Privatisation of British Rail

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The privatisation of British Rail was the result of the Railways Act 1993 introduced by John Major's Conservative government. The operations of the British Railways Board (BRB) were broken up and sold off. Some "non-core" parts of the BRB's operations had already been disposed of, by the administration of Margaret Thatcher, as early as the first years of the 1980s.

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Situation in 1979

Historically, the pre-nationalisation railway companies were almost entirely self-sufficient, including, for example, the production of the steel used in the manufacturing of rolling stock and rails. As a consequence of the nationalisation of the railways in 1948 some of these activities had been hived off to other nationalised industries and institutions, e.g. "Railway Air Services Limited" was one of the forerunners of British Airways; the railways' road transport services, which had carried freight, parcels and passengers' luggage to and from railheads, ultimately became part of the National Freight Corporation, but not until 1969.

The preferred organisational structure in the 1970s was for the BRB to form wholly-owned subsidiaries which were run at an arm's-length relationship, e.g. the railway engineering works became British Rail Engineering Limited (BREL) in 1970; the ferry operations to Ireland, France, Belgium and the Netherlands were run by Sealink (U.K.) Ltd, part of the Sealink consortium, which also used ferries owned by the French national railway SNCF, the Belgian Maritime Transport Authority Regie voor maritiem transport/Regie des transports maritimes (RMT/RTM), and the Dutch Zeeland Steamship Company. However, the BRB was still directly responsible for a multitude of other functions, such as the British Transport Police, the British Rail Property Board (which was responsible not just for operational track and property, but also for thousands of miles of abandoned tracks and stations arising from the Beeching Axe and other closure programmes), a staff savings bank, convalescent homes for rail staff, and the internal railway telephone and data comms networks (the largest in the country after British Telecom's), etc.

In 1979 the organisational structure of the BRB's railway operations still largely reflected that of the "Big Four" private railway companies, which had been merged to create British Railways over 30 years previously. There were five Regions (Scotland being a separate region), each region being formed of several Divisions, and each division of several Areas. There was some duplication of resources in this structure, and in the early 1980s the divisional layer of management was abolished with its work being redistributed either upwards to the regions or downwards to the areas.

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1980s developments

The Thatcher administration developed a policy of selling off the nationalised industries into private ownership, or privatisation. As far as the railways were concerned, the government's policy had little effect during the whole period of the Thatcher administration except in relatively small areas, as it was considered that privatising core railway operations would be too difficult.

The chain of British Transport Hotels was sold off, mainly one hotel at a time, in 1982; Sealink (U.K.) Limited was sold in 1984 to Sea Containers Limited, who ultimately sold the routes to their current owner, Stena Line. In 1988 British Rail Engineering Limited was split between the major engineering works, which became BREL (1988) Ltd, and the (mostly smaller) works that were used for day-to-day maintenance of rolling stock, which became British Rail Maintenance Limited (BRML). BREL (1988) Ltd was soon sold to the Swiss-Swedish conglomerate ASEA Brown-Boveri, which renamed the company ABB Transportation. A merger between ABB Transportation and Daimler Benz created ADtranz on 1 January 1996; ADtranz was subsequently taken over by the Canadian-owned conglomerate, Bombardier.

For reasons of efficiency and to reduce the amount of subsidy required from government British Rail undertook a comprehensive organisational restructuring in the late 1980s. The new management structure was based on business sectors rather than geographical regions, and first manifested itself in 1985 with the creation of Railfreight, the BRB's freight operation, and the creation in 1986 of Network SouthEast, which covered local passenger services in south-east England, including the London commuter area. Sectorisation was completed in 1987 with the creation of the InterCity, Provincial (later renamed Regional Railways), Parcels (later named Rail Express Systems), Departmental (civil engineering), Freightliner and Central Services (e.g. research and IT) sectors. The regional management structure continued in parallel for a few years before it was abolished. Sectorisation was generally regarded within the industry as a great success, and it was to have a considerable effect on the way in which privatisation would be carried out.

