The Multinational Monitor

Jan/Feb 2002 - VOLUME 23 - NUMBER 1 & 2

P r i v a t i z a t i o n  :  R i p  -  O f f s  a n d  R e s i s t a n c e

The UK’s Disastrous Experience
With Railway Privatization

By Brendan Martin

London — Even Margaret Thatcher thought British Rail was off limits. Virtually no public service was safe from privatization under Thatcher, British Prime Minister from 1979 until overthrown by her own Conservative Party Members of Parliament in 1991, but her instincts for political danger were more highly developed than her ideology. So, while she starved rail of investment, she refused to privatize it.

She has been proved right, and how ironic it will be if the state of Britain’s railways leads to the downfall of today’s British Prime Minister, Tony Blair.

That is no longer a far-fetched idea, and there would be some justice in it too, even though Blair’s Labor government, which replaced the Conservatives in 1997, only inherited the mess from Thatcher’s successor, John Major. Having done so, and despite Blair’s on-the-record commitment in opposition to restoring a publicly accountable, publicly owned railway, his government has tried to make the privatized system work. This has involved pumping an ever greater public subsidy into the pockets of shareholders whose commitment to safety or reliability no longer commands any public confidence in a service that, in Britain, has core economic and social significance.

After two major collisions caused by faulty signals killed a total of 38 people, a third crash, which killed another four people and was caused by a broken rail outside a town called Hatfield, brought the national rail system to a grinding halt in October 2000. Railtrack, the private company established to manage the privatized track, signals and stations and oversee their development and maintenance, imposed thousands of speed restrictions on the train-operating companies (TOCs) throughout the country, because even its own confidence in the state of its assets had evaporated.

The system’s collapse came four years into what had been a highly complex –– as well as controversial –– privatization. The integrated network was broken up into more than 100 separate businesses, all held together by contracts. In addition to Railtrack and 25 TOCs, track renewal companies, track maintenance companies, rolling stock leasing companies and many more were created to provide this or that part of the package. Some of these had common parentage at the time of privatization or soon afterwards, but many were also to subcontract some of their responsibilities.

The total proceeds to the government were 5.3 billion British pounds — around three years’ worth of the increased state subsidies provided as a sweetener. Subsidies have risen much more than planned, because of successive failures, and the government now plans to increase them still further.

Meanwhile, some of the newly privatized companies changed hands for far more than the buyers had paid for them, making clear how taxpayers had been taken. In one case, a rolling stock company sold for £536 million six months after privatization for a profit of £300 million.

Undervaluation has been a standard feature of British privatization — British Telecom’s share price rose by 80 percent in the first week, for example — but privatization’s advocates argued that incentives were required to secure the benefits of privatization. Private investment would renew the infrastructure while gradually decreasing the burden on the taxpayer, proponents claimed. Although subsidies were initially increased following privatization, they were planned to decline over time. Reliability and customer service would benefit from the efficiency and entrepreneurship of commercially oriented managers, the argument went, and the state would get a direct return on its investment through corporate taxes.

There have been some improvements since privatization, such as investment in new passenger trains, which are gradually replacing the old rolling stock. However, that process was already underway before privatization, albeit slowly, and could have been accelerated under British Rail had it enjoyed as much subsidy as the TOCs have received. Another plus — a paradoxical one in the fragmented circumstances — has been the institution of a National Rail Enquiry Service. Although initially understaffed, it increased its capacity in response to fines for early failures to meet call-answering targets set by the regulatory authority, Ofrail, and now boasts Britain’s most dialed telephone number.

Effective regulation has also been responsible for a moderation in fare increases, which has in turn contributed to the major success claimed for privatization: increased usage. Passenger journeys have increased by 25 percent and freight traffic by 40 percent. Ironically, however, the privatization designers did not foresee any increase, which is a product of Britain’s worsening road congestion and rapidly rising gasoline prices, coupled with economic growth in the London area, where most of the increased usage has occurred.

