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UK railway privatisation: Where did it all go so wrong?

05 Mar 2021 / Insight

By Nigel Hawkins

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UK railway privatisation, which was launched in the mid-1990s, has finally turned full circle: the Department of Transport has recently confirmed that its controversial railway franchise system will be scrapped.

Nigel Hawkins, the Infrastructure analyst at Hardman & Co, examines the 25-year history of railway privatisation and chronicles its ups and its downs. The successes of railway privatisation, such as new rolling stock, are addressed, along with the many shortcomings, which included minimal vertical integration.

With the winding up of the franchise system, the UK railway sector is effectively reverting to its former status as a nationalised industry, a shift started with the renationalisation of the collapsed Railtrack – later re-badged as Network Rail – in 2001.

Executive summary

  • UK railway privatisation was undertaken in the mid-1990s, but it has now hit the buffers following the Department of Transport’s decision to replace the controversial railway franchising system – the core element of the privatisation policy – with Emergency Recovery Measure Agreements (ERMAs): these are essentially stop-gap arrangements.
  • In reviewing 25 years of UK railway privatisation, the successes need to be laid out. However, the “where did it all go so wrong” question, famously asked of the legendary footballer, George Best, also has to be addressed.
  • Between 1995, shortly before the first train covered by the franchise arrangements – the 5.10am on 4 February 1996 – left Twickenham station, and 2014, passenger journey numbers on the railway network more than doubled, from 735m to 1,660m. Despite some over-crowding problems, especially on commuter lines into London, this surge in demand was accommodated, albeit with periodic shortcomings.
  • Investment levels remain high in the railway sector. Much of the capital expenditure has been undertaken by Network Rail, which – despite well-publicised electrification issues – still managed to invest £5.2bn in 2019/20 alone.
  • Via the rolling stock companies (ROSCos), there has been modernisation of the rolling stock across the network, with the phasing out of many old self-powered diesel units. Stations, too, have been transformed, such as Birmingham New Street, and new stations, such as Bromsgrove, opened.
  • The failures of railway privatisation are several. Its key privatised element was Railtrack, which was suddenly re-nationalised as Network Rail in 2001. The move to ERMAs is now the final nail in the coffin. Plus, it is not clear whether the various operators will wish to become glorified ticket-collectors – to ensure the fare-box is topped up – under the new system.
  • The major flaw in the privatisation policy was the decision – apparently driven by the Treasury – to reject vertical integration: the Isle of Wight being an exception. Where competition is inevitably limited, vertical integration – with strong regulation – has worked well, as in the water sector. And the hopes of widespread open access arrangements never materialised – even 25 years on, they account for ca.1% of all passengers.
  • Instead, the railway franchise system was thrust on the industry. It encouraged very aggressive revenue assumptions, especially on the East Coast Main Line (ECML) – a graveyard for successive Train Operating Companies (TOCs). Franchise periods varied greatly; too short a period would deter investment whilst too long a franchise might give rise to inefficiency by an incumbent.
  • Accountability has also been a key issue, with Network Rail, rather than the TOC, being responsible for ca.60% of all train delays. Furthermore, increasing participation by publicly owned overseas railways, benefiting from very low interest rates, was hardly the original intention of the privatisation policy.