In 1986 what may in retrospect be viewed as the harbinger of private rail operation occurred when the quarry company Foster Yeoman bought a small number of extremely powerful 3600 hp locomotives from General Motors' Electromotive Division (GM-EMD), designated British Rail Class 59, to operate mineral trains from their quarry in Wiltshire. Although owned and maintained by Foster Yeoman, the Class 59s were manned by British Rail staff. During acceptance trials, on 16 February 1986 locomotive 59001 hauled a train weighing 4639 ts – the heaviest load ever hauled by a single non-articulated traction unit. Foster Yeoman's class 59s proved extremely reliable, and it was not long before quarry company ARC and privatised power generator National Power also bought small numbers of Class 59s to haul their own trains.

Also in 1986, the possibility of breaking up British Rail was explored when discussions were held with Sea Containers Ltd, later the franchise operators of GNER, concerning the possible takeover of the railway on the Isle of Wight. However, the discussions proved abortive.

In Sweden in 1988 the State Railways, Statens Järnvägar, was split into two – Banverket to control the track network, and SJ to operate the trains. This was the first time a national railway had been split in this manner, and it allowed local county authorities to tender for local passenger services to be provided by the number of new train operators that appeared. The Swedish system appeared to be very successful initially, although some train operators have subsequently gone bankrupt, and the Swedish experiment was watched with great interest in other countries. Some observers — including the boss of the Swiss Federal Railways, widely regarded as one of the best railways in the world — still argue that the whole idea of separating track from train operations in this way is fundamentally misconceived, being based on the model of air transport, where the infrastructure, engineering and operational considerations are entirely different. On this view, the rail/wheel interface is an integral entity at the heart of what makes railways function, and hence the worst possible point at which to make a split, especially on an intensively-worked but multi-functional network such as Britain's.

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The move to privatisation

In 1991, following the apparently successful Swedish example and wishing to create an environment where new rail operators could enter the market, the European Union issued EU Directive 91/440. This required of all EU member states to separate 'the management of railway operation and infrastructure from the provision of railway transport services, separation of accounts being compulsory and organizational or institutional separation being optional', the idea being that the track operator would charge the train operator a transparent fee to run its trains over the network, and anyone else could also run trains under the same conditions (open access). Directive 91/440 did not, of itself, require that the railways be privatised; it was principally an accounting means of ensuring a level playing-field for incumbent train operators and new companies entering the rail transport market. However, Directive 91/440 provided the British government with a pretext for carrying out a far more dramatic reorganisation of the railway industry, while at the same time passing on some of the opprobrium to "Europe". As of 2004, Ireland and Greece have yet to comply with Directive 91/440 and its successor.

In Britain, Margaret Thatcher was replaced by John Major as leader of the Conservative Party at the end of 1990. The Thatcher administration had already sold off nearly all the former state-owned industries, apart from the railways. In its manifesto for the 1992 General Election the Conservatives included a commitment to privatise the railways, but were not specific about how this objective was to be achieved. They unexpectedly won the election on 9 April 1992, and consequently had to develop a plan to carry out the privatisation before the Railways Bill was published the next year. The management of British Rail strongly advocated privatisation as one entity, a British Rail plc in effect; Prime Minister John Major favoured the resurrection of something like the old "Big Four" geographical railway companies that had existed before 1948; however, the Treasury, under the influence of the Adam Smith Institute think tank advocated the creation of seven, later 25, passenger railway franchises as a way of maximising revenue. As is usual in British politics, the Treasury view prevailed.

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The Railways Act 1993

The Railways Bill, published in 1993, established an extremely complex structure for the rail industry. British Rail was to be broken up into over 100 separate companies, with all relationships between the successor companies controlled by legal contracts and supervised by the Office of the Rail Regulator and, in the case of the passenger railway, the Office of Passenger Rail Franchising (OPRAF).

The passage of the Railways Bill was controversial. The public was unconvinced of the virtues of rail privatisation and there was much lobbying against the bill. Almost everybody with any experience of the railway industry or understanding of transport economics was against it. The Labour Party was implacably opposed to it and promised to renationalise the railways when they got back into office. Even the Conservative chairman of the House of Commons Transport Committee, Robert Adley, one of the few Members of Parliament who actually understood how the railways operated, famously described the Bill as "a poll tax on wheels"; unfortunately Adley was viewed as a rail enthusiast and consequently his advice was ignored. Adley died suddenly before the Bill completed its passage through Parliament. The legislation stood conventional wisdom about the commercial environment in which the railways operated on its head, splitting the unified railway into many competing organisations, when many people thought that the true competition to the railways came from the internal airlines, coastal freight shipping and, above all, road transport.