The unplanned increased usage has actually exacerbated the privatized railway’s troubles, because the track usage fees charged to the TOCs by Railtrack were largely fixed. This meant that as more and more trains wore out more and more tracks, Railtrack’s revenue did not increase proportionately. Coupled with the fact that the privatization scheme neither imposed investment targets on Railtrack nor empowered Ofrail to do so, the inevitable result was a growing maintenance backlog.

Rail Fragments
Since fall 2000 and the Hatfield incident, reliability has deteriorated still further. In 2001, the number of train cancellations rose to 165,000, nearly three times the level of 1999. That does not begin to count the hours lost in delays to the nearly one billion passenger journeys made by rail in Britain annually, nor to freight services now so unpredictable that even the Post Office — rail’s major customer — is switching to roads that are already Europe’s most congested.

In October 2001, rail privatization claimed its first major corporate casualty when the government pulled the plug on Railtrack by placing it in “administration” — in effect, bankrupting it. Where the fiasco will head remains unclear. Blair himself is no longer making any promises, but he knows that he must do something to remedy the legacy of privatization and cuts that have shattered Britain’s public services.

“There remains huge frustration at some of our public services, particularly the railways, and the transport system in general,” Blair admitted in his New Year message. “I am not going to pretend that we can put our transport system right quickly. It will take investment and a constructive long-term partnership between the public and private sectors. Money alone is not enough.”

“There is no doubt that the privatized railway system we inherited was too complex and fragmented,” Blair continued. “Following Railtrack’s problems, we now need to put that right. Proposals are being put together for a new, simpler, less bureaucratic system which will provide managers with stronger incentives to put the traveling public first.”

A more simple, less fragmented system which prioritizes the traveling public would be welcome, but whether Blair and his advisers can come up with a way to produce it while still allowing it to be run for profit is far less certain.

Throwing Workers Off Track
Reducing the public subsidy for rail was central to privatization’s rationale, but the hope of doing so has proved ephemeral. The numbers are as complex as the privatized railway’s structure, and a small industry has grown up in interpreting them, but most observers agree that government subsidies to rail have roughly doubled since privatization.

The private operators have, however, lived up to expectations that they would shrink the workforce and seek to cut costs. Rather than enhancing efficiency, this cost cutting has decimated the system. All the TOCs as well as Railtrack and the maintenance companies cut jobs, causing problems ranging from cancellations due to too few drivers being available to dangerous unstaffed stations.

Railtrack acknowledges that, because of cost-cutting following privatization, “it is true to say that a lot of experience did leave the industry.” The Association of Train Operating Companies (ATOC) also admits that some companies let too many drivers go, and that new drivers receive less training than they did during British Rail’s day. The shortage is now being tackled, says an ATOC spokesperson, and the reduced period of training was justified because driver training is now tailored to the particular types of services operated by particular companies.

A further unforseen consequence of cutting the number of staff while increasing the number of services has been that the train drivers’ union has driven hard bargains, securing much higher wages. Now the less skilled workers in other unions want proportionate raises, which the companies refuse to concede, with the result that cancellations caused by strikes are now causing further commuter misery.

Pay is not the workers’ only beef. In the case of track and signals maintenance, the effects of staff reductions have been compounded by the replacement of a trained, integrated and knowledgeable workforce with an unstable and wasteful structure of contractors and subcontractors. Again, the numbers are disputed, but a conservative estimate based on what little information the companies provide — financial and other transparency has been another of privatization’s victims — is that the maintenance companies cut their staff by about a third.

The privatized companies’ commitment to commercial secrecy is such that maintenance workers who would once make a virtue of sharing valuable information among themselves were ordered not to do so with employees of rival contractors. Railtrack has admitted that “adversarial relationships” have caused problems, and the Blair government hopes to tackle them through a new Strategic Rail Authority, which will oversee and attempt to coordinate the fragmented structure and, in January, announced a new £64 billion 10-year investment plan. Half of that investment is to come from government, which means that, if the plan is delivered, rail subsidies will soon be about three times higher than they were before privatization.

