A Critical Research on the Privatisation of the British Rail (BR) Essay

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A Critical Research on the Privatisation of the British Rail (BR)

Abstract

Privatisation is the act of selling state-owned enterprises (SOEs) or government business enterprises (GBEs) and other government activities to the private sector (Edadan (1997 as cited from Hossain and Malbon, 1998).

The British Railways was privatised in 1993 through the 1993 Railways Act. It is through such that Railtrack PLC was formed in 1994.  Railtrack PLC paved the way for the division of the railways freight business  into 25 smaller units and were later known as Train Operating Companies (TOCs) and were franchised for a certain period of time.  Such an approach on the end of the government was hoped to further competition and the introduction of new ideas on the railways (Virgin Trains, 2007).

Furthermore, in order to make the train operations more cost effecrive, the operations of the rolling stocks were separated from the actual train operations.  It is with this respect that three Rolling Stock Leasing Companies (ROSCOs) were created in order to take over the etire passenger-railway operations and in juxtaposition with such their relationship with the 25 TOCs (Virgin Trains, 2007)

Such a system adopted by Railtrack is in accordance with the diverstiture approach of privatising government owned railways.  However Railtrack appeared to be falling behind its expectations due to its failure to establish profitability.  In addition, the subsidy provided by the government in order to establish its effective operations are also further increasing, hence causing further debt to railtrack.  Other issues such as the absence of competitivenes, monopoly, lack of safety and efficiency was also faced by Railtrack (Asian Development Bank, 2007).

On 2002, Railtrack Plc was brought by Network Rail for £500 million (Network Rail, 2007). On October 3, 2002, the company fully acquired Railtrack in which such was able to have 78.6% of the trains to run on time.  As of present, Network Rail has been gaining improvements in terms of its profitability though the company still posesses a significant amount of debt and still depends highly on government subsidy.  Issues in terms of lack of competitiveness and safety  are still in existence and is still trying to be improved by the organization (Network Rail, 2007).

Chapter I

Introduction

Background of the Problem

The rise of the 21st century marks the need for the government to have certain industries privatised in order to keep up with the demands of the local market, and in order to assure competitiveness and profitability. As John (1983) states that privatisation opens up exciting possibilities for consumer; better pay, conditions, and employment opportunities for employees; and new freedom for the managers of the industries concerned. For those reasons there should be no doubt that privatisation has become one of key elements of the government’s economic strategy. In order to follow this trend, the UK government privatised many of its public sectors including electricity, water, gas, and transportation.

In addition, The British Rail (BR) was privatised in 1993 through the 1993 Railways Act in order to cater to such demands. It was the last, but far from the least important or interesting of the major privatisation in Britain (Jon, 2000). Albeit, despite of these, various criticisms stem out due to the act of privatising the BR and its consequences to the government, its stake holders, customers and the entire market as well; hence a number of criticisms emerge whether the act of privatising BR has been a good or a bad move on the end of the government (Thompson, 2003).

Despite of these concerns, recent studies in terms of the profitability of the rail road sector appears to be very promising. The railroad sector within the United Kingdom has been seen significant growth rates since 2003 of 1.5% per annum and has reached its peak of 6.4% in 2005 and 2006. In 2006 alone, the railroad sector is able to generate a compound annual growth rate (CAGR) of 4.8% from 2002-2006. The most lucrative all of segments could be tagged as belonging to the passenger’s as such created total revenue of $10.9 Billion which is synonymous to 89.1% of the sector’s total value. On the other hand, the freight segment created revenue of $1.3 billion in 2006 which is synonymous to 10.9% of the sector’s aggregate revenue (Datamonitor, 2007).

As such, it is with this respect that one can significantly deduce that the railway industry has been significantly improving since its privatisation in 1993. However, concerns as to why it took so long for the aforementioned to gain its market strength and profitability is the utmost concern of this research. In addition with this further issue in terms of Network Rail’s operations as of 2007 are also taken into consideration.

Significance of the Study    

The study is relevant in order to know the nature of privatisation and its consequences, most specifically to that of the British Railway Stations. In addition with this, the effects of the policy and organisational changes within the management and the operations are also very vital in order to know if theories and speculations in terms of privatisation are indeed valid most specially in applying it to the BR. The theoretical foundations of privatisation and how the BR has arrived at its current organisational framework, policies and protocols and its implications to the total operational effectiveness, safety, improvement and profitability of the railway

Research Question

For the purpose of this research, this paper aims to answer the question: Has the privatisation of the British Railways caused an overall improvement of the British Railway Industry?

Objectives     

The objectives of the research are the following:

  1. To provide a theoretical background on the nature of privatisation within the United Kingdom.
  2. To provide an overview of the process of Privatisation of the British Railways.
  3. To identify the effects of the British Railway Privatisation.
  4. To identify the problems that stemmed out due to the British Railway privatisation.
  5. To provide an overview of the future Directions of the British Railways.
  6. To significantly deduce based from the secondary data the implications of the British Railway privatisation.

Methodology

For the purpose of this study, the research have undertaken the Qualitative Tradition of research which focuses upon the small-scale studies wherein deep explorations are being conducted in order to provide a detailed and holistic description and explanation of a specific subject matter (Holloway, 2002).

Rather than focusing on a single or two isolated variables, the aforementioned takes into account interconnected activities, experiences, beliefs and values of people, hence adopting a multiple dimension for study. This tradition of research is also flexible in a sense that certain factors are being explored due to not necessarily adhering to a strict method of data gathering. It also captures certain processes wherein changes in sequence of events, behaviours and transformation among cultures are closely taken into consideration (Holloway, 2002).

More importantly, a qualitative research is normally carried out in venues that are within a respondent’s natural environment such as schools, offices, homes, etc. This allowed participants to be more at ease and be able to express their ideas freely.  Finally, such a research tradition is said to be inductive in nature in a sense that it starts by collecting and analyzing data and then coming to a particular conclusion. These data are then related to the literatures that were initially collected so that an analysis could be made, hence a deductive approach.  Theories then that are formulated that result due to Qualitative research is made due to the result of the data collected and not really from the theories that were studied in the literature review (Holloway, 2002).

For the purpose of this study, the research has conducted a Desk or Library Research. This type of approach within the quantitative tradition of research involves the gathering of secondary data from books, academic journals, magazines and trusted websites in order to deduce a significant conclusion in accordance with the research problem and objectives of the research (Holloway, 2002).

Chapter II

Literature Review

Meaning of Privatisation

According to Edadan (1997 as cited from Hossain and Malbon, 1998), privatisation is the act of selling state-owned enterprises (SOEs) or government business enterprises (GBEs) and other government activities to the private sector. Fundamental reason of privatisation is to seek economic growth by promoting competition in the market and improving efficiency. It derives substantial advantages for management of the industries, their employees, the consumer, and the taxpayer (John 1986). Meanwhile it brings benefit to the government’s Exchequer and reducing the size of the public sector as well as its bureaucratic management system which is crucially inefficient for both supplier and customers. Owen (2003) also states the number of rationale for privatisation like below:

The main arguments are: first, economic arguments: secondly, arguments about management and efficiency; and thirdly, ideological conceptions of what the role of government in society should be.

There are a number of ways in which GBEs and other government properties could be privatised. Foremost upon these are the direct sales of a certain GBE, a public offer, concession sale, joint venture, management buyouts, liquidation and lease (Thein 1990 as cited from Hossain and Malbon, 1998). In most countries, privatisation is done in order to protect the interests and activities of the consumers, private companies and the government as well.

The last decade has been widely characterised by privatisation programmes. In 1995 alone, the total value of sell-offs has been recorded to reach US$73 Billion within 45 countries all over the world. Within the United Kingdom, over £60 Billion of UK business assets have been privatised. Initially, the annual value of sales for the privatised companies are relatively low, however, come mid-1980s the sales have rocketed to more than £5 Billion every year hence reaching more than £8 billion from the periods of 1992 to 1993 (Martin and Parker, 1997). The table below presents the industries that have been privatised since 1979 in the whole United Kingdom.