The Railways Bill became the Railways Act on 5 November 1993, and the organisational structure dictated by it came into effect on 1 April 1994. Initially, British Rail was broken up into various units frequently based on its own organisational sectors (Train Operating Units, Infrastructure Maintenance Units, etc. - for more details see below) still controlled by the British Railways Board, but which were sold off over the next few years.

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Privatisation under Labour

The Labour government (elected in 1997 once the majority of the privatisation process had been completed) reneged on its earlier commitment to keep the railways in the public sector. Instead, it left the new structure in place, even completing the privatisation process with the last remaining sales. Its one innovation in the early years was the creation of the Strategic Rail Authority (SRA), initially in shadow form until the 2000 Transport Act received Royal Assent.

However, Labour was forced to intervene in the wake of the Hatfield rail crash in 2000 as Railtrack entered into financial meltdown and the industry was in deep crisis. Railtrack was put into Railway Administration in 2001 and a new organisation, Network Rail, which is supposedly private but in practice government owned, emerged to replace Railtrack in 2002. Further changes have followed, which has seen the government take back a greater degree of control, but the early demise of the SRA, which was its creation, suggests that the situation is still in flux and the right formula for the long-term health of the rail industry has not yet been found.

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Organisational structure created by the Railways Act

The original privatisation structure, created over the three years from 1 April 1994, consisted of:

  • Infrastructure Owner: Railtrack took over ownership of all track, signalling and stations. Railtrack let out most of the stations to the passenger train operators, managing only a handful of the largest city termini itself, maintenance and renewal of the infrastructure was also contracted out to British Rail Infrastructure Services, leaving Railtrack's directly-employed staff consisting mostly of signallers. In the original privatisation plan, Railtrack would have been the last part of British Rail to be sold, but with the approach of a General Election in 1997 Railtrack was hastily privatised in May 1996 in an attempt to ensure that the new structure could not be reversed.
  • Regulation: The Office of the Rail Regulator (ORR) took responsilibity for overseeing the industry and to act as the umpire between the new companies. The Rail Regulator's most important role was to undertake the five-yearly review to determine the track access charges that the train operators should pay to Railtrack for using its infrastructure based on the income that Railtrack would require to maintain and renew it. ORR's role only covered economic regulation; safety regulation remained the responsibility of the Health and Safety Executive.
  • Franchising: The Office of Passenger Rail Franchising (OPRAF) took responsibility for organising the franchising process to transfer the 25 passenger train operators to the private sector and then develop the refranchising programme for the future. The first round of franchising was based solely on the lowest cost bidder wins.
  • Passenger Train Operators: 25 passenger Train Operating Units (TOUs), later Train Operating Companies (TOCs) once they were in the private sector, split by geographical area and service type. This meant that, for example, a major city terminus would be served by an ex-InterCity TOU and one or more local commuter TOUs, with consequent competition for train paths into and out of the stations, which had to be resolved by Railtrack and the ORR. The TOCs owned virtually nothing, hiring most of the assets required from Railtrack and the ROSCOs and contracting suppliers to undertake heavy maintenance on the trains or provide onboard catering.
  • Train Owners: 3 Rolling Stock Leasing Companies (ROSCOs), Angel Trains, Porterbrook Leasing, and Eversholt Trains (later HSBC Rail), which were allocated all of British Rail's passenger coaches, locomotives, and multiple units. Freight locomotives and wagons were owned by the freight train operators.
  • Freight Train Operators: 6 Freight Operating Companies (FOCs), including three geographical units for trainload freight (Mainline Freight in the south-east, Loadhaul in the north-east, and Trans-Rail in the west), Railfreight Distribution (international and wagonload trains), Freightliner (container-carrying trains) and Rail Express Systems (parcels and mail trains).
  • Track Maintenance and Renewal: British Rail Infrastructure Services (BRIS), which took responsibility for the civil engineering requirements of the railway. BRIS was subsequently organised for privatisation on the basis of 7 Infrastructure Maintenance Units (IMUs), which maintained the railway, and 6 Track Renewal Units (TRUs), which replaced rail lines, both organised geographically.
  • Specialist Companies: A variety of other companies created to undertake specific functions, including European Passenger Services (to operate the UK part of the Eurostar service) and Union Railways (to implement the Channel Tunnel Rail Link construction project).


