A Fare Return? The price of rail privatisation

On the eve of the confirmation of rail fare increases for next year, rail union RMT has produced new research that shows that the policy of privatisation has bled £6.6 billion out of the industry since 1997 - with a forecast that a further £6.7 billion will be ripped off in the next ten years as the train operating companies are give a green light to print money by the McNulty Rail Review.

The RMT- commissioned research carried out by Just Economics looks at the true financial cost of privatisation and finds that profit-taking and fragmentation costs were £883 million in 2009 alone, and more than £6.6 billion between 1997 and 2009.

The report, which is summarises below estimates that a further £6.7 billion will be taken out of the industry over the next ten years, a figure derived by taking the average of the past five years (£744 million) and projecting it forward.

Just Economics Report Summary

We are in the midst of the deepest spending cuts in living memory, and everyone is concerned with getting value for money from public services. It was in pursuit of value for money that privatisation was first introduced. Value for money was defined at the time in very narrow terms, based on an imperative to move people around at the lowest cost. Even on these terms, before wider considerations of social value and passenger satisfaction are taken into account, privatisation has not been successful.

Upon privatisation, British Rail went from an integrated entity to a loose grouping of more than 100 companies. Each was working to its own set of incentives, many of which were in conflict with each other. High interface costs and a lack of coherence in strategy and management were almost inevitable.

Subsidies have increased by 300 per cent, when privatisation was meant to save public money. Passenger numbers have increased too but most commentators agree that this would have happened anyway because of broader economic trends. Then there is the additional burden of leakage costs (profits that are paid out in dividends to shareholders) and interface costs (the transaction costs that result from having multiple service providers in competition with each other).

Our calculations show that leakage and interface costs amounted to more than £883 million in 2009 alone, and more than £6.6 billion between 1997 and 2009. Between 2000 and 2007 these avoidable costs represented almost a fifth of the entire public subsidy paid to the rail industry.

These costs are based on the profits of the industry, so it is difficult to estimate what they might be in the future. However, if we take the average of the past five years (£744 million) and project it forward for the next ten years, we arrive at a discounted value of £6.7 billion.

Of course it is not possible to ‘prove’ that the biggest problems of the UK’s railways are causally related to their ownership model. But it is easy to identify some of the reasons why privatisation has not delivered what it promised. The theory behind privatisation was that private sector discipline would improve the incentive structure, driving up quality and driving down price. This simply has not happened.

It is difficult to argue that any significant level of risk has been transferred to the private sector. In practice the Government has sometimes had to play the role of operator of last resort, replacing franchises on South Eastern and on East Coast (twice) since privatisation. Profits have been privatised, but risks remain socialised.