Table 1:  Major Privatisations in the United Kingdom

Organisation Year of first share sale Industry
British Petroleum 1979 Oil
National Enterprise Board Investments 1980 Various
British Aerospace 1981 Aerospace
Cable & Wireless 1981 Telecoms
Amersham International 1982 Scientific goods
National Freight Corporation 1982 Road transport
Britoil 1982 Oil
British Rail Hotels 1983 Hotels
Associated British Ports 1983 Ports
British Leyland (Rover) 1984 Car producer
British Telecom (BT) 1984 Telecoms
Enterprise Oil 1984 Oil
Sealink 1984 Sea transport
British Shipbuilders & Naval Dockyards 1985 Ship building
National Bus Company 1986 Transport
British Gas 1986 Gas
Rolls-Royce 1987 Aero-engines
British Airports Authority 1987 Airports
British Airways 1987 Airlines
Royal Ordnance Factories 1987 Armaments
British Steel 1988 Steel
Water 1989 Water
Electricity distribution 1990 Electricity
Electricity generation 1991 Electricity
Trust Ports 1992 Ports
Coal industry 1995 Coal
Railways 1995-7 Railways
Nuclear energy 1996 Electricity

Source: Martin and Parker (1997, p.2)

It could be seen from the table above that almost majority of the industries within UK are privatised: water, electricity, gas, transportation more specifically the aerospace industry, and telecommunications. As such it is with this respect that one could imply that since the economy of the United Kingdom are gearing towards privatisation, the government is also expecting to apply the same principles and expect the same outcomes would apply in terms of privatising the British Railway.

Nationalisation and Privatisation

The relationship between privatisation and nationalism is deeply rooted in the notion of the substantial transfers of wealth. In certain cases the act of privatisation not necessarily includes the entire transfer of ownership; rather such also involves the act of sharing of the stocks for a particular industry in a manner wherein the government retains a relatively lower share than that of the private corporation (Quiggin, 2002).

It is often the case that on Private Sector Participation (PSP) in railway privatisation, the government always provide annual appropriations and allow the entire operations to be conducted by private sector employees (Asian Development Bank, 2007, p.1.1). The major argument from such an approach leans towards economical benefits due to assumptions of increased efficiency and cost reduction. In addition with this, technological improvements that the private sector also plays a major role since it have been perceived to be relatively of high quality and lower costs (p.1.1).

There are various ways in which a railway could be privatised. Foremost is the act of corporatisation in which an entire government agency is transformed to a private company (p.1.1). In some ways, Leasing is also conducted in which a lease transfer of rights for a certain period of time is provided to the lessee provided with certain contractual rights. On the other hand, Service and Management Contracts are done when there is an apportionment of roles wherein the government still remains to be the owner of the railway’s facilities and services; while the private sector serves to do the operational functions of the aforementioned.

In this set-up, the private sector benefits by driving revenues from management fees or the fees that they earn from providing such services (pp. 1.3-1.4). Concessioning is the act wherein the government participates on a long-term contract which normally lasts from 20-30 years with private companies. In this manner, the government still remains to be the owner of the rail track while at the same time providing the private companies the rights to operate their trains for track and improving their assets (p.1.5).

The Japanese rail, adopted the Management of Contracts approach in privatising their railways.  On 1987, the Japanese National Railways (JNR) under the Reform Law was disbanded and all of its assets,operations and liabilities were given to a group of private companies called the Japan Railways Group.  The companies that took over JNR were:  “(i) JR Hokkaido or Hokkaido Railway Company; (ii) JR Higashi Nihon or East Japan Railway Company; (iii) JR Tokai or Central Japan Railway Company; (iv) JR Nishi

Nihon or West Japan Railway Company; (v) JR Shikoku or Shikoku Railway Company; and (vi) JR Kyushu or Kyushu Railway Company”.  The privatisation of the Japanese Railway came in full effect on 2003 wherein two thirds of the shares o JR West and JR Central were at the hands of the private sector while the rest of such remains to the hands of the government (Asian Development Bank, 2007,  2007, p.13.1-13.3).

        On the other hand, the Australian Rail took the Leasing Assets method in which the government still remains to be the the sole owner of the Railway enterprise.  The Australian Rail Track Corporation (ARTC) functions include: “(i) selling access to train operators; (ii) developing new business; (iii) capital investment in the corridors; (iv) management of the network; and (v) management of infrastructure maintenance” (p. 10.4).

Finally, divestiture is the method that is adopted by the UK in order to privatised British Rail. Such involves the transfer of shares of the organisation to the private sector through a trade sale or a strategic investor (p.1.9). Albeit, it should be significantly noted that the process of divestiture is difficult to accomplish since such considers a significant number of factors such as taking into consideration risk assessments and return of customary line of business. In addition with this, a careful choice of strategic partner must be conducted, and must take into consideration the cost of capital and return (pp.1.9-1.10).

The privatisation of the BR stemmed out due to the need to have its railways adopt to the demands of the economy and its citizens.  The effort to privatise BR was made in accordance to the need to keep up with the market changes and the needs of its consumers (p.12.1).

Divestiture often happens when a particular company decided to sell certain part of its asserts for cash, security or asset.  There are various theories of how divestiture can bring forth gains for a particular organization.  Foremost of such is in accordance with the “strategic hypothesis” wherein divestiture is predicted to “eliminate negative synergies between divestin firm’s operations and the divested unit” (Cooney, Finn and Karl, 2004, p. 135).

  In effect of this, companies adopting such a type  of approach is perceived to have a more efficient allocation of management time, thus causing the aforementioned to focus more on certain areas of their business wherein they can gain or has a relatively more competitive advantage.  At the same time, such an approach has also been expected to produce more financial utility for an organization since such would allow a particular company to do away with businesses that would interfere with their effective operations (Cooney, Finn and Karl, 2004, p. 135).   In addition with this, divestiture is also perceived to

On the other hand, the strategic theory of divestiture paves the way for the divestiture unit to have its value increased since such an act would allow more focus and eventually firm value to the aforementioned.  Often times, the act of divesting a certain compay happens on time of financial distress or period of poor market performace.  In effect of this, such firms are perceived to have limited access to capital markets, and the very act of divesting a particular company for that matter provides more funding to the company to enact their plans (Cooney, Finn and Karl, 2004, p. 135).

Purpose of Privatisation

There should be no doubt privatisation is now global trend even within developing countries. Governments endeavour to enjoy various benefit in order to privatise public sectors and it seems, virtually, to work well through looking at on-going processes of privatisation. There are number of reasons advanced for the privatisation of nationalised industry in terms of economical, social and political issues.

One of the key arguments for privatisation is that it pursues the improvement of economic performances. Indeed, during the life time of the Thatcher government, sales of assets realised only£370 million in 1979/80 but the figures rose to £1142 million in 1983/84 by privatisation (Les and Sue, 1993). Firstly, privatisation generates to reduce public spending and borrowing requirements.

By selling off public enterprises, the government would be able to provide flow of funds into the Exchequer which could then be used for other purposes including reducing tax pole. Simulating competition is also an attractive part of privatisation programme (Owen, 2003). Competition enables to weaken monopoly power so that consumers more likely enjoy lower price for better value. The distribution coalitions have also paved the way to control “natural monopolies” in certain strategic areas such as telecommunications, railways, gas and electricity.

Further it has been criticised that state-owned industries are relatively inefficient and have been very slow in terms of developing and introducing new technologies. Part of the reason for such could be tagged on the political interventions that are primarily composed of influential trade unions (Veljanovski, 1987 as cited from Martin and Parker, 1997). As such it is with this respect that privatisation has been an avenue wherein the government could be unburdened of the relatively low productivity and loss that emerges from these sectors.

At the same time, such an act also allows the government to spread the ownership of the industry, hence in the long run also limiting the demands that trade unions often assert. Privatisation usually leads managers to place greater emphasis on the pursuit of profits. More importantly, privatisation could also be a source of state funding most especially at a time wherein the economic policy of the government is aimed at reducing the public sector borrowing requirement (PSBR).

