Competition, Regulation and the Privatisation of British Rail

John Shaw

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351732505
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

This title was first published in 2000. This work looks at the privatization of British Rail. It covers the competition for franchises and the regulation of those franchises. The study evaluates the extent to which the promotion of competition was an appropriate policy goal in the privatization of British rail. The book examines the rail system as a whole and looks at the prospects for the future.

1
Introduction

1.1 The privatisation of British Rail

The dominant political ideology in Britain during the 1980s and early 1990s was that of the New Right, whose economic beliefs, based upon neoliberalism, prioritised reducing public sector involvement in society and the economy by promoting a ‘free’ market driven by competition (Barry, 1987; Famham and Horton, 1993; Green, 1987; Hayes, 1994). For this and other reasons, the privatisation of public sector industries was of central importance to successive Conservative governments in the 1979–1997 period and the most recent major divestiture was that of British Rail (BR).

The Conservatives argued that selling BR was necessary in order to “see better use made of the railways, greater responsiveness to the customer and a higher quality of service and better value for money for the people who travel by rail” (Department of Transport (DoT), 1992a), but they acknowledged that rail privatisation was likely to be more complex than many earlier divestitures. Although BR was one of the most technically efficient railways in western Europe (Nash and Preston, 1994), its passenger operations still made heavy losses. Many of BR’s routes, although unprofitable, were seen as socially and politically necessary and any method of sale would need to maintain pre-privatisation service levels and therefore incorporate a means of providing the private sector with continuing subsidies from the state. Moreover, experience from previous sell-offs had convinced ministers that the liberalisation of BR’s market was essential if the potential benefits of privatisation were to be realised. A key objective of the Major administration was therefore to end BR’s monopoly and introduce a competitive structure into the railway industry. The White Paper New Opportunities for the Railways (DoT, 1992a), published in July 1992, committed the government to radically restructuring BR in advance of privatisation. The method of divestiture adopted, the ‘track authority’ model, would resolve the subsidy question by franchising passenger rail services and would promote competition by splitting BR into 92 companies to create an internal market (DoT, 1996).

Academic interest in the BR sell-off has been widespread. Various studies have traced the evolution of policy from empirical and theoretical perspectives, whilst others have provided generalised policy analyses or focused upon specifics such as the economics of rail privatisation.¹ The centrality of market liberalisation to the government’s plans has also prompted a considerable amount of research. Studies in the early 1990s reviewed ex ante the theoretical prospects for, and implications of, competition between passenger operators (Dnes 1993; Jones et al., 1993; Preston, 1997; Shires et al., 1994a; Starkie, 1993; Williams, 1992) whilst Bradshaw (1997), Charlton et al. (1997) and Gibb et al. (1998) have described ex post and in general terms where competition has materialised in the railway industry.

But despite the rapidly expanding literature on rail privatisation, there remain omissions and considerable scope for original investigation into the subject. This is particularly true with regard to railway competition and there is a need to further develop academic understanding of the policy adopted to promote it. Although the above studies have contributed significantly to current knowledge, they have tended to assess the policy either in terms of economic theory or without extending their analyses much beyond the bounds of the railway industry. Little attempt has been made to examine the evolution of railway competition policy, or to discuss it in the wider context of political economy. Moreover, none of the studies has examined the outcome of this competition policy in any significant detail. Concern has instead revolved around general concepts rather than comprehensive reviews of specifics. Finally, those studies which review the policy’s prospects of promoting competition in the future are now somewhat dated and need revisiting in the light of recent events.

This book therefore focuses on the policy adopted to promote competition in the British railway industry at the time of its privatisation. The research was designed in light of gaps in the literature and seeks to answer numerous research questions, including: Why did competition become central to the Conservatives’ rail privatisation plans? How did policy makers’ wish to liberalise BR influence the policy advanced in New Opportunities for the Railways? Where do opportunities for competition now exist and are they being exploited by the private sector? What are the future prospects for railway competition? Has the policy been, or is it likely to be, a success? This book attempts to address these questions by drawing upon the experiences of key personnel involved in framing, executing and operating within the policy to augment existing secondary data. It draws heavily upon more than 60 interviews with former Secretaries and Ministers of State for Transport, senior and mid-level civil servants, government advisors, industry experts, British Railways Board (BRB) members and employees, industry regulators, franchise bidders and senior managers within the ‘new’ railway. Verbatim quotations are used throughout the book to enliven the text and support the arguments advanced therein, although most are presented anonymously to honour a condition upon which interviews were granted.