Railtrack feels it has unfairly been pinned with responsibility for privatization’s failures, pointing out that it inherited years of neglect and that infrastructure capital spending will be more than three times higher this financial year than in the last year of British Rail. Its shareholders are threatening legal action against the government’s decision to wind the company up, but since they earlier enjoyed rich dividends; there is little public sympathy for them.

More interest focuses on what will replace Railtrack. Public opinion polls show large majorities in favor of renationalizing the whole system, but the government appears most likely to reconnect the “wheel-rail interface” by setting up a new infrastructure management company, perhaps not-for-profit, largely owned by the TOCs. Whatever transpires, and whatever it achieves, there are some other problems that will be harder to solve.

Rail’s New Money Culture
A key idea behind fragmentation and privatization of the system was that market mechanisms guarantee more effective transmission of information than can be achieved by hierarchical bureaucracies. The expected result was a more efficient system.

The lesson of experience is that the rail network’s integrity as a knowledge system, far from having been strengthened, has been destroyed. “The railway used to be organized on a logical, geographical basis with a hierarchical management structure in which everybody knew his or her responsibilities,” says independent rail safety consultant Peter Raynes. “There was one set of instructions and one timetable, bearing the operating manager’s name, which everybody worked to. It was a time-serving, uniformed hierarchy — somewhat old-fashioned, maybe — but with safety running through it.”

“Somewhat old-fashioned” is putting it mildly. British Rail’s performance epitomized the weaknesses as well as the strengths of the bureaucratic model of public service management and was the butt of many a weary joke. The effects of privatization are no laughing matter, however; people in Britain had no idea until their rail network was broken up and privatized just how infuriating public service could be, nor how dangerous.

Before privatization, says Raynes, a former British Rail senior operating manager, “when an accident happened, everyone was dedicated to the task of finding its cause to prevent recurrence. Staff, trades union representatives and managers alike worked to this end. There was no doubt on the site of an accident who was in charge, and no delay in clearing the lines. Over the years, lessons were learned from each accident; each one brought about an improvement in equipment or procedures.”

The changing ethos in British railways after privatization undermined these processes of vertical and horizontal dissemination of information and experience. Severing the “wheel-rail interface” by separating responsibility for the system’s infrastructure from responsibility for operating services was one major reason, but the 100-plus companies that resulted from the break up represent only the tip of the iceberg. Underneath, the privatized maintenance system rests upon layers and layers of subcontractors, each making money out of hiring the next down the food chain until, at the base — where the work is done and where the greatest strength is needed — labor is casualized and individualized. While, formally, the privatized structure has one company responsible for maintaining and improving infrastructure, it contracts with a dozen others, which in turn subcontract further and further. In reality, there are more than 2,000 companies involved, not including the self-employed laborers even further down the hierarchy.

The consequences of this casualization and cheapening have been vividly described in the Financial Times, a newspaper not noted for its hostility to privatization: “The first consequence was the breakdown of the old comradeship, which used to mean that problems were easily spotted, repairs made, and people could talk to each other. Track workers operated in gangs and knew their stretch of rails like their own back gardens. Instead, workers became nomadic, moving to the next job with little or no local knowledge and instructions not to talk to rival workers except via a supervisor miles away. The second big problem was a growing lack of control over the staff and their work. There have been complaints of subcontractors recruiting workers out of pubs to fill gaps on the night shift.”

Inevitable Crashes
The fatal consequences of the new priorities could be seen in the second of Britain’s post-privatization train crashes, at Ladbroke Grove in London, in October 1999. The collision between an incoming inter-city express and an outgoing local commuter service killed both trains’ drivers and 29 passengers, and injured many more. The immediate cause was that the driver of the commuter train — only three weeks into the job and without the years of training and experience that would previously have been his preparation for such solo responsibility — missed a danger signal. Had the train been fitted with an automatic braking system as used elsewhere in Europe, at least the speed at impact might have been reduced, but investment in the technology was an early victim of privatization.