Moreover, the increasing internationalisation of products and markets has also created a more complex and a bigger demand for a more liberal market. Hence, so-called “national politico-bureaucratic compromises” are avoided as they are perceived as hindrances to a very demanding environment which requires speed in decision making (Cass, 1989). Yet, all these improvements will remain fond hopes unless a substantial increase in business efficiency can be generated (Paul and Colin, 1995). Organisations should be able to set free their goals and maximising profit scheme but the minimum constraints are still needed to protect vulnerable customers. It is important, therefore, to ensure that regulation should be kept to a minimum.

Chapter III

The British Railway Privatisation

Process of British Railway Privatisation

On 1947, the United Kingdom railways were owned by the government before it was consolidated as British Railways (BR) in 1962 (Tyrall and Parker, 2005). Since the nationalisation of railway, BR ran one of the most efficient railways in Western Europe. However, it was still making heavy loss and requiring a lot of subsidy to run. Thus under the Thatcher’s government there were many attempts to privatise BR to provide better services for public. Although many parts of BR sales are proceeded during 1980s (See table 2) complete rail privatisation postponed due to the idea being to difficult or politically unacceptable to them. There were various and continuous argument for privatisation for BR and the method of privatisation was controversial even in the Conservative party[1].

Table 2BR’s subsidiary business sales, 1981-1989 (excluding various property disposals)

Business sold Date of sale
BR Hovercraft October 1981
BR Hotels 1982-1984
Superbreak Mini Holidays February 1983
Slateford Laundry September 1983
Sealink UK July 1984
British Transport Advertising August 1987
Doncaster Wagon Works October 1987
Horwich Foundry August 1988
Traveller’s Fare December 1988
British Rail Engineering Ltd April 1989
Golden Rail May 1989

Source: Hansard, 256, Col. 53w, 1995.

However, the success of the new “business railway” in comparison to the “social railway” has caused the Major government on 1990-1997; which later on leads to final disturbance- that is privatisation (Tyrall and Parker, 2005). On 1991, an agreement was made between all rail operators within the European Union in which entitling the members of the aforementioned to separate the management and the services sector of the BR.

Come July 1992, the While Paper ‘New Opportunities for the Railways’ heralded the official beginning of the privatisation process and committed the government to radically changing the structure of the rail industry. The document noted that “the introduction of competition…and the ending of BR’s monopoly in the operation of services will be instrumental” in improving rail services and the government’s wish to liberate private-sector management from state control in order to harness its “skills, flair and entrepreneurial spirit” was also emphasised (Jon, 2000).

Such also points out the cost effectiveness that the privatising could provide with an underlying notion on the usefulness of the forces of competition and through having private sector practices transform the British Railways. In order to make this happen, an improvement of the system was perceived to be imperative in order to have public subsidy, hence the Railways Act came into existence in November of 1993 (Curwen, 1997, p.56).

 After two years, Railtrack Plc was denationalised in order to effectively administer inter alia, the track, power supplies, tunnels, bridge spans, stations and signalling within the railway through a group of private companies (Curwen, 1997; Haubrich, 2001). Railtrack Plc did not receive any subsidy from the government, rather most of its earnings and profits were derived from 25 Train Operation Companies (TOC) that are owned by 12 different franchisees that were initially owned by the three major passenger business of the British Railway (Haubrich, 2001, p.320; Curwen, 1997). This will be discussed more precisely in the part.

On 2002, Railtrack Plc was brought by Network Rail for £500 million (Network Rail, 2007). Network Rail is a private company that solely for the purpose of purchasing Railtrack. On October 3, 2002, the company fully acquired Railtrack in which such was able to have 78.6% of the trains to run on time. As of present, the company operates in eight routes. Through out time, Network Rail has boasted to have increasing passenger train miles and freight miles, hence pointing out its sustainable development (Network Rail A, 2007).

Change in Organisations and Tasks due to the Privatisation

The 1993 Railways Act provided the legislative authority for the reorganisation and privatisation of the rail system (Jon, 2000). After the BR privatisation the ownership, management and maintenance of the railway and its other infrastructures were consolidated to various companies. . The structure of industry was very complicated, the need was for a new structure which would strike a balance between maximising competition and practicality. In outline, the main rail business that emerged to provide the organisational frame work for privatisation fell into the seven groups (See table 3).

Table 3Organisations and responsibilities of newly structured BR

Organisations Responsibilities
Railtrack Ownership of all rail infrastructure
Passenger Train Operating Companies (TOCs) Operators of designated passenger train services on a franchised basis
Rolling Stock Companies (Roscos) Three businesses set up to own and lease out passenger trains to the TOCs
Rail-freight companies Operators of rail-freight services and owners of freight rolling stock
Companies concerned with the heavy maintenance of locomotives and rolling stock Initially within British Rail Maintenance Ltd (BRML)
Ancillary business A miscellany of units providing services in support of the rail industry such as communications and research

Source: Jon (2000)

Figure 1: The Structure of the British Rail Industry after the Privatisation

Source: Stephen et al (2006)

Figure 1 presents the changes within the organisational structure of BR due to privatisation. The entire operations of Railtrack, was held under regulation in order to ensure that such keeps up with the various protocols necessary for the company’s effective operations. There are basically three railway regulating authorities for the British Rail. The Office of the Rail Regulation (ORR) was created on July 5, 2004 under the Rail and Transport Safety Act of 2003 (Office of Rail Regulation, 2008). The organisation is an independent body that assures the efficient management of Network Rail relative to the manner that meets the demands of its consumers.

In addition with this, ORR also monitors the perpetual development in terms of safety and performance of the Network Rail. The Office of the Rail Regulation also assures that the health and safety laws of the country are followed at all times and in the same manner significantly contribute on the development and enhancement of health and safety legislations. Finally, ORR also takes into account the licensing of operators of “licensing operators of railway assets, setting the terms for access by operators to the network and other railway facilities, and enforcing competition law in the rail sector” (Office of Rail Regulation, 2008).

The Office of the Passenger Rail Franchising (OPRAF) was initially created to monitor and manage the 25 train franchises and at the same time protect passenger interests, investment of the railways and maintain quality service (Haubrich, 2001, p.320). OPRAF was created through the Railways Act of 1993 and then later on was replaced by the Department of Transport (Office of the Rail Regulation, 2008).

The Department of Transport (Dft) Railway Group was created on summer 2005 in accordance with the Railways Act of 2005 (Department of Transport, 2007). The Dft Rail Group functions are the assurance of the provision of operational and financial performance and safety of the railway. In addition with this, services and reasonable prices are always made sure to be given to respective clients. Furthermore, the DfT Rail Group also assures the further development of railways that would enable the Network Rail to cater to wider transport services. Finally, the cost-effective and timely delivery of projects is also of utmost consideration (Department of Transport A, 2007).

The Strategic Rail Authority (SRA) was created on December 1, 2006 through the Railways Act of 2005 which serves as one of the main regulators of the British Railway that aims to serve the public interest. On July 21st 2005, SRA published its final Annual Report in preparation for its organisation to be consolidated under the Department of Transport (Department of Transport B, 2007). In effect of this, the DfT carries the functions that were formerly done by the SRA (Department of Transport, 2007).

These regulating bodies are then responsible for the operations of Infrastructure Service Companies that provide maintenance services to Railtrack/ Network Rail. On the other hand engineering services for trains are the ones which give services to train leasing companies and then later on collaborate to provide support to Train Operating Companies (TOCs) in order to provide services for the consumers.

The very elaborate changes within the British Railway’s organisational framework and its success is still something that is very debatable as studies reveal that out of the nine goals aimed for by the organisation, only one of them has been fully achieved (Haubrich, 2001).

Figure 2: The Achievement of Nine Objectives of Rail Privatisation Policy

Source: Haubrich (2001, p. 331)

Separation of Rail Track and Franchising Failure

The Railways Act of 1993 paved the way for the separation of rail track for 25 TOCs. The 25 TOCs are then held by 12 different franchisees which later on managers the operations on certain routes that have won on the bid (Haubrich, 2001, p. 320). When BR was split up to 25 train operating companies (TOCs) they were franchised in a number of tranches given by the Office of Passenger Rail Franchising (OPRAF). Franchises were rewarded by OPRAF initially based on the lowest subsidy that could be provided to them; and later on were granted based on the upgraded strategies that they could provide (Haubrich, 2001; Preston et al, 2000).

