Making tracks to roll free: The Government is unveiling its rail privatisation plans in the shadow of BR's decline. Is enterprise the answer, or will this be a poll tax disaster on wheels? Michael Harrison reports

FOR SALE: one state-owned industry. Workforce of 130,000, 2 million customers a day, 2,500 sales outlets. Turnover of pounds 3bn, liabilities of pounds 1bn, losses of pounds 145m a year. Government support running at pounds 900m. Badly in need of investment. Existing management need not apply.

In the next week John MacGregor, Secretary of State for Transport, will publish the Government's long-awaited White Paper on the privatisation of British Rail - something that no other country has attempted with its railway.

To some it represents an experiment too far in free-market ideology, a threat to the integrity of the national rail network and a challenge to the principle which has guided BR since nationalisation in 1948 - that railways are there to provide a public service.

To others it is a priceless opportunity to breathe new life into the railways by dismantling BR's monopoly and transforming it from a producer-led industry, which coincidentally happens to carry passengers, into a commercial business where success will depend on meeting the demands of customers and competition will drive up levels of service and quality.

There is a third school of thought - that the experiment will turn into a 'poll tax on wheels', shunting out of the sidings just in time to mangle ministerial reputations and, perhaps, the Government's hopes of re-election.

In the past five years many options have been advanced as to the best method of privatising BR. Ministers have examined: a single flotation of the whole business; the piecemeal sale of its existing divisions, such as InterCity and Network SouthEast; a return to Victorian times by converting BR back into a series of privately owned regional companies. Finally, they have examined splitting BR in two, creating a track authority which could subsequently be sold to investors, and then inviting the private sector to operate competing services on its lines.

Partly because of the Government's inability to agree on any one of these options, Mr MacGregor appears to have settled for an old-fashioned Whitehall fudge. He has permed all the alternatives and come up with a solution that borrows from each, save the idea of a single sale.

His White Paper will say that BR's freight and parcels divisions are to be sold as separate entities - probably through trade sales. The Government is also prepared to consider the outright sale of mainline stations.

Passenger services, however, will be put out to private-sector tender, with BR remaining as the track authority and the franchises awarded by a new rail regulator.

Ministers had been aware for some time just how bad BR's 1991-92 results would be, and knew their announcement last week would not enhance the prospects for privatisation.

Although fare increases continued to outstrip inflation, the combined losses of Network SouthEast and Regional Railways rose 16 per cent to pounds 765m, while Government support rose by pounds 290m to pounds 892m. InterCity's profits dwindled to a paltry pounds 2m and freight, the star performer, saw operating profits slump by a third to pounds 67m.

Overhanging these miserable results was a 55 per cent decline in income from property - the division that has propped up BR's sagging balance sheet for the past four years.

Under private operation, Network SouthEast and Regional Railways will still receive subsidies - but it is possible that the franchise will go to the operator which bids for the lowest level of grant support.

Bidders will be required to meet agreed standards for quality of service, punctuality and reliability. A separate study into how fares will be regulated is being undertaken by the accountants Coopers & Lybrand.

The private sector will no doubt be tempted to cherry-pick by bidding for profitable services, such as some of the InterCity routes and the Victoria- Gatwick Express.

But it is by no means clear that franchises will be limited to particular routes. Some franchisees may well inherit not just a slice of InterCity but also parts of the Regional Railways network through which services run.

Privatisation is not new to the BR board. Its hotels, cross-Channel ferry business, poster sites division, Travellers' Fare and train-building subsidiaries have all been sold off. On-board catering and some cleaning services have also been contracted out, while privately owned wagons account for 40 per cent of its freight fleet. But by and large these were all discrete businesses, capable of being hived off with no impact on the core rail network.

Announcing BR's slide further into the red last week, Sir Bob Reid, the chairman, who came to the railways after a lifetime spent in the oil industry with Shell, insisted he had no fears about the move towards full-blooded privatisation.

Privately, however, he and the rest of the BR board appear lukewarm at best towards the policy. The most Sir Bob was prepared to volunteer was that franchising could be 'quite a good idea' - hardly the ringing endorsement that ministers must long to hear.

BR has had to earmark pounds 100m against the cost of preparing for privatisation - equivalent to almost half its expenditure last year on improved safety measures.

But its more pressing priorities are to complete the management restructuring introduced last year under the 'organising for quality' programme; gearing up for the Passenger's Charter, which will be implemented next January; and planning its long-term investment strategy.

BR might argue that the organisational changes, which flattened the management structure by embracing different disciplines from engineering to marketing under one umbrella, have partly answered the criticisms levelled by the privatisers.

Meanwhile the Passenger's Charter, which entitles season-ticket holders to refunds or travel vouchers if their trains fail to meet punctuality and reliability targets, will perform a similar function to the quality standards imposed on franchised operators.

But the overriding question which Mr MacGregor's White Paper will need to answer is how a privatised railway will meet its investment programme. BR believes that pounds 10bn- pounds 15bn needs to be spent in the next decade on measures to improve the network, such as the pounds 600m automatic train protection system, and to launch a number of large projects, including the Channel tunnel rail link, upgrading of the West Coast main line, more Networker trains for commuter services and the CrossRail link between Liverpool Street and Paddington in London.

Last week Sir Bob said that privatisation must not lead to a 'damaging hiatus' in investment and warned: 'The move from deterioration to dilapidation to danger comes all too quickly.'

Presumably the manner in which the franchises are constructed will take into account the investment needs of the network. It seems highly unlikely, however, that any private operator will be interested in taking on passenger services if this also entails a large up- front capital contribution.

The Government says that its objective is not to maximise revenues. Indeed, in order to privatise BR it might have to give the industry away. As Sir Bob commented: 'Everything depends on the conditions of sale and what the capital requirements are. If they are minimal I would be interested.'

Where will private sector interest focus? Regional Railways is destined to be a perennial loss-maker, while Network SouthEast is politically sensitive because of its vast captive market. Those who are obliged to commute on it may rage against BR, but are they likely to take any more kindly to a private operator in the absence of a quick and clear improvement in services?

That leaves InterCity as the passenger division likely to attract most private sector attention. But InterCity is in competition with cars, coaches and, on longer routes, airlines, and last year virtually all its performance indicators took a turn for the worse.

The drawbacks have not dimmed the enthusiasm of Richard Branson's Virgin group. He intends to submit plans in the next two weeks to operate experimental services on four or five routes. But Mr Branson also believes that increased investment by the Government is essential. 'If privatisation is going to work, it has to make the rail lines available to private operators at roughly the same cost as road is made available to lorries,' he says.

In this respect he is singing the same tune as Sir Bob. The only difference is that the BR chairman wishes he could be left to get on with the job without the distraction of privatisation. 'What the business needs is focused management, not extraneous advice,' he says.

BR, however, is about to receive a trainload of that, starting with Mr MacGregor's White Paper.

(Photograph omitted)

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