That driver had not been the first to pass that very signal at red. Other drivers had reported that the signal was badly positioned and easy to miss because of overhanging cable and sunlight reflection. In fact, the problem had been the subject of a series of meetings, including site meetings, between representatives of TOCs, Railtrack and its maintenance contractors. Each had incentives to either duck the problem or pass responsibility for dealing with it to another. Meetings were followed by letters and letters were followed by memos in a sort of caricature of the worst kind of bureaucratic buck-passing. The delay was, quite literally, fatal.

Buck-passing rather than problem solving is now the norm. Privatization “broke traditional bonds and practices of passing on skills and experience,” as the Financial Times put it, and at the same time it “introduced hard-nosed commercial tensions into relationships that often needed to be cooperative,” with the result that “today the railway industry employs hundreds of people just to fight over whom is to blame for every minute of delay to trains.”

“Safe working of the network is hardly possible in such a climate,” John Hurst, British Rail’s former organizational development manager, told the public inquiry into the Ladbroke Grove disaster. “Merely taking steps of a technical and operational nature, in light of any particular disaster, will not address this underlying malaise which will inevitably chronically manifest itself in new disasters.”

Tragically, Hurst proved correct. In October 2000, one year and 12 days after the Ladbroke Grove crash, came the Hatfield derailment, in which an inter-city train traveling at nearly 100 mph derailed and shattered into 300 pieces, miraculously killing only four passengers.

More than a year earlier, a health and safety report had indicated a 21 percent increase in broken rails compared to the year before. On August 12, 1999, the regulatory agency, Ofrail, had written to Railtrack demanding an “action plan” to deal with the problem. Again, correspondence went back and forth between Railtrack and Ofrail, and between Railtrack and its maintenance contractors, and, no doubt, also between the contractors and their subcontractors. This continued for the rest of the year, despite the fact that by September 1999, in response to the company’s admission that it was faced with “rail nearing the end of its life in high-tonnage routes,” the regulator had retorted that the increasing incidence of broken rails “does not seem to suggest that the rail was nearing life expiry, but that it was already at or even beyond life expiry.”

So the general and urgent problem of broken rails across the network, especially affecting high-speed routes, was well known. Worse, it was known that the particular rail responsible for the Hatfield crash was cracking. Again, the responsible companies had extensively discussed what to do about it. Eventually, Railtrack awarded a contract to replace the rail to a company called Balfour Beatty Jarvis, one of the companies that had bought up British Rail’s maintenance division. Jarvis delivered the new pieces of track to the site in April 2000. Now the problem was to arrange a “track possession slot,” which is a time, agreed upon between all the interested rail companies, when the work is done.

But Ofrail, Railtrack and the operating companies could not agree on a time to conduct the repairs. The inter-connecting contracts and penalties create a system in which each company is putting the squeeze on the other, all trying to pass responsibilities, pressures and costs away from themselves. Big money is involved, and, in the case of the cracking Hatfield track, another seven months of delay resulted, as yet more correspondence went in and out of Railtrack to negotiate the date and duration of the necessary “track possession.” Finally, the renewal was scheduled for November 2000 — which turned out to be a fatal month too late.

The Hatfield crash led to the departure of Railtrack’s chief executive Gerald Corbett with a severance package worth around $400,000 — generous even compared to the shareholder dividends paid out during his tenure, which he marked from the start by getting rid of most of the senior managers inherited from British Rail and bringing in McKinsey, the management consultants. Corbett’s hold on power became untenable because the Hatfield crash threw the government and the rail companies into such a panic that speed restrictions were imposed throughout the network for months afterwards — many of them, paradoxically, as a result of over-reaction by ignorant accountants in defiance of their engineers’ more measured advice. At a time when oil refineries were being blockaded by fuel protesters opposed to rising gasoline prices, and no one could fill their tanks, the whole country pretty much ground to a halt.

According to former senior British Rail manager Chris Green, the “collapse” of professionalism has been the “most fundamental” consequence of privatization. He cites contracting out and the jettisoning of so many junior and middle managers “with vital experience” as the cause of the problems. “The net result has been a collective loss of memory on the basics of running a railway,” he says.

