Showing posts with label rail. Show all posts
Showing posts with label rail. Show all posts
Monday 5 June 2023
Tuesday 16 January 2018
Both the left and the right can learn from Carillion's demise
Ben Chu in The Independent
Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.
For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.
For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.
Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.
But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.
And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?
As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.
This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.
Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.
This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.
One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.
In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.
When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.
Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.
For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.
For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.
Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.
But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.
And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?
As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.
This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.
Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.
This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.
One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.
In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.
When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.
Wednesday 10 January 2018
Public Benefit Company to replace Public Limited Company
Three-quarters of British voters want our rail, gas and water renationalised but it’s expensive – there is a business model that offers the best of both worlds
Will Hutton in The Guardian
Will Hutton in The Guardian
Public ownership is fashionable again. Turning over Britain’s public assets, lock, stock and barrel into private ownership and relying only on light-touch regulation to ensure they were managed to deliver a wider public interest was always a risky bet. And that bet has not paid off.
Recent polls show an astonishing 83% in favour of nationalising water, 77% in favour of electricity and gas and 76% in favour of rail. It is not just that this represents a general fall in trust in business. The privatised utilities are felt to be in a different category: they are public services. But there is a widespread view that demanding profit targets have overridden public service obligations. And the public is right.
Thames Water, under private equity ownership, has been the most egregious example, building up sky-high debts as it distributed excessive dividends to its private-equity owners via a holding company in Luxembourg, a move designed to minimise UK tax obligations. As the Cuttill report highlighted, at current rates of investment it will take Thames 357 years to renew the London’s water mains: it takes 10 years in Japan.
Equally, BT’s investment in universal national high-speed broadband coverage has been slow and inadequate, while few would argue that the first target of the rail operators has been quality passenger service – culminating in the most recent scandal of Stagecoach and Virgin escaping their contractual commitments. Most commuters, crowded into expensive trains, have become increasing fans of public ownership. Jeremy Corbyn’s commitment to renationalisation surprised everyone with its popularity.
The trouble is, it’s expensive: at least £170bn on most estimates. Of course the proposed increase in public debt by around 10% of GDP will be matched by the state owning assets of 10% of GDP, but British public accounting is not so rational. The emphasis will be on the debt, not the assets, and in any case there are better causes – infrastructure spending – for which to raise public debt levels.
And once owned publicly, the newly nationalised industries will once again be subject to the Treasury’s borrowing limits. If there are spending cuts, their capital investment programmes will be cut. What voters want is the best of both worlds. Public services run as public services, but with all the dynamism and autonomy of being in the private sector, not least being able to borrow for vital investment. It seems impossible, but building on the proposals of the Big Innovation Centre’s Purposeful Company Taskforce, there is a way to pull off these apparently irreconcilable objectives – and without spending any money.
The government should create a new category of company – the public benefit company (PBC) – which would write into its constitution that its purpose is the delivery of public benefit to which profit-making is subordinate. For instance, a water company’s purpose would be to deliver the best water as cheaply as possible and not siphon off excessive dividends through a tax haven. The next step would be to take a foundation share in each privatised utility as a condition of its licence to operate, requiring the utility to reincorporate as a public-benefit company.
Regulators, however good their intentions, too easily see the world from the view of the industry they regulate
The foundation share would give the government the right to appoint independent non-executive directors whose role would be see that the public interest purposes of the PBC were being discharged as promised.
This would include ensuring the company remained domiciled in the UK for tax purposes and guaranteeing that consumers, social and public benefit interests came first.
The non-executive directors would engage directly with consumer challenge groups whose mandate is to be a sounding board for consumer interests but at present are little more than talking shops, and deliver an independent report to an office of public services each year, giving an account of how the public interest was being achieved. It is important to have an independent third party: regulators, however good their intentions, too easily see the world from the view of the industry they regulate.
Because the companies would remain owned by private shareholders, their borrowing would not be classed as public debt. The existing shareholders in the utility would remain shareholders, and their rights to votes and dividends would remain unimpaired. So there would be no need to compensate them – no need, in short to pay £170bn buying the assets back. Indeed, the scope to borrow could be used to fund a wave of new investment in our utilities.
But the new company’s obligation would be to its users first and foremost, and would be free to borrow free from any Treasury constraint. Nor would any secretary of state get drawn into the operational running of the industries – one of the major reasons Attlee-style nationalisation failed. Inevitably decisions get politicised.
