Breaking up is hard to do: Confusion reigns over the great unravelling of British Rail, a privatisation even Thatcher balked at. Nicholas Faith blows the whistle on an exercise that is running out of control

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ON GOOD FRIDAY (which also happens to be April Fool's Day), the biggest, boldest and most complicated exercise in fragmenting a key industry ever mounted in this country - an exercise fraught with controversy and risk - takes a decisive step. On that day the infrastructure now owned by British Rail, including 23,500 miles of track and 2,500 stations, becomes the property of a separate company, Railtrack.

And within two years, more than half BR's revenue will be in the hands of private companies running some of the 25 franchises into which passenger train services have been divided.

The results will not be obvious immediately. But in the longer run, even if the Government's plans are not fully implemented, and even if an incoming Labour government reverses the process, 1 April will mark the permanent fragmentation of one of Britain's biggest businesses, with sales of pounds 3bn, assets variously estimated at between pounds 6.5bn and pounds 17bn, and 130,000 employees.

The process dwarfs the complexities of demerging ICI, which Sir Denys Henderson has described as 'the greatest management story never written'. In recognition of the difficulties, John MacGregor, the Secretary of State for Transport, conceded last week that the first six franchises would not now be let until late 1995 - about a year later than anticipated, although other insiders claim the timing is faithful to the original timetable.

The omens are bad. Dubbed 'the poll tax on wheels', the BR break-up has the same intellectual father, the leading academic Sir Christopher Foster. The only difference is that it was never on Margaret Thatcher's agenda. Even that ultra-loyalist the late Nicholas Ridley was against it. Nevertheless, John Major and his Transport Secretary have gone ahead with privatisation, and in a convoluted and fragmented form disliked by BR and understood fully by almost nobody.

Rail privatisation is unusual not only because it was not on the Thatcherite shopping list, but because it also looks like being unique: restoring the industry to private hands is likely to result in greater, and more detailed, control by the Government. This, needless to say, was not the intention. Privatisation was supposed to free the industry from central control and allow enterprise to flourish unimpeded by bureaucratic hierarchies.

The degree of fragmentation involved is far greater than in the privatisation of any previous utility. Railtrack is the only coherent countrywide entity carved from BR's mangled body - and even then, BR will retain the 'infrastructure support units', which will maintain the tracks, for at least a couple of years.

Apart from the 25 passenger franchises, there will be three for freight as well such oddities as BR's charter and special train operations, while earlier attempts to sell off the heavily loss-making Red Star parcel service have been suspended, pending a drastic slimming operation.

The fragmentation goes further: the franchisees themselves will not own the locomotives and rolling stock they use: this will become the property of three leasing companies, owned, like the other fragments, by BR, until they can be floated off. New quangos to control and supervise the new sprawl include a franchising director, an independent rail regulator, and a new independent safety executive. It is all a far cry from an original aim of the exercise: reducing the railways' alleged excess overheads.

Another dream, that of introducing competition, has been relegated to vague talk of open access at some nebulous point in the future once the franchisees have settled down. The complexities involved are reflected in the bill, reckoned to be pounds 160m by the end of March 1995 - pounds 53m of that on legal fees - a figure which does not include the pounds 24m being spent by the Department of Transport on outside consultants.

On the face of it, the whole expensive exercise looks little more than an act of brutal industrial iconoclasm motivated more by vindictiveness than anything else. Baroness Thatcher, with her love of the car and contempt for planning or any activity having a social or communal element, left a lasting legacy of railophobia. For privatisation makes nonsense of the Government's supposed conversion to a more balanced transport policy. As the House of Commons Transport Committee put it, the exercise precludes the development of a 'framework in which major projects such as Crossrail, the Channel Tunnel Link and Thameslink 2000 can be identified, developed, planned, financed, implemented and managed.'

Yet the exercise could have achieved Mr MacGregor's aim of allowing BR's managers - many of whom are expected to be among successful bidders for passenger franchises - some freedom to develop the services they run. Indeed, cynics believe the managers will be almost the only serious bidders, although the official view is that Mr MacGregor has enjoyed some success in wooing institutional investors in the City.

His main point is that two- thirds of the franchise operators' costs will be fixed, in the form of payments to Railtrack and their leasing charges, so that any cost reduction or rise in revenues will be reflected in their profits.

Unfortunately the idea of releasing entrepreneurial talent is being thwarted by the Treasury's insistence on getting blood out of a stone and imposing an even heavier burden on the industry, while keeping government subsidies to a bare minimum. But there could be a positive, if unforeseen, result: by opening up the books, by providing a degree of transparency, it may demonstrate that rail is a highly cost-effective form of transport in comparison to road.