 However, Jupe (2007) asserted that the policies about TOC franchises are problematic due to concerns about subsidy and the lack of commercial market between train companies and Network Rail. From 1996 up to 1997, the initial subsidy of TOCs amounts to £2 billion; albeit such is expected to decline through out the years once a “negative position of net receipts” has already been achieved.

The Railways Act of 1993  paved the way for the railways freight business to be separated into three companies and were sold together with their rolling stock.  The passenger sector of the BR which were divided into three busines sectors: InterCity, Network SouthEast, and Regional Railways were further divided into 25 smaller units and were later known as Train Operating Companies (TOCs) and were franchised for a certain period of time.  Such an approach on the end of the government was hoped to further competition and the introduction of new ideas on the railways (Virgin Trains, 2007).

Furthermore, in order to make the train operations more cost effecrive, the operations of the rolling stocks were separated from the actual train operations.  It is with this respect that three Rolling Stock Leasing Companies (ROSCOs) were created in order to take over the etire passenger-railway operations and in juxtaposition with suchm their relationship with the 25 TOCs.  Hence it is with this repsect that every operating companu is required to have an agreement with Railtrack in order for them to use the railway infrastructure (Virgin Trains, 2007).

The franchising failure of the BR emanated due to the failure of the acquisition of the desired competitiveness and eventually increased profitability of Railtrack.  The amount of subsidy given by the government has never gone down contrary to the notion that such would be decreasing as the franchisees was able to be in full operation.  It appears to be that the costs of maintaining BR has been steadily growin as years have gone by (Stephen et al, 2006).  This area of the research is further elaborated on the fourth chapter.

Chapter IV

Effects of British Railway Privatisation

Aspects of competitiveness

It is within bounds to say that competition was at the heart of the BR privatisation. Modern Railways magazine noted at the time that “for BR, the benefit of privatisation is seen as being twofold: in addition to receiving the proceeds of sales, BR will 매내 face reduced calls on the finance available within its investment ceiling as the investment requirements of the subsidiaries in the holding company will be met in part from the private sector” (Jon, 2000). The British government pursues an increase in competition in the railway industry by fragmenting operators like below.

  • Competition for passengers by privately-owned train operators
  • Twenty-five contracts for specific passenger service groups referred to as ‘franchises’ to be let by competitive tender
  • Three competing rolling-stock leasing companies
  • The rail freight businesses to be sold as a number of competing private businesses
  • The infrastructure owner and operator to be kept as privately-owned but regulated monopoly, called Railtrack (its sole source of income was to come from access charges to users, the train operators)

Source: Stephen et al (2006)

  The model chosen by the government was relatively complex and expensive to set up, but was thought to be the most appropriate to ensure competition. Since new operators are given the opportunity to give their own forms of services, such gives consumers a choice and eventually paves the way for the industry to further improve its services and value that it provides. In effect of the BR privatisation, a significant number of companies have expressed their interest in terms of introducing new freight or passenger services.

For example, the number of services operating across the network has increased from 17,096 per day in winter 1995 to 18,470 in winter 1999 (Jon, 2000).  As such, consumers are given more choice in terms of finding more value to their money. On the other hand, the management became freer to go change their strategies in accordance with the need of the passengers and other consumers (McGregor, 1992).

However despite of the increased private sector competition for franchise, there are certain policies introduced by the government that paved the way for monopoly in certain aspects. The introduction of “Open Access Operators” who are capable of bidding for certain “slots” are those contractors who are given an exclusive access to  restricted areas that provide a significant degree of profit and in certain areas where there are parallel routes (Preston et al, 2000). Although Open Access has been highly moderated by the Rail Regulator in three stages, criticisms emerge that Open Access would pave the way to the decrease of private sector interest in terms of franchise bidding (Jupe, 2007).

Profitability and subsidy

It was hoped that profit in the rail industry will rise gradually by its efficient and appropriate financial management system and an increase in demand by consumers by privatisation. This would lead to reduce governmental subsidies as well as to provide useful funding to fill the Exchequer. During the Post privatisation attempts in 1999, the government gave £1.3 billion in such subsidies and it decreased 13% compared to the previous year (Haurich, 2001). The reason for a decrease in the aforementioned was due to the competition by contract in the market and increases in passenger revenues which could be generated by both running speed and service frequencies. Figure 3 shows a fall in subsidy whereas figure 4 presents an increase in demand for railway passengers over time.

Figure 3: Train Operating Company bids and payments

Notes: Train Operating Company total agreed bids and outturn payments (current prices).

Sources: Data from OPRAF and SRA Annual Reports, various years.

Figure 4: Rail passenger-kilometres, 1908-2004

Sources: Data from Dft, Transport Statistics Great Briain (various years), and Office of Rail Regulation, National Rail Trends: July-September 2005 (2005).

Yet the amount of subsidies after privatisation was actually roughly the same amount of money in real terms compared to British Rail’s last year of operation. Moreover, in late 2001 several TOCs were in serious financial difficulty which has been caused by labour costs (Stephen et al, 2006). By July 2003 nine franchises had failed financially and had been allowed by the government to continue on kind of cost plus basis (See Figure 3). In addition, the transport department plans to a decline in subsidies by approximately 10% in every year, however, it seems to be difficult to achieve the aim by looking at poor performance in financial sector up to today.

The privatisation of the BR has led to both management and employees within the private sector to provide relatively huge incentives in order to cater to the demands of the consumers. The profitability of the BR is highly dependent on the capacity to provide service which eventually establishes itself as a necessity (McGregor, 1992).  However, such perceptions in terms of the BR being profitable once it has been transformed to a private company turned out to be a failure. It appears to be that even after Network Rail’s acquisition of Railtrack, there are still certain areas wherein their financial efficiency has not been thoroughly met.

Table 4: Financing and Financial efficiency index (FEI)

  Source: Office of the Rail Regulation (2007, p. 11).

Based from the data presented above, it appears to be that on the fourth quarter of 2006- 2007 and the second quarter of 2007-2008, BR has been falling short of its financial management in terms of its operations, maintenance and track renewals. Such according to ORR has been due to their increasing debt of being £378 million. However it should be noted though that ORR is very optimistic that Network Rail will be able to meet their target by the end of the year.

Service

British Railways initially provides services through- Network Southeast, commuter services throughout London, Rehnal services in rural areas and some services to cross-country links. Services are also given to InterCity such as those catering to express long distance services and European Passenger Services through the Channel Tunnel. The profitability of the BR is made possible through the process of franchising and inviting the private sector to bid on the rights in order to operate them.

Even if an increase in the percentage of railway journey is vary in terms of region services tend to increase relatively well as table below shows. BR was restructured into two separate units: management and accounts. Railtrack is the one which owns the track and managers the daily operations of the BR by using a signalling system. On the other hand, the residual opening is the unit which is responsible for the management of rail services until they have been franchised (McGreggor, 1992, p.6-7).

Table 5: Rail passenger journeys 2003-2004

 

  Passenger journeys (millions) Percentage change

1993-4 to 2003-4

National rail 1014 37
London

Underground

Docklands Light Railway

Croydon Tramlink

 

948

49

20

 

29

484

n.a.

Tyne & Wear Metro 38 -2
Blackpool Trams 4 -33
Sheffield Supertram 12 n.a.
Manchester Metrolink 19 67
Centro West Midland Metro 5 n.a.
Nottingham Tram 0.4 n.a.

n.a. = not applicable (service started after 1993)

Source: Data from Department for Transport, Transport Statistics Bulletin: A Bulletin of Public Transport Statistics Great Britain (DfT, 2004d).

In addition, it would be expected to increased competition on the network which, in turn, would augment the quality of service and enhance the freedom of choice (House of Lords, 1993). In general the principle underlying the competitive tendering for franchises was that prospective franchisees would offer to provide a service somewhat better than specified as a minimum, and as OPRAF press releases demonstrate, this was generally achieved; particularly preference was given to those offering to improve quality as well as quantity (See figure 3, table 5)(Peter, 1997).

