif and lacked a governance structure to effectively manage and operate the railway system.

Narrative

The privatization of the British Railway was destined for failure from the beginning. An idea that was derived during the Thatcher tenure and realized post-Thatcher, the privatization was a political power-play that lacked clear definition, structure, and organization. This effort was a push to ‘reduce government spending’ that essentially forced offerors to compete by over promising and under-delivering. This resulted in failed franchises that were unable to make payments to the government and were ultimately replaced by other private suitors. In most recent occurrences, several railways ceased to operate under the franchising model and instead operated under the concessions model. The failed franchise model of the British Rail privatization made it more difficult for the government to find new offerors as franchises came up for renewal. A model that once helped increase the number of passengers on the British Rail System, proved to be no longer effective.

Key Takeaways

The British Rail privatization has succeeded in growing passenger, however, annual subsidies for passenger rail services remained unchanged and proven to be unsustainable. Ultimately, rail services became less reliable, and the private sector has lost confidence in rail investment. The outcome of rail passenger service privatization did not match the theoretical expectation that competition would both improve efficiency and maximize consumer benefit, and subsidy levels did not decrease as expected “because many franchises were let on the basis of bids that overvalued their worth and required unsustainable levels of cost cutting and revenue growth.” In conclusion, the privatization of the British Rail failed as a mechanism to resolve Britain’s urban and interurban transportation problems, and a more effective method is required if the objective is to boost railway investment.

Discussion Questions

• Is it realistic to expect competition for franchises in a basically loss-making industry to lever in substantial private sector investment and deliver extensive consumer benefits?

• Why do you think this privatization failed?

Additional Readings

Great British Railways

Railway Rolling Stock

The Failure of Metronet

The Development of Railway Network in Britain 1825-1911