A 12-point guide to the great rail privatisation disaster, by Christian Wolmar. Overleaf, how it's been working in practice


Even Mrs Thatcher hesitated to extend the privatisation programme to the railways, despite suggestions from the right-wing think tanks in the late Eighties. British Rail was performing well and it seemed unnecessary to risk the controversy. However, when Malcolm Rifkind took over as Transport Secretary, the issue was revived, and it was included in the 1992 election manifesto. Soon after the Tories were re-elected, they published the crucial White Paper, New Opportunities for the Railways.


Politically, Rifkind pushed it along. The ideological promptings came from think tanks like the Adam Smith Institute. Sir Christopher Foster, a long-time adviser to successive transport secretaries, devised much of the specific scheme that eventually emerged, while the civil servant chairing the committee in charge of implementing the scheme, Nick Montagu, did much to ensure that the politicians' rather unrealistic plans were brought to fruition.


Malcolm Rifkind often spoke of breaking up the British Rail monopoly and introducing competition. In fact, Railtrack remains a monopoly, while on-rail competition between operators has been ruled out for fear that no one would take over the franchises. The only other big idea behind the privatisation seems to have been to cut back on the huge subsidy bill for the railways. Unfortunately, because of the need to ensure that Railtrack and the rolling stock companies are profitable, subsidy leapt from pounds 1.1bn to pounds 1.8bn last year - although ministers still hope that this will one day be reduced.


British Rail has been split into more than 100 parts. These include Railtrack, which owns the track and infrastructure; 25 train operating companies, which run the services; three rolling stock companies, which own the passenger trains and coaches; 13 infrastructure companies, which maintain the track; and some 60 others.


The Railways Act introducing privatisation became law in 1993. The Offices of Passenger Rail Franchising and of the Rail Regulator were created, and the privatisation process is now well underway. Key parts that have already been sold include the three rolling stock companies, which were sold for pounds 1.8bn in December; most of the13 infrastructure units; and various design teams and technology units. Of the 25 train operating companies, seven have been handed over as franchises to private operators. And Railtrack was sold last week, for some pounds 2bn.


The Government has set itself the task of having all the remaining franchises sold in time for the general election. The bidding process for another 13 franchises is already underway, and the Government hopes to have all 25 disposed of by next spring. But several, like the West Coast Main Line, are proving difficult to prepare for sale because of the poor state of the track or arguments over services paid for by local councils; while some, like Railfreight Distribution (which has lost pounds 60m in each of the last two financial years), look simply unsaleable. None the less, this time next year BR will be a shell, with only around 60 people working at its headquarters and a few bits and pieces which have not been privatised or cannot be sold.


The directors of Railtrack made a lot of noise publicly eschewing share options; but they still stand to make a lot of extra money in bonuses if Railtrack meets its not-too-onerous targets. Bob Horton, the part time chairman, could double his current base salary of pounds 125,000 while John Edmonds, the chief executive, could add pounds 201,000 to his pounds 168,000 pay.

Eventually, the Treasury hopes to gain, but it is far from clear that the necessary squeeze on subsidy can be achieved without unpalatable cuts in services. The only certain gainers have been the consultants and the advisers. No precise estimate of their fees has been given, but by the beginning of last year pounds 23m had been paid out by the Department of Transport, and the final figure is likely to be several times that. The other gainers will probably be the founding purchasers of Railtrack shares. The deal has been so well endowed with goodies that one City analyst reckons shareholders will make a 19 per cent return in the first nine months - the equivalent of 25 per cent per year. (How much the shares will be worth in five years' time is of course a slightly different question.)


The biggest losers so far have been the railway workers. Already, under British Rail, the number of staff had shrunk from 154,000 in 1988 to 112,000 in 1994. Now the industry employs around 100,000 people, and a sharp reduction can be expected in the next few years as the privatised companies "downsize". But that isn't the real scandal. On a wider level, the need for privatised railways to attract future investment will make their financial structure incredibly expensive relative to roads. Some fares have been capped, but it seems inevitable that the price of rail travel will rise and that people will therefore continue to prefer road to rail, to the detriment of the environment (and at an incalculable cost to society). In addition, those who do use the railways may find services deteriorating for reasons relating to profitability.

Finally, because Railtrack and the rolling stock companies have been sold off at a giveaway price, we have all been cheated. The shareholders and the owners of the rolling stock companies will have to be remunerated at a cost in terms of extra subsidy of around pounds 700m per year, pretty poor value for the relatively small capital receipts - around pounds 4bn - which have been used to pay for tax cuts.


Most of the new franchisees have made commitments about more services, new trains, more comfortable waiting-rooms, and they all seem to have a passion for bus links, which may be connected with the fact that many of them are bus operators. However, there are doubts as to whether such improvements are compatible with reducing the subsidy bill. So far, passengers will have noticed little change, apart from the proliferation of logos. But there has been a serious hiatus in investment since privatisation was first mooted. Big modernisation schemes have been held up, and there have been no new train orders for two years.


Railtrack's record since it was split off from British Rail has been no worse than its predecessor's. However, there are widespread worries that a private sector organisation concerned mostly with profit may be tempted to cut corners or avoid making necessary investments. There has also been criticism, not least from former BR chairman Sir Bob Reid, that Railtrack retains a key role in the investigation of accidents. Sir Bob and others would like to see a completely independent organisation taking over all such responsibilities.


Even supporters of the programme privately agree that this model of privatisation, untried anywhere else in the world, is too complex and unwieldy. It has created upheaval on the railways, cost upwards of pounds 1bn in redundancies, consultancy fees, lost revenue and extra subsidy, and so far resulted in a deterioration in services (according to Passenger's Charter figures) and a demoralised workforce. Many Tories still believe in elements of it; few believe this model was the right one. In the words of the late Tory MP, Robert Adley, it is a "poll tax on wheels".


It is too late to reverse very much of this. The Labour Party has promised tighter regulation and wants to claw back Railtrack's property development profits, but it cannot legally break the contracts (which range from seven to 15 years) of the franchisees, while to renationalise after the contracts expire would be ruinously expensive. Nor would a Labour government buy back Railtrack, although there is a vague promise about buying shares in it if finances allow. Given the party's myriad other priorities, this seems unlikely. Instead, Labour in government would merely bask in the comforting knowledge that, whatever went wrong, it wasn't their fault.

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