Also from the tables presented below, it could be seen that there has been a steady improvement. Table 6 represents the gradual enhancement in punctuality and reliability from 1992 to 1999 whereas table 7 shows Network Rail’s performance as evident on their increasing numbers from the third quarter of 2006-2007 to the second quarter of 2007-2008. According to ORR, the company is ahead of both their regulatory and business plan targets from 2007-2008.

Table 6: Aggregate punctuality and reliability figures, 1992/93-1998/99

Date Punctuality (all companies) Reliability (all companies)
1992-1993 89.7 98.7
1993-1994 90.3 98.8
1994-1995 89.6 98.7
1995-1996 89.5 98.8
1996-1997 92.5 99.1
1997-1998 92.5 98.9
1998-1999 91.5 98.9

Source: Department of the Environment, Transport and the Regions. Transport statistics Bulletin, Government Statistical Service. Information provided by Transport Statstics.

Table 7: Train performance and Network Rail delay minutes

Source: Office of the Rail Regulation (2007, p. 14).

Safety

Of the many critical determinants which had to be met for the ambitious timescales set for rail privatisation to be achieved, the most important had to be sustaining safety. It was not only concern about public’s safety, but it is also related financial elements because even one accident can bring serious damage to rail company to recover it. In fact railways has provided the safest form of land transport. For instance, there were a total of 371,017 road accident casualties. Of these, 3,201 were fatalities and 28,954 were serious injuries, in Great Britain, in 2005[2]. By contrast, during the same period, there were a total of 5,172 casualties from train accidents, and only 127 injuries occurred including trespassers and suicides[3].

The privatisation of the BR has caused no decline in terms of how safety is kept. In January 1993, the Ensuring Safety on Britain’s Railways was published in which proposals for assuring safety “following the liberalisation of access to and privatisation of British Railways” were set out (Jon, 2000). Afterwards the government established a framework of safety regulation which ensures that protocols are all exercised at the entire vicinity. In order to make this happen, the aforementioned took expert advices from the Health and Safety executives, endorsed by the Health and Safety Commission.

The safety framework of the government places utmost importance in terms of having safe operation all through out the railway by having the management assure the safety of their own operations by taking a number of precautions and further strengthening their protocols. In addition with this, the aforementioned by appointing a Health and Safety Executive, the regulations and operations of the railway could be dealt at independently. Corollary to this, safety validations for all operators are also required in addition to the provision of means in order to make sure that the management follows the safety standards set forth by the Executive. This is further strengthened by assuring that every staff involved in critical operations have their own certifications which could assure the safety of all passengers and the integrity of the railway as well (McGreggor, 1992, p.18).

The Railtrack is the one which assures the safety of the operations of the railway.  To further assure the integrity of the BR, operators are expected at all times to comply with the aforementioned. The systems that are introduced within the BR also assure that all operators are complying on the safety requirement of the organisation. Everyday, it is a protocol to demonstrate their every day management systems to make sure that all of their services are within good conditions.

The aforementioned s also required to comply with certain standards set forth by the Executive to make sure that the enforcement and monitoring of activities are done in accordance with the standards. The inspectors are also expected to follow with the Health and Safety at Work Act of 1947 and various railway legislations. In effect of this, inspectors are given powers to ban any operation that could have threatened the safety of the consumers and the management. Drivers and signal men are very critical to safety; as such they also require certification from the Executive (McGreggor, 1992).

It had become the practice of BR to produce an annual Safety Plan, incorporating a set of safety objectives and monitoring their achievement (Jon, 2000). Its safety performance improved gradually. Table 8 shows a summary of fatalities and other incidents for the 5 years from 1992 to 1997. More generally, the public fatality rate and significant train accidents per million train miles represented a continuing downward trend during this period (See Figures 5 and 6).

Table 8: Summary of fatalities and other incidents, 1992/93-1995/96

Date 1992-1993 1993-1994 199401995 1995-1996
Passenger fatalities* 14 9 17 16
Workforce fatalities* 9 5 7 2
Level-crossing fatalities* 13 13 10 9
Passenger-train collisions and derailments 35 52 40 39
Signals passed at danger on or affecting the running line 749 790 735 702
All accidental/ equiv. fatalities per million train miles^ 0.67 0.66 0.65 0.61

* Accident fatalities

^Measure annual change in harm on the railway network

Source: Railtrack Safety and Standard Directorate

Figure 5: Fatalities per annum, 1946-1996/97

Source: HMRI Annual Report

Figure 6: Accidents per million train miles, 1975-1996/97

Source: HMRI Annual Report

However having looked at the recent development in safety issues, it has been documented that increase in railway fatalities are happening even at the present Network Rail administration (Office of the Rail Regulation, 2007). It has been documented by the ORR that despite the improvements in the railway’s protocol and management, the number of accidents are continuously increasing.

Table 9: Safety Risks Assessment

Source: Office of the Rail Regulation (2007, p. 5)

It could be seen from the data above that by the first quarter of 2007, BR only remained 50 lower than their established safety level of 100. ORR maintained that such a rate although is significant, is not yet worthy to be raised of concern since part of the accidents that happened are due to natural catastrophes such as “earthworks failures, flooding and rail adhesion, associated with the exceptionally wet weather during the early part of the year and June”.

Albeit certain concerns were still raised most specially on the level crossings on public areas which are primarily accounted to be the cause of most train fatalities; despite of this, ORR maintained that in order to effectively deal with such issues Network Rail is at present performing publicity campaigns such as

“Don’t Run the Risk.” The problems of safety concern will be discussed in the next chapter.

Regulation

The regulation of the railway is highly characterised by its management freedom wherein the aforementioned is able to adjust its strategies and ways in accordance with the satisfaction of passengers and consumers alike. This freedom is counterbalanced by an independent regulator from the government which “oversees the application of arrangements for track access and charging over the network.”

In addition with this, the regulator also ensures that competition and the prevention of abuse of monopoly power and anti-competitive practices will be prevented; and finally, the importance of promoting the interest of costumers and assuring that the benefits among employees are always upholded (McGregor, 1992). In order to sell privatisation of the railways to a generally sceptical, even downright hostile, public, political guarantees had to be made which world be delivered by the new companies under “regulation”: for example, it was decided that the level and quality of train services should be maintained after privatisation regardless of whether they were profitable or loss making (Jon, 2000).

Under the privatisation of BR there existed two sectors responsible for the practice of regulatory functions which is called as dual regulation. Dual regulation was consisted of the office of Office of Passenger Rail Franchising and the Office of the Rail Regulator (ORR). Broadly, the OPRAF were in charge for bidding, contract, rewards, and fines amongst TOCs, on the other hand, ORR took responsibility of Railtrack’s access charges, consumer protection, and competition between train operators. Table 10 shows the jurisdiction of the Rail Regulator and Franchising director regarding consumer protection and table 11 summarises the functions and duties of the Rail regulator.

Table 10: Regulating franchises; the roles of the Rail Regulator and Franchising Director

  ORR OPRAF
Fares regulation  
National railway timetable  
Disabled access  
Telephone enquiry bureau (∨)
Impartial retailing (∨)
Routeing guide (∨)
Through ticketing (∨)
Multi-model ticketing  
Discount card (∨)
Interavailability  
Information at stations
Timetable connections  
Passenger’s charter  
Complaints handling (∨)

Source: Welsby, J (1998) “What next in UK railways? In Beesley, M.(ed.)

Regulating Utilities: Understanding the Issues, Institute of Economic Affairs, London. With permission.

Table 11: Functions and duties of the Rail Regulator.

The main areas of the Regulator’s statutory functions are:

­       The issue, modification and enforcement of licences to operate trains, networks, stations and light-maintenance depots;

­       The approval of agreements for access by operators of railway assets to track, stations and light-maintenance depots;

­       The enforcement of domestic competition law;

­       Consumer protection.

The Regulator has duties under Section 4 of the Railways Act 1993 which include:

­       The protection of the interests of users of railway services, including disabled people;

­       The promotion of the use and development of the national railway network for freight and passengers;

­       The promotion of competition;

­       Through-ticketing;

­       Minimisation of regulatory burden;

­       Commercial certainty and security;

­       The protection of persons from dangers arising from operation of railways, with the advice of the HSE;

­       The environmental effect of railway services;

­       Certain statutory guidance from the Secretary of State for Transport;

­       The financial position of the Franchising Director and holders of network licences (including Railtrack).