1.2 Aims and objectives of the book

The central aim of this study is to evaluate the extent to which the promotion of competition was an appropriate policy goal in the privatisation of British Rail. In pursuit of this aim the book critically evaluates the evolution, outcomes and future prospects of the policy adopted to liberalise BR’s market and closely examines the translation of neoliberal political philosophy into practical policy measures. As such, there are three key objectives:

• To establish why and how the liberalisation of the passenger train market became an important goal of rail privatisation policy;
• To assess the outcome of rail privatisation policy in terms of the extent to which the passenger rail market has been liberalised;
• To review the future prospects for competition developing between passenger train operators.

Although the potential for competition was introduced throughout much of the rail industry at the time of privatisation, this study focuses specifically upon competition among passenger train operators.² The passenger railway was chosen as the principal object of study because of its relative importance to policy makers. As one commentator has observed, producing change in the delivery of passenger, rather than freight, services was uppermost in ministers’ minds when they sold the railways (Clarke, 2000) and in this sense it is appropriate to review the passenger business before embarking upon a study of other industry components.

It is also important to stress that an exhaustive analysis of railway competition in terms of its impact upon service output is not attempted. It is not the case, therefore, that operators’ efficiency, investment records and quality and frequency of service are scrutinised for comparison with pre-privatisation levels. Rather, the book seeks to identify the circumstances in which competitive opportunities are now available in the new railway structure, whether or not they are being exploited and why. The rationale supporting this line of investigation is that many of the opportunities for competition are subtle and/or complex – indeed, some were still being discovered by train operators when respondents were being interviewed – and these should probably be identified and understood before any large-scale survey of their impact upon service output can begin. Moreover, many were in a rather embryonic stage of development when data were being collected and no reasonable judgement about their impacts could have been made after such a short period of time. The central aim of the book does not demand a comprehensive review of the impact of service competition. Focus here is on the viability of promoting competition as a goal of rail privatisation policy, i.e. whether or not the railway industry is capable of supporting competition as an organising principle and why.

1.3 Scope of the book

The privatisation of BR followed the sales of numerous British transport concerns. Transport, particularly since World War Two, was perceived to be an industry which required the control and supervision of the state (Lowndes, 1997), but the Conservatives under Thatcher were more inclined to believe that the “best way to ensure the public interest is to promote free competition between the providers and free choice between the users” (Conservative Party, 1977: 364). The first Thatcher administration sold the National Freight Corporation (NFC) to a management buy-out team and liberalised the long distance coach industry. BR’s Hovercraft, Hotels and Holidays businesses were also disposed of. Subsequent transport privatisations included those of Sealink, British Airways, the British Airports Authority and the National and Scottish Bus Companies.³

Primarily because of the nature of their business, the transport companies sold by the Conservatives share key characteristics with BR. This is particularly true of the bus industry. Not only does it require continuing subsidy to fund its loss-making yet socially necessary services, but ministers also perceived the need to introduce service competition between operators. Both the National and Scottish Bus Companies were fragmented and the successor businesses were transferred to the private sector by competitive tender. Furthermore, the market was liberalised by way of the ‘42-day rule’, which entitled new operators to compete with incumbents provided they gave six weeks’ notice of their proposals (White and Farrington, 1998). Thus, from having been a statutory monopoly, the bus industry was restructured to allow competition for the market, through competitive tendering, and competition in the market, as a result of the 42-day rule. The privatised railway industry was also restructured to accommodate both these forms of competition.

It is perhaps logical to assume that the model adopted to privatise BR was a direct descendant of that used for the disposal of the bus companies, but chapter three explains that this may not, in fact, be the case (see also Charlton et al., 1997; Helm, 1996; Mountford, 1996). The track authority model of rail privatisation was originally suggested in the mid-1980s (Gylie, 1984; Starkie, 1984), but became influential after a variant had successfully been applied to the privatisation of the Central Electricity Generating Board (CEGB), part of a network’ industry. Such industries – examples are telecommunications, gas, water and electricity – were viewed by some policy makers as analogous to BR in that they have a network element: wires, pipes or, in the case of BR, track. The track authority model adopted to restructure BR can be seen as further experimentation with the method used to sell the CEGB and, in this sense, is based upon a model of privatisation adopted for a network industry rather than companies in the transport sector.

