Railway Privatisation De-rails in Britain

SIX years after privatising British Rail, the Labour government has finally pulled the plug on Railtrack and effectively re-nationalised the company. This is after years of paying out good tax payer’s money to Railtrack, the private company that had taken over the major assets of British Rail – its railway tracks, signalling equipment and stations. Already, it had been put under receivership nine months back. Finally, Alistair Darling, the transport secretary in Tony Blair’s government told the House of Commons on June 28 that a new, non-profit company will take over from the private, bankrupt Railtrack. This signals the formal end of the privatisation experiment in railways in the UK. It is an important landmark in the continuing saga of privatisation, which has been flogged through out the world based on its so-called success in the UK. Ordinarily, the failure of deregulation in California’s electricity sector and the forced re-nationalisation of British railways should have led to some soul searching, particularly in privatisation of public services. Such an outcome is perhaps too much to expect when gung-ho liberalisation is the mantra of the day, never mind that it’s repeated failures litter the ground. The only consequence of Railtrack’s failure has been to put a brake on the opening of postal services in the UK to competition and the eventual privatisation of Royal Mail.


At the heart of the debate about privatisation of public services such as railways, are two questions. One is the old fashioned one: can private companies whose interest lie primarily in their balance sheets, deliver good quality public service? The second is unlike privatisation of monopolies and opening them to competition – in the UK, the case of Central Electricity Generating Board (CEGB) and British Telecom – railways was an inherently loss making activity, for reasons that we will explore later. The issue here was could such an activity be run more efficiently by the private sector so as to provide, not only the increased costs of the private companies, but also their need for high profits.

The answer to both these questions have been a resounding no. The British railways, not exactly the most efficient organisation before privatisation, now seems almost a paragon of virtue from the hell of the current system. Even government officials admitted that the British railways, after privatisation, had become the worst system in Europe. Frequent accidents, endemic late running, repeated cancellations, have all played havoc with the railways.

The question that has to be addressed by the British government is that by privatising a system that was operational, even though making some losses, how much more has now to be paid to restore that system back to some semblance of health. And if the British taxpayers have to foot this bill, would not they have paid much less to continue with a subsidised public transport system?

The British government now concedes that the new company, Network Rail will need government support worth 21 billion US dollars. Earlier, Railtrack had been demanding and getting virtually a blank cheque from the government to continue running the system. It wanted its full costs to be met by the government for the next four years, the suspension of all regulatory regimes and a guarantee that government would completely underwrite the shareholders. Faced with such demands, even the pro-privatisation New Labour of Tony Blair baulked and finally decided to re-nationalise Railtrack. There is still a set of private operating companies in the UK whose future currently remains uncertain.

The genesis of the problem in British railways lies in the decision of the then Tory government to “restructure” British Rail in 1994. After years of under-investment and neglect of the railway system, the tracks, signalling equipment and the stations were hived off to Railtrack and the rolling stock – the coaches and engines – re-organised into 25 operating companies. The argument here is the familiar one applied to the electricity sector. The railway lines are the monopoly element of the railways. Once these are separated from the rolling stock – the trains – there could then be competition between the operating companies. Thus, Railtrack owning the lines would become a regulated monopoly, while others would compete with each other for passengers and freight.


After restructuring, these entities were privatised; Railtrack was privatised in 1996. A stock taking today would show that British railways went into a steady decline after restructuring and privatisation. The private companies sacked its employees, calling it “rationalising” of the workforce, cut maintenance and equipment costs and neglected track renewal. Their so-called profits and increased financial efficiency came from these measures. Interestingly, even when the company was losing money, it paid dividend to its shareholders making clear what their priorities were. As they paid out dividend to the shareholders and fat salaries for the top management, the quality of service deteriorated rapidly. Initially, it was late running of trains and cancellations. Soon after, a crash at Hatfield occurred due to broken rails. A survey of the tracks revealed thousand of cracked rails, as Railtrack had neglected track repairs. This led to massive delays as a large number of trains were withdrawn and speeds were drastically reduced. A final irony in this situation was when on a balmy summer day with temperatures in “high” 20s, British railways had to suspend a number of services as the tracks were “too hot.”

The rapid decline of the British railway system led to a huge increase in congestion on the roads. The New Labour hailed this congestion as a sign of burgeoning wealth and more and more people abandoning old-fashioned public transport for nifty private cars. The American model, with no public transport, a decaying Amtrak became the New Labour’s ideal. The picture on the ground was quite different. The congestion on roads, increased pollution and road accidents was directly due to failure of public transportation. And the policy of encouraging privatisation of public transport, espoused by the Tories, became the mantra of New Labour as well. It not only embraced the philosophy of privatising public services, it set in motion privatisation of the underground rail in London and the postal services.


The key issue in the transport sector is what constitutes subsidies and what constitutes genuine public investments. The motorised road system is bolstered with huge public investments in terms of highways and roads, while the railways are expected to be self-sufficient in maintaining the tracks, laying out new tracks, keep fares low and provide good quality service. If they then run into losses, this is tom-tommed all over as proof of the failure of public sector. The American paradigm of transport is based on this differential treatment of railways and road transport system. And it is this model that the UK government was keen on adopting in its treatment of British Rail.

The problem of failure of privatised public services is that the government of the day cannot wash its hands off such companies. An instructive case is that of the California utilities. When the California de-regulation hit the skids, and California started facing blackouts, the government had to step in to save the private utilities. As the California governor stated, electricity is a necessity and no government can wash its hands off such public services. The collapse of the electricity sector would mean the collapse of the economy of California (the sixth largest economy of the world).

The collapse of British railways privatisation should immediately raise alarms signals here. The paradigm of restructuring loss making public utilities such as SEBs is quite similar. As the Orissa case has shown, once such privatisation collapses, the state has to step in with huge amounts to save such utilities from collapse. A perusal of the Kanungo Committee Report of failed Orissa privatisation reads eerily similar to that of Railtrack – poor maintenance, no investment and siphoning out money. Delhi Vidyut Board is treading the same path: with Orissa case before it, it has already provided for Rs 3,500 crore as the subsidy it will pay to Tata Power and BSES to take over its assets. Once the private companies take out their money and have eaten up this Rs 3,500 crore, chances are that they will again land in Delhi government’s lap in worse shape than they are now.

The restructuring of the railways by the Tory and the subsequent New Labour and India’s proposed restructuring of the electricity sector that both the BJP-led central government and the Congress state governments are following, are informed by similar ideological premises. It is an ideology-driven vision by which things automatically improve if they are privatised. The reality for the people is that the only improvement that takes places is in the pockets of people associated with such privatisation and in the balance sheets of the companies. If we look at the services offered, then it is a dismal tale of high prices coupled with declining services.

The Nobel Prize winning former economist of the World Bank, Joseph Stiglitz exposed this ideology of privatization –the World Bank-IMF-WTO recipes in scathing terms. In an interview to The Observer (London, Oct 10, 2001), he called privatisation as “Briberisation: Politicians and officials are encouraged to flog their electricity and water companies, and rewarded with a 10 per cent commission paid for “shaving a few billion off the sale price of national assets”. This is the true face of the current reforms. Unfortunately, we in India will pay a heavy price for the illusions that were created in the UK and are being marketed worldwide by the World Bank-IMF and their apologists.