The aim would be to combine the best of both the public and private sectors. If companies do not deliver what they have promised, there should be a well-defined system of escalating penalties, starting with the right to sue companies and ending with taking all the assets into public ownership if a company persistently neglected its obligations. But the cost would be very much lower, because the share price would fall as it became clear it was operating illegally.
Britain would have created a new class of company. Indeed, there is the opportunity to start now. If Virgin and Stagecoach are unable to fulfil their contractual obligations on the East Coast line, the company should be reincorporated as a public benefit company. The shareholders would remain, but the newly constituted board would take every decision in the interests of the travelling public guaranteed by the independent directors, empowered consumer challenge groups and the office of public services – so that the taxpayer can trust her or his money is spent properly. Corbyn and John McDonnell have a way of delivering what the electorate want – and still keeping the industries off the public balance sheet. The circle can be squared.
Recent polls show an astonishing 83% in favour of nationalising water, 77% in favour of electricity and gas and 76% in favour of rail. It is not just that this represents a general fall in trust in business. The privatised utilities are felt to be in a different category: they are public services. But there is a widespread view that demanding profit targets have overridden public service obligations. And the public is right.
Thames Water, under private equity ownership, has been the most egregious example, building up sky-high debts as it distributed excessive dividends to its private-equity owners via a holding company in Luxembourg, a move designed to minimise UK tax obligations. As the Cuttill report highlighted, at current rates of investment it will take Thames 357 years to renew the London’s water mains: it takes 10 years in Japan.
Equally, BT’s investment in universal national high-speed broadband coverage has been slow and inadequate, while few would argue that the first target of the rail operators has been quality passenger service – culminating in the most recent scandal of Stagecoach and Virgin escaping their contractual commitments. Most commuters, crowded into expensive trains, have become increasing fans of public ownership. Jeremy Corbyn’s commitment to renationalisation surprised everyone with its popularity.
The trouble is, it’s expensive: at least £170bn on most estimates. Of course the proposed increase in public debt by around 10% of GDP will be matched by the state owning assets of 10% of GDP, but British public accounting is not so rational. The emphasis will be on the debt, not the assets, and in any case there are better causes – infrastructure spending – for which to raise public debt levels.
And once owned publicly, the newly nationalised industries will once again be subject to the Treasury’s borrowing limits. If there are spending cuts, their capital investment programmes will be cut. What voters want is the best of both worlds. Public services run as public services, but with all the dynamism and autonomy of being in the private sector, not least being able to borrow for vital investment. It seems impossible, but building on the proposals of the Big Innovation Centre’s Purposeful Company Taskforce, there is a way to pull off these apparently irreconcilable objectives – and without spending any money.
The government should create a new category of company – the public benefit company (PBC) – which would write into its constitution that its purpose is the delivery of public benefit to which profit-making is subordinate. For instance, a water company’s purpose would be to deliver the best water as cheaply as possible and not siphon off excessive dividends through a tax haven. The next step would be to take a foundation share in each privatised utility as a condition of its licence to operate, requiring the utility to reincorporate as a public-benefit company.
Regulators, however good their intentions, too easily see the world from the view of the industry they regulate
The foundation share would give the government the right to appoint independent non-executive directors whose role would be see that the public interest purposes of the PBC were being discharged as promised.
This would include ensuring the company remained domiciled in the UK for tax purposes and guaranteeing that consumers, social and public benefit interests came first.
The non-executive directors would engage directly with consumer challenge groups whose mandate is to be a sounding board for consumer interests but at present are little more than talking shops, and deliver an independent report to an office of public services each year, giving an account of how the public interest was being achieved. It is important to have an independent third party: regulators, however good their intentions, too easily see the world from the view of the industry they regulate.
Because the companies would remain owned by private shareholders, their borrowing would not be classed as public debt. The existing shareholders in the utility would remain shareholders, and their rights to votes and dividends would remain unimpaired. So there would be no need to compensate them – no need, in short to pay £170bn buying the assets back. Indeed, the scope to borrow could be used to fund a wave of new investment in our utilities.
But the new company’s obligation would be to its users first and foremost, and would be free to borrow free from any Treasury constraint. Nor would any secretary of state get drawn into the operational running of the industries – one of the major reasons Attlee-style nationalisation failed. Inevitably decisions get politicised.
The aim would be to combine the best of both the public and private sectors. If companies do not deliver what they have promised, there should be a well-defined system of escalating penalties, starting with the right to sue companies and ending with taking all the assets into public ownership if a company persistently neglected its obligations. But the cost would be very much lower, because the share price would fall as it became clear it was operating illegally.
