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Journalism of Courage
The last 20 years in Britain have been a period of the triumph of the private over the public. This is especially so for the economy. The Conservative governments under Margaret Thatcher began a process of privatising the over long list of industries which had been nationalised by the preceding Labour governments: the steel industry, car manufacturing, sugar, hotels, airlines, etc., etc. This phase of privatisation is accepted, even by Labour, as having been necessary to bring the British economy back from the brink. But privatisation was as much an ideological obsession with the Conservatives as nationalisation had been for the old Labour party. Besides, the Thatcher and Major governments also saw public sector privatisation as a way of servicing their budget deficits.
And so, in a second tranche of privatisations, the Conservative governments privatised a swathe of utilities, like water, and services, like the railways, which far from providing cheaper services through “competition” were transformedinto private monopolies, which continue to be a drain on the State’s resources while lining the pockets of their owners.
The privatisation of PSUs is, according to many, the ultimate indication that economic reforms are working. But the British government National Audit Office (NAO) Report should caution those who push for privatisation simply because something is publicly owned, as the Conservatives did with the railways and water supply.
The NAO report deals with the last and most controversial privatisation under the Conservative government: Rail privatisation. It concludes that the government was in such a hurry to sell British Rail’s three leasing companies that it could cost the British exchequer over a pounds 1 billion. The three companies were sold for just pounds 1.8 billion were worth almost pounds 3 billion. In less than two years the buyers had re-sold the three companies for a profit of pounds 850 million.
The leasing companies were the first bits of the railway to be sold. The tracknetwork was sold soon after as one company, and train operating franchises for separate routes were the next to follow. Besides being sold below their market value, the new companies retained a government subsidy, in order to keep a cap on ticket prices, while guaranteeing the owners a margin of profit. The government subsidy today stands at twice what the nationalised British Rail received. With the subsidy in place the stock market value of the companies has grown phenomenally. However, the number of rail accidents and the quality of service has declined with delays being the norm rather than the exception.
Rail users, and the very large number of tax-payers among them, do believe they got a very bad deal from rail privatisation.
Railway privatisation in Britain, nearly all are agreed, was the final push of an ideologically dogmatic government, which possibly had some short-term notion of servicing its revenue deficit. An important part of rail privatisation, which received widespread opposition fromacross the political and ideological divide, was the role played by the existing railway management teams.
It was their willingness to go along with the privatisation that broke the opposition to privatisation within British Rail. They accepted share option deals as part of the privatisation package. The result was that public sector bosses, who had until then been castigated for running what was seen as an inefficient and loss-making railways, were transformed into millionaire private shareholders. Their investments of tens of thousands of pounds were converted into millions of pounds when the companies they had bought shares in were re-sold at a more realistic market value. The profits that the former British rail managers, in leasing and train operating companies, turned around for themselves were in the region of 25,000 per cent. One managing director of a leasing company made a personal profit of pounds 33.6 million.
The bottomline in the railway story is that its privatisation was pushed throughdespite the absence of two factors essential to any successful privatisation: effective competition and stringent regulation. First, the nature of this privatisation limits the possibility of competition on individual routes, since only one Train Operating Company was licensed to run any one route. Second, the manner in which British Rail was broken up made the functioning of the railway as an integrated transport provider much harder, since it is easier for each sector to pass the buck for non-performance to another.
For instance, a train operating company may want to introduce state-of-the-art rolling stock on a route but the track operators may not be able to deliver the track needed to run the new trains on that route. Three, given the separate remits of each of the companies, regulation of the railway network as a composite entity is near impossible, for the same reason: that the responsibility can simply be passed down the line. For example, the train operating company can blame the track owningcompany for delays and safety-related matters.
Although rail privatisation was completed more than two years ago it still makes headlines because of a huge rise in complaints and the parallel high profits that the railways’ new bosses are making. Just this week one operating company, Great Western, which has over two years developed a reputation as one of the worst run railway companies in the country was re-sold giving its shareholders enormous profits. Just the seven directors of the company, made a 7,500-per cent profit on their holding. Pressure on the government to tighten regulation on the rail companies has grown because British tax-payers (a sizeable part of the population) feel cheated.
The sale of the rail companies at way below the market price, the bad service they provide and the government subsidy to help them keep their margin of profit is seen as profiteering at their expense.