Moreover, in implementing its structural changes, the Government has installed two heavy hitters who have already gone native: Bob Horton, the former chairman of BP, as head of Railtrack, and Roger Salmon, a senior merchant banker, as franchising director. Mr Horton has indicated he will hammer home the Transport Committee's point that 'no cheap solution is available for the problem of cumulative under-investment in the rail system . . . we're a long way from having road and rail investment assessed on a common basis . . . non-user benefits must be properly taken into account on assessing rail investment schemes.'

Mr Salmon is also highly unlikely to respond easily to the political pressure inevitable as a result of one important part of his remit: to develop criteria for allocating subsidy to individual services, taking into account such factors as the number of passengers and the availability of alternative passenger services. At the moment, he says, 'the subsidy is divided very unequally over the country as it is with, say, postal services or water supplies.'

As a result Mr Salmon will be forcing the Government to make some awkward decisions, such as switching 'money spent supporting a line where the staff outnumbers the passengers' to a busier commuter route. If the line happens to run through a marginal constituency, there could be important political implications.

In general, the form taken by pri vatisation has institutionalised the Government's pro-road bias: while roads do not have to make a profit, Railtrack has to charge franchisees enough to earn 5.6 per cent, rising to 8 per cent in a few years - and have enough to pay the pounds 2bn debt burden assigned to the railways' ageing assets. Even this figure was a compromise on the Treasury's original demand for 8 per cent immediately. The assets have been valued at pounds 6.5bn, although any valuation must be pretty fanciful, given that most of the main-line tracks involved date back to the 1840s.

As a result, the privatised railway operators will pay pounds 2.2bn to use Railtrack's facilities, 50 per cent more than they now pay as part of BR's internal accounting procedures. This increase reflects the allocation of all the costs involved in running the rail system. Nevertheless the increase guarantees a squeeze on prices and / or services. The present annual profit of pounds 40m made by the East Coast Main Line from London to Edinburgh will be translated into a pounds 70m loss. This is the crunch: the increased charges will force more applicants to rely on subsidies (which can be changed at will) than if charges were lower.

Next financial year Railtrack will charge Metropolitan Transport Authorities an extra pounds 144m for the use of the tracks. Although the Government has pledged the additional costs will be reimbursed by the Treasury, the additional burden does emphasise the artificiality of many of the new arrangements. This gives the Treasury a choice: it can either hand out its increased income from Railtrack in the form of subsidies, or allow the franchising director to give permission for a lower level of services. Either way it retains control.

Until now the Government has not been prepared to allow comparisons of investment in rail and road schemes, and the benefit to the public has been excluded from the figuring when it comes to evaluating rail schemes. The bias, which includes a pounds 1.5bn subsidy for company cars (and their parking spaces) was shown most blatantly in the near- pounds 300m made available for the 1.5-mile Limehouse link road to Canary Wharf, a sum which could have improved the lot of hundreds of thousands of passengers who travel via London Bridge into the City on tracks little improved since the 1860s.

The rationale for some form of privatisation was spelt out by John Redwood in a speech six years ago. The future for railways, he said, 'should be brighter than at any time in the past 30 years', but BR was too defensive, it was missing big market opportunities. Underlying the situation was a 'Victorian railway network alongside a postwar motorway network'.

This was despite something of a boom in investment during the 1980s. But, as Bob Horton pointed out in a recent speech, this was the result of a series of unrepeatable circumstances: a squeeze in costs by two successive chairmen (both called Sir Bob Reid); high traffic revenues generated by the boom; and one-off property receipts. Without these benefits the railways were, and are, in danger of losing all competitiveness with road transport.

Over the years a number of ways were devised for privatising BR. The BR board preferred to retain the sectoral division - Network SouthEast, Regional Railways, and so on. In particular, BR was anxious to retain InterCity's capacity to market itself as a brand and the ability, provided by retaining the network as a single unit, to launch new services and promotional fares. Others, mostly outside the industry, such as John Major, wanted to revert to the pre-1947 position of four main networks.

But Mr MacGregor, on Sir Christopher Foster's advice, went for fragmentation, for reasons which are either unclear or have been invalidated by events. Moreover, privatisation shows every sign of last-minute tinkering. The Transport Committee complained of 'the absence of full debate or sufficient time for an informed public debate'. As one MP put it at the time, 'The ship is still having the rivets put in and the plans drawn as it is about to go down the slipway.' With many of the details still not settled, there is an air of continuous and continuing improvisation over the whole exercise.

The air of unease is heightened by attempts to play down the possible disruption involved. 'There isn't going to be a Big Bang on 1 April,' said an official. 'The fundamental units of the BR passenger business are forming the franchise units.'

The only solid institution to emerge from the chaos is Railtrack, a business charged with BR's track and signalling, and with a turnover of pounds 2bn. Railtrack will take over jobs now being performed by just under half BR's 130,000 employees, but Mr Horton expects to contract out such a high percentage of services that the number will fall below 15,000. However, typically of a process which can be construed as a series of accounting exercises, most of the remainder will be employed by 'contractors' who are also former BR employees, and this after a two-year period in which BR will be Railtrack's main contractor.