Source: Office of the Rail Regulator. Regulating the Railway in the Public Interest: Annual Report 1996/97, ORR, 1997. Reproduced with permission from the Office of the Rail Regulator.

Even if this separate dual regulation was messy and led to confusion aong customers regarding which regulatory body their concerns should be addressed to, the concept of independent regulation is well established in the British privatisation programme. Jon (2000) asserts that the regulatory system was effective; at the outset, it force Railtrack to concentrate on reducing delays attributable to the company for the obvious reason that if it failed to do so it would pay large sum of money to operators. Although newly fragmented and integrated railway systems might bring complicated uncertain accountability to operators, the OPRAF, the ORR and government officials ensure the regulatory system relatively well.

Chapter V

Problems of British Railway Privatisation

Limitation of Franchising and Monopoly

When BR was split up to 25 train operating companies (TOCs) they were franchised in a number of tranches given by the Office of Passenger Rail Franchising (OPRAF).  Franchises were rewarded by OPRAF initially based on the lowest subsidy that could be provided to them; and later on were granted based on the upgraded strategies that they could provide (Haubrich, 2001; Preston et al, 2000). OPRAF asks for a number of minimum service standards that is dependent on the frequency, speed and reliability and crowding of passengers. The table below presents the franchisees of BR as of 1998.

Table 12: The Franchise Awards

Source: (Preston et al., 2000, p. 101)

However, government’s fragmentation which aimed to bring competition in the market does not seem to work appropriately. Even if there are some competition between several companies in the maintenance, repair and rolling stock segments, in the passenger service segment TOCs enjoy a temporary monopoly for the lifetime of their franchises (Haurich, 2001). Even worse, Railtrack has a complete monopoly and more and more reintegration has occurred and it allowed companies to have more monopoly power in the market.

Other than the restrictions that are given to the BR franchisees, Jupe (2007) pointed out another significant issue on the nature of the aforementioned. He argued that the policies about TOC franchises are problematic due to concerns about subsidy and the lack of commercial market between train companies and Network Rail. From 1996 up to 1997, the initial subsidy of TOCs amounts to £2 billion; albeit such is expected to decline through out the years once a “negative position of net receipts” has already been achieved. However as years have passed, the subsidies of the government did not went down and have even increased due to the escalating operating costs of the BR.

According to Shaoul (2006 as cited from Jupe 2007) the costs for subsidising the BR has never fallen below £1 billion; and in consequence it appears to be that the risks that are tagged in terms of operating the railways are still within the responsibility of the government. More particularly, due to the absence of an authentic customer-client relationship, TOCs have a responsibility to the government to pay for penalties for delays. From 2002-2003, it has been found out that TOCs was able to spend £150 million and £200 million in compensation from Network Rail, hence implying that they are spending more that their actual profit.

Despite the calls for calls for franchisees, it could be significantly noted that there are companies who were classified as “Open Access Operators” who are capable of bidding for certain “slots.” The issue of monopoly among Open Access Operators stemmed out due to the notion that competition between operators are restricted to certain areas that provide profit and in certain areas where there are parallel routes (Preston et al, 2000). Although Open Access has been highly moderated by the Rail Regulator in three stages, criticisms emerge that Open Access would pave the way to the decrease of private sector interest in terms of franchise bidding (Jupe, 2007). The first stage of the moderation involves limitations of routes that have less than 0.2% of TOCs’ revenue.

In the second stage, competition is permitted until 20% of the revenues; in addition, competition within the market is only allowed when there is an overlap of franchises and areas where there are parallel routes (Preston et al, 2000). Albeit despite of this, the act of granting open access rights creates confusions most specially in terms of the capability of ORR to allocate train paths (Jupe, 2007). A significant case that could be cited is with regard to the decision of ORR to grant open access rights to Hull Trains to operate an additional service between London and Hull; and Grand Central to do return services between Sunderland and London.

One of the major problems in terms of franchising happens when the franchisor holds capital controls that largely inhibits the reparation of certain fees and royalties that primarily affects the economic benefits of a certain investent.  For instance, constraints in terms of legalities, beureaucracy, legal enviroment, unstable political leadership, limited ifrustructure and  sporadic enforcement of established laws had a significant effect in terms of the total international franchise explanision ( Welsh, Alon and Falbe, 2006, p. 130).

In addition with this, Bishop, Colin and Mayer (1994) argued that one of the major causes of franchising failure is deeply rooted on the nature of the railway industry itself.  Due to the fact that the aforementioned is huge, it is inevitable that the fixed costs for its production will perpetually rise.

As the inputs necessary for production are increased, their costs spread over more units of output and eventually arrives to the point that overused of the railway occurs and eventually the management overstretched.  It is with this respect that railways are often said to operatre behid the falling segment of their cost curves, and are always prone to be “natural monopolies” in a sense that it is always more effective for the aforementioned to be operated by a single firm than two (p.225).

In addition with this Bishop, Colin and Mayer (1994) pointed out that limitations for competitions on the very act of franchising since the very act of dividing track ownership hinders effective train-control, rail formation and station management.  As such, it has been argued by Bishop, Colin and Mayer (1994) that more flexibility could be achieved if there are only four running tracks wherein competing companies handle two each (p.226)

Separation of Rail Track

The cost of having the rail track separated to TOCs has caused the government more that they have spent prior to the privatisation of the BR. On 1993-1994, the government has spent £1.07 billion; this amount has doubled to £2.18 billion on 1996-1997 (Knowles, 1998, p. 123). Sustaining the BR appears to be very costly as well, as the initial amount that was spent in opening the railway was £562 million.

Furthermore, the sustenance of BR requires support from passenger rail services; as such it is with this respect that  £930 million in Public Service Obligations which includes £430 million for capital funding and £43 million for the costs of privatisation were given to BR (p.123) . In addition with this, 105 million was also granted in accordance to Section 20 payments and another £32 million Level Crossing Grant was also given (p. 124). The huge subsidy that the government has to provide the British Railways is primarily due to the high access charges and ROSCO leasing charges to TOCs.

Nevertheless the government expects significant improvements in terms of sliding scale franchise payments just what like they expected on 2001-2002 of £1.09 billion.  Albeit, it should be noted that such improvements were only expected on the urban parts of the BR as the Regional Railways sector TOCs are still in need of huge annual operating subsidies that amounts to over £700 million (p.125).

For instance, Merseyrail Electric’s annual subsidy amounts to £80.7 million which is synonymous to 0.55 per passenger mile which ranks second to the isolated Island Line and is two-thirds higher than the Regional Railways average and is nine times higher than the Network South East average (p.125). Part of the agreement that was made between the franchisees and the government is the commitment to increase their premium payments in addition to the enhancement of the services that they provide (p.124).

In terms of the revenues that have to be collected, the first two franchises that were awarded in 1995 are required to provide a 1.2% per annum (South West Trains) and 1.7% per annum for Great West Trains. On the other hand, the second tranche are required to have financial improvements from 3.2% to 4.0% (pp.125-126).

The positive thing though about the amount of subsidy given by the government is the significant developments that could be seen most specially in terms of the railway’s operations. All of the 25 franchisees are able to enhance their services and are able to invest more on refurbished rolling stocks or station upgrades. On the other hand, only 22 of them are able to improve their Passenger Charter targets for punctuality and reliability (p.126).  The table below shows the improvements that were made by the TOCs.

Table 13: Passenger Rail Franchisee Commitments

Source: Knowles (1998, p.128)

Safety and Services          

Due to the privatisation of the BR and its division to 100 different organisations, issues emerge as to how safe the railway would be under the hands of various stake holders. One of the attempts to assure the safety of the organisation was through the Government’s effort to ask the Health and Safety Commission (HSC) to provide recommendations to assure the railway’s safety performance, hence the report: “Ensuring Safety on Britain’s Railways” (Evans, 2006, p.510). The major problems with regard to safety that stemmed out due to the organisation being fragmented are: first, the varying safety responsibilities of the private organisations concerned.