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Changes to the structure since the Railways Act

Since 1997, considerable changes have taken place to the original structure of privatisation, of which very little is left unaltered. The principal changes are as follows:

  • Infrastructure Owner: Railtrack was placed into Railway Administration in 2001 and, the following year, its functions as the track owner were taken over by Network Rail, which is a Company limited by guarantee, nominally in the private sector but with 'members' instead of shareholders and its borrowing guaranteed by the government.
  • Regulation: ORR has been renamed the Office of Rail Regulation and the Rail Regulator replaced by a board in line with changes to the regulation of other privatised industries. ORR has also been given the responsibility for safety regulation which was previously the remit of the Health and Safety Executive.
  • Franchising: OPRAF was replaced by the Strategic Rail Authority, whose remit also included the promotion of freight services. The SRA has since been wound up and its franchising functions passed to the Department for Transport. The most recent rounds of franchising have considered the planned improvements and previous good service delivery of bidders as well as the cost element. As part of the devolution process since 1997, the Scottish Executive has been given a greater role in determining the franchising of Scotrail, Merseytravel (the Merseyside Passenger Transport Authority) is responsible for Merseyrail, and the Mayor of London has some input in decisions on rail services in the Greater London area.
  • Passenger Train Operators: The number of passenger franchises has been reduced and further amalgamations are planned. Many of the franchises have changed hands between private sector operators and one, Southeastern (train operating company), has been operated in the public sector after Connex was removed from control by the SRA and before a new private sector operator could be appointed. However, two new 'open access' operators have appeared to run new services; Heathrow Express and Hull Trains. A third, Grand Central Trains is due to start operating in Decmeber 2006. Other applications by potential open access opeators have been turned down by ORR.
  • Freight Train Operators: Despite going to the expense of setting up separate management structures for the three parts of the trainload freight sector, on 24 February 1996 all three units were sold to North & South Railways", a subsidiary of the American Wisconsin Central Railroad, which soon renamed the operation English, Welsh and Scottish Railway. EWS also acquired Rail Express Systems, Railfreight Distribution (the last part of the nationalised railway to be sold, after Labour had been elected) and National Power's railfreight operation. Current freight train operators other than EWS include Freightliner (purchased by a management buyout) and two 'open access' freight operators: Direct Rail Services and GB Railfreight.
  • Train Owners: The three ROSCOs continue to exist as originally established, the only part of the privatised railway to remain unchanged, although some now lease freight locomotives and wagons to the FOCs. They have been joined by a variety of small-scale train owners ready to let old railway stock on short-term leases, including FM Rail, Harry Needle Railroad Company and West Coast Railway Company. Also, Railtrack and Network Rail have purchased some rolling stock themselves.
  • Track Maintenance and Renewal: Track maintenance was taken back 'in-house' by Network Rail, but track renewal remains contracted out to the private sector.
  • Specialist Companies: After Union Railways ran into trouble with the construction of the CTRL, it was rescued by Railtrack.
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Effects of privatisation

There is considerable debate around the effect of railway privatisation, especially since the structure now in place is considerably different from that originally envisaged at the time of the 1993 Railways Act. Some of the most common arguments for and against are:

