why are railways privatised?
The railways in Britain are only partly privatised, and passenger operators are mainly created by the award of limited-length franchises (operating contracts) to qualified private sector bidders.
What is the advantage of doing this?
What is the advantage of involving the private sector?
The official reason, as set out in the 1992 White Paper which launched privatisation, was that it would improve railway services by encouraging competition.
However, many passenger services do not pay their way, although there are good reasons for keeping them in the wider social and economic interest of the country.
This meant that a complete sale to the private sector was not possible without a major reduction in the size of the network, which could have left only a handful of services running (at best).
Instead, the franchising system was evolved to allow socially necessary but uneconomic services to be continued with the help of government subsidies. It was also thought that some busier franchises would be able to support themselves and pay ‘premiums’ to the state.
In practice, this did not work out. With one minor exception, all the new franchises (launched in 1996 and 1997) required subsidy. Today, just three franchises make net payments to the state, and two of these pay less than £10m annually. Given that their turnovers are many times larger, this represents very fragile profit margins which could easily disappear.
Just one franchise, South West Trains, makes a substantial (£100m +) annual payment to the government. Since all other operators require support, which is provided in various ways, the net result is that all passenger journeys are subsidised, on average, by more than 3p/km.
So privatisation did not end the need for subsidies, which are running at roughly £4bn/year. Most of this money goes to Network Rail, and is used (in part) to keep access charges due from operators artificially low. That is why more of them can pay premiums, although in most cases they are returning money to the state rather than yielding an actual profit for the taxpayer.
(The figure of £4bn does not include Treasury loans to Network Rail, which has been part of the public sector since September 2014. Network Rail's debt is expected to top £40bn by 2019.)
However, these large sums must be set against the potential damage to the national economy which could be expected if railways were abolished, and it is possible to argue that the cost is a sensible investment in vital national infrastructure.
What about competition?
Again, this has proved to be elusive, because most franchises have their own routes (and cannot usually compete with themselves [see Note]), and there is only an element of true franchise-on-franchise competition in one or two cases. Open access operators have no franchise contracts and take full commercial risk, but although the original 1992 White Paper suggested otherwise, very few have been licensed. The usual reason for refusal is that they could ‘abstract revenue’ from the government’s franchises. In other words, if they did gain business through providing genuine competition, the government could then be liable, because of the way franchise contracts work, to recompense the franchise holders for their losses.
What does the industry say?
Industry leaders take the line that there is indeed real competition, but that it occurs when various private sector organisations bid for a franchise. This is competition at the tendering level, then, but not on the railway itself.
The Competition and Markets Authority concluded in 2015 that more open access operators would be a good thing, but did not explain how the conundrum of ‘abstraction of revenue’ could be resolved. So far, there has been no evidence of any change in the government’s policy.
At least this was the case until Gatwick Express became part of Southern in June 2008. Gatwick Express continued as a distinct service after the takeover, charging higher fares than Southern trains on the same route. Since July 2015, Southern (including its Gatwick Express operation) has become part of Govia Thameslink Railway, which therefore operates trains to Gatwick Airport under three brands: Gatwick Express, Southern and Thameslink. The last two are not in competition because their fares are the same, but Gatwick Express continues as a premium service, providing a unique example of competition within a franchise.