It could be the case that some of them have poor defined protocols or infrastructure provision and train operation. Second, problems in terms of safety of critical information across organisations may also arise; third new companies that make up the organisation may have small number of experience, hence could highly affect the safety of the entire operations. Finally, since there are different organisations involved, changes and differences within their work practices are possible to arise (p.510).

From 1996-2003, five fatal train collisions and derailments happened within the main line railway system at “at Watford Junction in 1996, Southall in 1997, Ladbroke Grove in 1999, Hatfield in 2000, and Potters Bar in 2002” (p.511). In effect of this the public, train professionals and various journalists significantly believed that safety concern in BR has not been fully achieved within the course of BR privatisation. The table below presents the number of fatalities within the BR from 1967 to 2003.

Table 14: Fatal Accidents and Fatalities: Main Line Railways: 1967–2002/2003

Source: Evans (2006, p. 511).

According to the study made by Evans (2006), fatal train collisions, derailments and overruns happened less in comparison to that of fatal movements and non-movement accidents. However, it is often the case that they are serious and needs to be addressed effectively (p.517).

Also, the study found out that collision between trains and vehicles primarily happens at level crossings most especially at roads that cross the railways; there are few incidences however that happen on roads that could reach railway tracks such as bridges. Most of the fatalities that occur are those concerning of road vehicle occupants, and a small number of accidents happening to those people boarding the train (p. 519).

Since Network Rail took over Railtrack, issues in terms of punctuality and reliability has been slowly being resolved by the BR.  For instance, in 2007, the passenger rail performance has increased 1.2% higher than the last quarter.  It is with this respect that Network Rail wa able to achieve 88.7% instead of the target of 88.3%.  Such an improvement on the end of the railways are attacjed on the notion of reduction of delay minuted byy 22% compared to 11% on the second quarter of 200-2007 (Office of the Rail Regulation, 2007, p.5).

Table 15: Passenger Train Performance

Source: Office of the Rail Regulation (2007, p.5).

Organisation

The organisational problem of the British Railways emerge due to the fragmentation of the company through groups which are the Railtrack/Network Rail which is the infrastructure company managing British Rail, the passenger Rolling Stock Companies (ROSCOs) which are composed of Angel Train Contracts, Eversholt Leasing and Porterbrook Leasing; and the 25 train operating companies (TOCs) (Knowles, 1998). It has been expected that since BR is owned by various companies, such would naturally entice a normal commercial economy wherein there are long lasting efficiency improvements and better value for money.

The collaboration of various companies is expected to create a competitive network, and as a whole a competitive market as well. According to Haubrich (2001), privatised rail companies normally operate in various sub sectors of the industry. Due to this very fact, the regulatory environment which is supposed to look over various areas for improvements has a difficult time accomplishing their tasks. For instance, certain regulations such as fixed track access charges and mandatory provision of unprofitable services makes TOCs to work on costs that are fixed and would allow costs as high as 75-80% turnover, hence giving no room for improvements (Haubrich, 2001).

The privatisation of the BR however brought a significant degree of problem most specially in terms of expected profitability.  After adopting the diverstiture approach and franchising the entire TOCs and ROSCOs, the BR is expecting cost effectiveness and profitabilty.  However, through out the years, the costs of subsidizing BR has been very costly due first on the nature of the industry in itself as stated by (Bishop, Colin and Mayer, 1994).

In addition with this, the higly fragmented market and the lack of efficient management and planning has further caused the decline of passenger traffic and and the same time confidence on the end of the conusmers (Bishop, Colin and Mayer, 1994) It is with this respect that until now BR is still in the process of paying off its debts and has been trying hard to keep up with their budgeted subsidy from the government (Office of the Rail Regulation, 2007).

Chapter VI

Future Direction

Success in Railway privatisation lessons from other countries

        Japan is perhaps one of the countries that are able to adopt a successful railways privatisation system. The Japanese National Railway was denationalised on April 1, 1987 and later on became as The Japan Railways Group (JR Group) (Watanabe, 1994).  The organisational structure of the JR Group is something that is highly different to the BR due to the fact that despite the company consists of seven operating companies, they are considered as an independent and does not have any holding company like the Railtrack/Network Rail.

All of the operating companies of the JR Group have six passenger operators and national freight operators (Watanabe, 1994).  It is withthis respect that that ownership and rail operations are separated.  Since the railway infrustructure is owned by public bodies such does not have to fund or refund certain constuction costs unlike BR (Asian Development Bank, 2007, p. 13.1).

        The operational performance of JR group has amounted to 542 billion yen.  Despite the non-operating loss that JR Group has been paying off because of long-term debts has create no significant negative effects has still retained its profits. As a consequence, JR Group has been a major contributor to the government’s national budget even without the railway fares having been increased (Watanabe, 1994).

Part of the reason for such stemmed out due to the establishment of a separate body supervising the debt payments of JNT.  The Japan National Railway Settlement Corporation (JNRSC), is a temproary holding compay that assurs that the debts of the railway will be paid off by selling JNR-owned real estate and by allocating the remaining 40% of the lon-term debt o the company to JR East, JR Central and JR West (Asian Development Bank, 2007, p. 13.1).

The table below presents the revenue contributed by the JR Group in comparison with the Japanese National Railway (JNR) to the Japanese government.

 Table 16: JNR/JRs Contribution to Government Revenue, 1982-91 (Billion Yen)                                                                

Company Year Tax and other payments

to the Government

Government subsidies Net government revenue
JNR 1982 35.2 729.4 -694.2
1983 38.3 701.8 -663.5
1984 46.3 647.4 -601.1
1985 47.8 600.1 -552.3
1986 50.1 377.6 -327.5
JRs(1) 1987 220.7 193.7 27.0
1988 245.7 211.0 34.7
1989 230.1 633.1 -403.0
1990 299.4 157.1 142.3
1991 444.3 109.2 336.1

1 The JR figures include not only the seven operating companies, but also the                                                             JNR Settlement Corporation the Shinkansen Holding Corporation and the Railway                                                             Development Fund.

Source: Ministry of Transport, Railways Bureau, op. cit., p. 10. (as cited from Watanabe, 1994, p.89)

Another successful privatised railway is that of Australia. Initially, railways within Australia were owned by the government. Not until 1975, the Australian National Railways Commission took over the government owned Commonwealth Railways Commission (Asian Development Bank, 2007, p. 10.1). On the national level, the Commonwealth or Federal Government, the Department of Transportation and Regional Services (DOTARS) are the ones which are tasked to provide safe and efficient transportation system.

In order to assure that healthy competition among the private companies involved will be fostered, the government created the Competition Policy Reform Act 1995, in which competition among other major businesses is encouraged.   Through this policy, the Australian Rail Track Corporation (ARTC) was created in 1997 which serves as a company which can provide operators access to the interstate standard gauge that could be seen between Brisbane and Perth (p. 10.4).

From the Australian railways, it could be seen that one of the factors that would determine a successful railway management is the one which include “vertically integrated and horizontally segmented (QR) and vertically separated and horizontally segmented (by business activity) (NSW)” (p.10.7). The main reason for this rests on the idea that specific market segments could be easily identified therefore further establishing competition within the market (p. 10.7).

Though highly different from the Management Contract approach took by Japan, the Leasing Assets method of Australia allowed their railways to be managed by the government while at the same time, still capitalizing on the role of the private operating companies for the sake of the total efficient operations of the railways. It is with this respect that unlike BR which advocated on the act of structural separation, the Australian railway was able to undergo a structural reform that no only improves the entire performance of their rail industy but at the same time encourages a healthy competition.  The sturcural reforms that paved the way for the encouragement of the entry of most privte sector allowed the prevention of monopoly unlike what happened to BR (Asian Development Bank, 2007, p. 13.3-13.4).

Discussion

The United Kingdom railways sector is perceived to have a total growth of 11.5% in 2011 and gain a total value of $14 billion. In relation with this, its compound annual growth is expected to rise to 2.2% from the period of 2006-2011 (Datamonitor, 2007). The figure below presents the development of the BR from 1986-1999.