In the light of these issues, the book is structured as follows. Chapter two examines the privatisation of the network industries. It outlines the key assumptions of neoliberal thought and explores the interaction between privatisation policy and abstract theoretical ideals. The network industry sell-offs are assessed in terms of the extent to which they promoted a ‘free’ market driven by competition, whilst the chapter’s conclusions establish the political and economic contexts in which ministers considered the privatisation of BR.

The remainder of the book documents and critically assesses the privatisation of BR in terms of the aims and objectives stated above. Chapter three traces the evolution of rail privatisation policy and establishes why and how the promotion of competition between passenger train operators became an important policy goal. The chapter shows that debates over rail privatisation within the Conservative Party can be traced back to the late 1960s and that BR was considered as a candidate for divestiture throughout most of the 1980s. Potential policy options advanced from both within and outside of government are explained and events leading up to the adoption of the track authority model are reviewed. Finally, the chapter outlines the structure of the ‘new’ railway industry and identifies key shortcomings in the policy contained in New Opportunities for the Railways.

Chapters four to six assess the extent to which the passenger rail market has been liberalised. The analysis begins by addressing the passenger rail franchising process, or competition for the market. Chapter four examines the private sector’s attitude towards the BR sale in the early 1990s and explains its potential impact on the outcome of rail privatisation policy. The development of franchising policy is discussed in chapter five in this context. The degree to which competition for the market developed among franchise bidders is assessed and various reasons as to why this was so are suggested. Finally, rail franchising’s contribution to attaining the neoliberal policy aims outlined in chapter two is considered.

Chapter six is concerned with competition in the market, or ‘on rail’ competition between train operators. Interviews for this chapter were undertaken in early 1998, four years after the railway industry was restructured, and results presented in the chapter pertain to that period. The chapter first reviews debates surrounding the appropriateness of on-rail competition and highlights several weaknesses in the case for such a policy. The opportunities for competition in the passenger rail market are then identified and compared with those which the government originally envisaged. The chapter concludes by comparing the policy outcome of rail privatisation with those of the telecommunications, gas and water industry divestitures in the 1980s.

Finally, chapter seven summarises the findings of the above chapters, before moving on to evaluate the prospects for competition developing between passenger rail operators in the future. Overall conclusions pertaining to the central aim of the book are presented in a discussion which re-evaluates, in view of potential future trends, the fundamental themes addressed throughout the book.

Notes

1. On policy evolution: Gibb et al., 1996; Grantham, 1998; Knill and Lehmkuhl, 1998; Truelove, 1991; Zahariadis, 1995, 1996. General critiques, see, for example: Bradshaw, 1996a; Curwen, 1997; Freeman and Shaw, 2000; Glaister and Travers, 1993; Knowles, 1998; Nash, 1993; Nash and Preston, 1993; Welsby and Nicholls, 1999. On the economics of rail privatisation, see, for example, Bradshaw, 1996b; Else, 1993; Foster, 1994; Harris and Godward, 1997; Helm, 1996; Jones et al., 1993; Nash and Preston, 1992; Powell, 1997; Preston, 1996; Shires et al., 1994a; Stittle, 1996; White, 1998. These and other studies are discussed later in the book.

2. In its broadest sense, the passenger rail industry includes infrastructure (track, bridges, signalling), the ownership of rolling stock, heavy maintenance depots and so on. However, as chapter three will show, BR was fragmented to such an extent that ‘Train Operating Companies’ (TOCs) now do little more than their name suggests. They own neither infrastructure nor rolling stock and must buy in almost all of the services upon which they depend. It is competition between these TOCs with which this book is primarily concerned.

3. The current Labour administration, elected in May 1997, is continuing the policy of privatisation in the transport industry. It has announced that the National Air Traffic Service and parts of the London Underground are to be sold off, although the precise form of each sale is yet to be determined.