Mr Horton stoutly defends the decision to separate the infrastructure from the services operated on it. Railtrack is presented as being like the National Grid or the British Airports Authority - with the implication, not discouraged by anyone in authority, that eventually slots on crowded routes (such as the London-Brighton line) will be allocated by price, like slots at American airports. As Mr Horton sees it: 'Heathrow is vital to British Airways' global position in the airline industry, but is owned and operated by a totally separate company, BAA. Because they have never been integrated, no one thinks they should be . . . So far as railways are concerned, the act of separation will enable us to clarify responsibilities and calculate costs, and it will be much easier to obtain value for money, for instance by deciding on the level of maintenance required and then seeking tenders for the appropriate bundle of maintenance work.'

Mr Horton has made a good start. Although he will have to pay around pounds 380m in tax and interest charges to the Treasury every year, the completion of the expensive improvements connected with the Channel Tunnel have ensured that his budget will rise by around pounds 100m a year to reach pounds 750m in 1996-97, against last year's figure of pounds 420m (excluding the Chunnel links). With maintenance accounting for only pounds 140m of his budget, he relishes managing 6,000 projects a year, 200 of them for more than pounds 1m and 50 more than pounds 5m. He stoutly defends himself against rumours of overcharging: 'We want as many trains as possible on our tracks.'

He denies the widespread criticism that the complexity of contractual relationships with the franchisees will be a lawyer's paradise, and appears unabashed by charges that Railtrack will not bear its full share of the risks involved in the relationship between him and the operators - above all, that they will have their charges repaid if the track is unusable, but will not get any compensation for the loss of revenue involved.

Chris Green, head of ScotRail, one of the first franchises to be offered, says that 'there should be a sharing of risk, but at the moment it feels like a one-way transfer'.

'Something's got to give,' says one insider. 'The problem is that the Treasury thinks it can transfer all the risk to the private sector, while the private sector expects the public to take a full share of risk.'

The Treasury's continuing control, and the uncertainty produced by the fragmentation of BR, is shown most clearly in the plans to involve private capital in the pounds 900m scheme to renovate the West Coast Main Line, BR's spinal cord, linking London, Birmingham, Manchester, Liverpool and Glasgow. This will provide an early test of the Treasury's atttitude towards the risks involved in such an exercise. But, in a further complication, the cost of the exercise will depend on the franchisee. Will he want to go up to 155mph (250km/h) and try to do the Glasgow run in under 4hrs and thus compete with air links? This would mean much more track realignment than the 140mph (225km/h) on the East Coast Main Line.

Not surprisingly, Roger Salmon wishes that the WCML had been on the first list of lines to be franchised, but this proved impracticable, so great are the uncertainties. And when it and other franchises are awarded, there will have to be endless juggling, allowing the franchisees to run fewer (or slower) trains if the subsidy is reduced, either because the overall grant is reduced, or because Mr Salmon changes his priorities.

The contrast between reality and theory is sharpest when it comes to the arrangements by which the franchisees will lease their rolling stock from the new leasing companies. To keep franchisees up to the mark, it was assumed that they would only have tenure for seven years. But since railway equipment is normally expected to last for 30 years or more, a 15-year tenure is the minimum - it takes two years to deliver even a standard locomotive or train set. So it is really only practical for a franchisee to take on new equipment if he has a long lease - and as a result there is talk that the lessee of the WCML will have a 20-year franchise, to pay for new equipment and to compensate for the lengthy period, up to 10 years, required to upgrade the route. This destroys one of the basic tenets behind privatisation, that of keeping franchisees up to the mark by keeping their leases short.

These are only a few of the problems raised by privatisation. Other include the confusion inevitable where franchisees derive much of their income from journeys that cover more than one region - this will be particularly noticeable in the North of England, where improved services from Newcastle down to York and Leeds and across the Pennines to Manchester would be split between two franchisees. Other problem areas include the future of cheap tickets and the need to ensure that a single ticket can be used on the territories of a number of franchise operators; in the mid- 19th century, when the railways were last so fragmented, a massive 'Railway Clearing House' was required to allot the share of revenue due to each company when a passenger travelled over more than one company's tracks. Today such cross-franchise journeys involve computer calculations so complex that the first attempt to resolve them proved inadequate.

Indeed, at the moment the situation is so confused that no one really knows how it will all work out. As one senior Transport Department civil servant put it: 'It looks a dreadful mess, but it's possible that some good will come out of it.' For the increased pressure generated by the exercise could force the Government to give far greater support to the railways, almost as though the whole exercise were an attempt by John MacGregor to outflank the Treasury and the roads lobby. But this is merely a second-best or third-best solution. Had successive governments allowed BR to be run in a business-like fashion, the present upheavals would not have been a necessary preliminary to a regular and properly thought-out increase in the pitiful sums allotted to the railways in the 47 years they were nationalised.

(Photographs omitted)