The Labor government is pinning its hopes on the SRA effectively coordinating its £64 billion answer to the investment question. In the short term at least, however, it appears that worst is yet to come, and not only because of rail’s deteriorating labor relations. (One TOC, South West Trains, owned by the anti-union bus company Stagecoach, was threatening at press time to fire and replace striking guards.) A December 2001 investigation published by The Observer newspaper concluded, “Britain’s railways are on the brink of a catastrophic safety breakdown, with senior executives warning that much of the network is worn out and that even the most basic repairs are not being carried out.”

Whatever Thatcher foresaw that the men around her did not, even she could not have imagined this. But Blair would do well to imagine the consequences. Thatcher was brought down by the effects of introducing a regressive local taxation system — dubbed the “poll tax” — which Major scrapped even as he privatized rail. One dissident Conservative backbencher of the time called rail privatization the “poll tax on wheels.” As long as Blair remains hooked on market solutions to every public service problem, it could yet roll over him.

This article is adapted from a chapter of Brendan Martin's forthcoming book, In the Public Service (Zed, 2002), a companion volume to his earlier and recently reprinted In the Public Interest? (Zed, 1994). Martin has produced two reports on rail privatization for the International Transport Workers' Federation (ITF), one focusing on Africa and the other on Latin America.


Railway Privatization In The Third World

The neoliberal thinking that led to Britain’s rail privatization fiasco is also behind the way in which the World Bank is driving the process of rail restructuring in developing countries. It is causing job losses on a catastrophic scale as well as enabling powerful corporations to manage infrastructure and services to suit themselves rather than wider economic and social interests.

In Latin America, Bank-led rail privatization started in Argentina, and has since reached Bolivia, Brazil, Chile, Colombia and Mexico. In Argentina, from 1991 to 1995, the World Bank financed dismissal of around 80,000 rail workers as part of its “assistance,” the first time it had overtly used its money –– public money –– for redundancy payments. The same has happened in Brazil, where, in 1995, the railways employed 42,000 people. Nearly half of those lost their jobs by 1998 in preparation for privatization, as part of a World Bank-funded staff reduction program.

But the cull has not stopped there. Of the 22,000 workers absorbed by Brazil’s privatized rail companies in 1998, 11,000 more were gone by the end of that year. Since the beginning of the privatization process, therefore, around 75 percent of the workforce has been dismissed, a scale of job loss that is turning out to be typical of rail privatization.

According to union sources, working conditions and health and safety have deteriorated as a result of privatization. Argentine labor officials report that drivers are working longer hours for lower wages and that accident rates have increased because of fatigue. Their Brazilian counterparts say that the drive for lower costs through cuts in jobs and more use of subcontractors has increased worker and especially driver fatigue and undermined the skills and knowledge base of the workforce.

The exact model of restructuring and privatization varies between countries. In Brazil, the formerly state-owned railway network was broken up into eight regional private monopolies, following the example and replicating the effects of the same policy in Argentina. The new Brazilian railway operators include a company already dominant in the production of its lines’ main cargo, iron ore. Now it is facing an inquiry into whether it is subsidizing its own freight costs at the expense of rival businesses, not to mention passengers.

Similar concerns have emerged in Cote d'Ivoire, the west African country in which the World Bank has developed its rail privatization strategy as a continental model, since followed in Kenya, Zambia and Zimbabwe, among other countries. In Cote d'Ivoire, the whole railway was taken over by a consortium led by a freight forwarding company based in France (the former colonial power), which has been able, as a result, to dominate both road and rail cargo businesses. This despite the fact that the whole rationale behind privatizing rail companies as monopolies is that they face competition from trucking.

As with privatization in other services, such as electricity and water, renegotiation of contracts just two or three years into long-term concessions has become the norm, as the private operators take advantage of their place in the driver’s seat and the weakness of regulatory capacity to further increase profits.
— B.M.