Figure 5: Efficiency in British Rail Industry

Source: Haubrich (2001, p. 324)

The figure above presents that prior to the 1993 Railways Act, the passenger revenue for BR has been significantly low, and that goes hand in hand with the subsidy provided by the government. Shortly after BR was privatised, passenger revenue started to increase due to the changes that were made in the organisation and also through the subsidy provided by the government.

It could be seen from the figure that the highest subsidy that was given happens between 1994 -1995 as such has been the start of Railtrack’s privatisation. Shortly after, one can see that the subsidy has started to go down, yet passenger revenues are still starting to improve. It should be noted however that subsidies that are included in the aforementioned are only those that are limited to the government, hence not including those coming from Passenger Transport Authority (PTA), Public Sector Obligation until 1994, and PRAF grants.

        It is with this respect that Knowles (1998) pointed out that sustaining the BR has been very costly. The monitors made by ORR as of 2007, that the performance of the BR has started to improve as evident on the public performance measure (PPM) of 88.7% which is .4% higher than the industry target of 88.3%. This measure is also significantly higher compared to that of the PPM on Q2 2006-2007. ORR claimed that such improvements are attributed to the reduction of train operators’ delay which total to 19% better than of last year. In addition with this, the delay minutes are also significantly reduced by 5.0% (Office of Rail Regulation, 2007).

On the other hand, other issues are still perceived most specially in terms of asset failures which causes delay to services. Although Network Rail has shown significant improvements, these are however not consistent within their entire assets. In addition with this, ORR also perceived that the level of accident risks has also increased between the third quarter of 2006-2007 and the first quarter of 2007-2008. Developments within the railway are also often ben deffered and are still in constant monitor as to why such is happening (p.2).  Below is a summary of the recent key performance indicators (KPIs) of Network Rail.

Table 17: Summary data (Great Britain) Q2 2006–07 (24 June 2007 –15 September 2007)

Source: Office of the Rail Regulation (2007, p. 4)

Based from the data presented by ORR as of 2007, it appears to be that the Network Rail has been improving in terms of its safety risks and on its passenger train performance, despite the fact that there are still a number of fatal accidents that occurred lately. The same goes with its network rail delay minutes and delays to passenger trains. However, Network rail has been showing declining performances in terms of delays to freight trains, asset failure on the fourth quarter of 2006-2007, and expenditure enhancements on the third and fourth quarter of 2006-2007.

In effect of this, it could be seen deduced that there has been a significant improvement in BR since the replacement of Railtrack by Network Rail. However, there are still a few areas that are needed to be improved most specially in terms of safety.  Classic issues such as the amount of cumulative subsidies that are given to the organisation is still something that has not been totally solved as evident on the table below.

Table 18: Enhancement Expenditure

Source: Office of the Rail Regulation (2007, p.17)

It could be seen from the table above that the full year spend budget totals to be 9 million above the organisation’s budget in effect of the implementation of the Disability Discrimination Act (DDA) as requested by the Dft and King’s Cross (p.17).

Recommendation

It could be seen from the brief historical background, policies and organisational changes within the British Rail that such has adopted a partial divestiture approach in terms of privatising its railways (Asian Development Bank, 2007).  Divestiture is the ultimate stage in Private Sector Participation (PSP) because such involves the full transfer to the private sector the ownership of existing assets and responsibilities of a particular organisation.

One of the biggest problems that could arise from such state of affairs is the capacity of the organisation to effectively manage the entire BR. Since the organisation is highly fragmented, factors such as effective collaboration and strong management dedication to solve vital issues are not always present. Since the collapse of Railtrack and the take over of the Network Rail, the main issue of government subsidy has not yet been resolved. It could be seen from the tables above that the BR has still been spending more than its budget. Although there are changes that could be seen on the manner in which their operations are made (See Table 10), the rate of increasing spending (See Table 11) and at the same the frequency of train accidents is still very evident (See Table 7).

        In order to resolve this issue, the research is suggesting to have the government provide subsidy not in relation to the forecasted budget demand of the BR but rather relative to their profitability and performances. The government will provide subsidy only based on the performance of the organisation in relation to the Ten Key Performance Indicators (KPI) of the ORR (Office of the Rail Regulation, 2007). In this manner, it could be assured that there is a close to almost equal exchange of utility between two parties. In addition with this, the effort on the end of the Network Rail to improve their performance and profitability will also be intensified since the need to provide something in exchange for government support.

The problem in terms of the frequency of railway fatalities could be solved by further improving their KP1 or the Safety Risk Indicators. The research concerns that in order to do well on this area, the need to not only improve its safety protocols and monitoring system must be done, rather there must be an attempt for the organisation to totally create a strong organisational culture wherein there is unity among various private companies, each one believing in a single mission, vision, values and corporate objectives.

Corporate culture is known to be the “set of norms and values that are widely shared and strongly held throughout the organisation” (O’Reilly and Chatman, 1996, p.166 as cited from Sorensen, 2002). The underlying principle in having an effective corporate culture is the notion of having highly motivated employees in working in achieving a common goal for the betterment of the organisation.

In order to attain a strong corporate culture, the company must be able to have the employees and the entire management team to share strongly held norms and values.  The organisation must be able to establish a greater sense of internal consistencies amongst the goals and behaviours that are relevant in order to have the organisation perpetually develop (Sorensen, 2002). The role of corporate culture in terms of the organisation’s performance variability is very important.

A strong corporate culture allows the organisation to increase the frequency of their risk taking behaviours that would eventually help the company to increase its profits. A strong organisational culture would allow organisation to facilitate more planning and decision making and would increase organisational autonomy. The strong value that is inculcated to every employee is often times predicted to increase organisational performance and would allow firms to have a survival advantage in comparison to its counterparts.

Chapter VII

Conclusion

Recap of the main discussion of the paper

The research has provided a general framework on the concept of privatisation, more specifically having British Rail as the centre. In relation with this, the relationship between nationalisation and privatisation is established and its effect to the economic, social and political aspects of a particular country. A brief historical account of how BR was transformed from a government owned organisation until the 1993 Railways Act that privatised the entire organisation.

In effect of this privatisation initiative, certain problems more specifically in franchising and management have emerged. However there have been a number of notable changes on the BR privatisation most especially in terms of competitiveness, and service. There are some problems however that stemmed out due on areas such as profitability and subsidy, safety and regulation. Other major issues that emerge are those of the limitations in franchising that paved the way to monopoly, the separation of rail tracks, operational problems, and organizational problems.

Total analysis of British Railway Privatisation

Since the Railways Act of 1993, various changes have already been made to the BR.  The government initially thought that privatising the BR would increase its efficiency and would eventually cut down costs. However for more than a decade that the BR has been privatised, problems in terms of management effectiveness, profitability and safety is sill in existence. Although it could be significantly noted that BR has now been contributing total revenue of $10.9 Billion which is synonymous to 89.1% of the sector’s total value, such could still be said as not compensating more than enough the subsidies that are given by the government and other organisations. As such, part of the implications of the monitor made by ORR is improvement in terms of how funds are managed and how safety within the entire operations are kept and improved.

Discussion

The research adopted the Qualitative Tradition of research wherein a desk or library research was conducted. Based from the secondary data that were gathered, a brief account of the British Rail was established and its developments starting from 1993 to the present. Based from the secondary data, the research is able to conclude that the denationalisation of the BR has made significant developments only on certain areas such as facilities and railways reach. However even until the establishment of the Network Rail, old problems such as the fragmented organisation and its effects on operational effectiveness, profitability and safety is still questionable.

It is with this respect that certain changes must be made more specifically those efforts focusing on the corporate culture of the organisation must be dealt at other than improvements and developments on protocols and Network Rail’s KPIs.

The privatisation of BR has caused improvements in terms of services provided and the technological advancements in terms of rail way operations. However, developments in terms of cost effectiveness, profitability and safety have gained very little positive changes. It is with this respect that there must be a need to work more on the company’s weaknesses such as cost effectiveness and safety and most importantly profitability.

There must be a thorough research that must be made in order to increase its competitiveness and at the same time make an attempt to make the highly fragmented organization as a whole.  Through this, the corporate culture of the organization will be improved and such will allow BR to function as a whole and thus would allow it to effectively compete with other transport industries in the whole country and could be the epitome of a highly effective and profitable railway sytem in the international market.    

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