  • Customer Service: Privatisation was supposed to bring improved customer service and many rail lines have seen improvements in this field with better on-board and station services. In the early years, however, customer service was dented when too many drivers were given voluntary redundancy by the new TOCs and trains had to be cancelled. Also, the impact of the Hatfield rail accident in 2000 left services seriously affected for many months after.
  • Fares & Timetable: In an attempt to protect passengers' interests, certain fares (mostly commuter season fares) and basic elements of the timetable were regulated. However, the TOCs still had quite a bit of latitude in changing unregulated fares and could change the number of trains run within certain regulatory and practical limitations. While average fare prices have changed little since privatisation, this masks substantial changes. The price of commuter season tickets has fallen in real terms, but many unregulated fares have increased substantially, especially 'walk-on' fares on inter-urban routes where operators have tried to encourage passengers to user cheaper 'advance purchase' tickets instead. So far as the timetable is concerned, many more trains are being run each day than under BR as operators have tried to run more frequent, but usually shorter, trains on many routes to attract more custom.
  • New Trains: The promoters of privatisation expected that the ROSCOs would compete against each other to provide the TOCs with the rolling stock they required. In practice, in most cases the individual TOCs required specific classes of trains to run their services, and often only one of the ROSCOs would have that class of train, resulting in their having to pay whatever the ROSCO concerned cared to charge for leasing the trains. Old rolling stock was extremely profitable to the ROSCOs, as they were able to charge substantial amounts for their hire even though British Rail had already written off their construction costs. This was due to the adoption of 'indifference pricing' as the method of determining lease costs by the government, which was intended to make purchasing new trains more attractive when compared to running life-expired trains. In practice, the average age of trains in the UK is no different to that under the last years of BR.
  • Punctuality and Reliability: The privatised railway has not shown the improvement in punctuality and reliability that was hoped for. The contracts in place between companies were intended to incentivise improvements in these areas, but with the large increase in the number of trains run while using more or less the same amount of rolling stock and track, there has been less room for maneouvre when problems occur, with consequent impacts on punctuality.
  • Level of Traffic: It is unclear whether privatisation was intended to increase traffic, but that is what happened in the early years of the privatised railway with many more trains run, more passengers carried and more freight (in terms of weight and distance - in terms of weight alone there was little change) lifted. Opponents of privatisation argue that some increase would have been expected anyway in line with the improved UK economy; it took some years after privatisation before traffic returned to the levels achieved by BR in the late 1980s at the height of the previous economic boom. Nevertheless, more passengers are now being carried each year than at any time since the 1950s, when the network was twice the mileage.
  • Safety: This is one of the more emotive sources of argument. The railway can point to continued improvements in safety under privatisation; in fact the rate of improvement has increased compared to that experienced in the last years of BR. However, four serious rail accidents in the early post-privatisation period (Southall (1997), Ladbroke Grove (1999), Hatfield (2000) and Potters Bar (2002)) all undermined confidence in the safety of the privatised railway and highlighted some areas where it appeared that new safety risks had been created as a result of the privatisation process (e.g. the separation of wheel from track). The industry has sought to tackle these risks and so far there has been no fatal accident for which the railway is responsible since May 2002. Two other fatal accidents that have occurred since privatisation (Great Heck (2001) and Ufton Nervet (2004)) have been due to cars blocking the rail line being struck at speed.
  • Investment: It is a common view that the railways had been systematically starved of government investment since the 1960s as successive governments openly favoured road transport, and that when the railways were privatised they were already in bad shape and in need of renewal. This argument has been put repeatedly, for example, by Sir Richard Branson, the boss of one of the largest railway operators, Virgin Trains, as an explanation for his company's poor service. However, informed observers, notably the journalist Roger Ford in the industry trade magazine Modern Railways, have shown that this is largely a myth. While BR received less financial support than in most European countries from the government, it was able to maintain the network to a reasonable standard. Indeed, in BR's final years it could claim to run more trains at more than 100mph than any other railway in the world. This was largely because investment in the UK was spread across all rail lines rather than being pumped into developing a small number of high-speed lines.
  • Funding: Privatisation was intended to allow private borrowing to fund investment and remove the short-term constraints of Treasury budgeting from the railways. However, it was always recognised that there would be a requirement for some public subsidy to maintain unprofitable but socially desirable services. Indeed, of the three passenger sectors (Intercity, Network South East, and Regional Railways), only the first could hope to be independently commercial. The conflict between trying to maximise private sector investment while subsidising and regulating the industry to provide desirable services has proved difficult to reconcile. Neither most pro- nor anti-privatisers believe the current balance is correct. Nevertheless, privatisation has brought private sector investment into the railway and has also committed the government to long-term funding streams which provide more certainty for the industry when developing projects.
  • Profitability and Efficiency: One of the principal expectations from privatisation was that the railway service could be delivered more efficiently in the private sector because of the profit motive. The expectation that there were considerable costs that could be slashed from the system was not fulfilled; new operators found that BR had already done much of what could be done to improve efficiency. In addition, the profit motive was diluted when some of the passenger franchises ran into financial trouble and entered into management contracts with the franchising authority, which reduced the incentive to innovate. In addition, new health and safety requirements and the complexity of the privatised structure has thrown up additional costs in the industry. In all, the subsidy to the railway from the Government is considerably larger now than it was for BR.
  • Political Control: One the benefits promoted for privatisation is that it would remove railways from short-term politcal control which damaged an industry like the railways, which had long-term investment requirements. This has not happened and, with the latest changes that have been made to the railway structure, the industry is more under government control than ever before.
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External links

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