Britain would have created a new class of company. Indeed, there is the opportunity to start now. If Virgin and Stagecoach are unable to fulfil their contractual obligations on the East Coast line, the company should be reincorporated as a public benefit company. The shareholders would remain, but the newly constituted board would take every decision in the interests of the travelling public guaranteed by the independent directors, empowered consumer challenge groups and the office of public services – so that the taxpayer can trust her or his money is spent properly. Corbyn and John McDonnell have a way of delivering what the electorate want – and still keeping the industries off the public balance sheet. The circle can be squared.
Sunday 1 October 2017
The pendulum swings against privatisation
Evidence suggests that ending state ownership works in some markets but not others
Tim Harford in The Financial Times
Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.
In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.
They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.
Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.
Privatisation’s proponents mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver
That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.
Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.
There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.
Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.
Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.
But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.
Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.
All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.
A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.
My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.
The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents. The pendulum swings — but shows no sign of pausing in the centre.
Tim Harford in The Financial Times
Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.
In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.
They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.
Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.
Privatisation’s proponents mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver
That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.
Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.
There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.
Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.
Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.
But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.
Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.
All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.
A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.
My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.
The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents. The pendulum swings — but shows no sign of pausing in the centre.
Monday 15 August 2016
Schoolmates used to ask me about Indian trains. I can now confirm British ones are worse
Nish Kumar in The Guardian
Virgin Trains East Coast staff to strike in row over jobs
It’s interesting how far we have moved on in our attitude to renationalisation. In the 1980s and 1990s, we consistently elected governments that essentially based their economic policies on the boardgame Monopoly, where public services were flogged off to the highest bidder. We were in thrall to Rich Uncle Pennybags, the moustachioed, monocle-wearing mascot we now call Mr Monopoly. (This is clearly a terrible name, by the way. It’s like me changing my name to Grandpa Nishy Mouthjoker.)
But there has been a change in public opinion, if not in government policy. A 2015 poll revealed nearly 60% of us support public ownership of the railways. Last year, the East Coast service was reprivatised. The government had taken over the running of the line after the collapse of the previous private ownership and, in public control, it had become profitable to the Treasury and reported positive customer satisfaction. It is now run by Virgin Trains and, on Friday morning, staff announced strike action over two weekends in August. This means that I can’t get back to London from the Edinburgh Fringe. Once again, comedians are punished. Truly we are the most oppressed people in society.
Frustration with the trains is inevitable, given the daily difficulties commuters face. In France, a near fully publicly owned rail system managed to give its passengers fares far lower than the UK for almost exactly the same amount of public rail subsidy between 1996 and 2010. Furthermore, the French government has invested profits in private rail companies, which then invest in companies that run British trains. Including – surprise! – Southern. As we haemorrhage money, we are lining the pockets of Riche Oncle Sacs d’Argent.
Nationalisation might seem like the preserve of old-fashioned, duffel-coat-wearing, Red-Flag-singing socialists, but it also appears to be economically efficient. Labour adoped renationalisation as a policy at its 2015 autumn conference, and Jeremy Corbyn is trying to make this a key platform in his plans to be the next prime minister. Corbyn might be on to a winner here. Time will tell. Anyway, I had better head off – I’ve got to start booking some train tickets for October 2025.
Protesters against Southern Rail in London last month: a 2015 poll revealed nearly 60% of the public supports public ownership of the railways. Photograph: NurPhoto/Getty Images
Last week Southern Rail staff went on strike, leaving thousands of commuters facing a slightly improved service. Southern’s non-stop calamities this summer have added support to the idea of renationalisation. This debate is something I watched with great interest. I’m a standup comedian who can’t drive. I have never learned. I don’t trust my hand-eye coordination. You’re looking at someone who once dropped a cricket ball on to his own head during a routine catching practice; I don’t think it’s a great idea to have me in control of a high-speed metal death robot.
So I rely on the train system in this country. And I can tell you from firsthand experience that our train system is a mess. Carriages are full of unhappy travellers packed together like sardines, who have inexplicably paid for the privilege of being incarcerated. Periodically, everyone has to flee for cover, either by lying across the laps of the passengers lucky enough to have a seat, or by climbing into the luggage racks on the ceiling to allow the optimistically named “buffet” cart to pass through just in case anyone wants to spend £50 on a packet of crisps or a single fruit pastille.
And it’s not cheap, either. Train fares have increased way out step with inflation, meaning the percentage of our salaries we spend on train fares is now six times higher than many of our European counterparts – and that’s if you plan ahead. If you want to travel from London to Manchester, and have not booked a ticket, be prepared to sell a kidney or stay at home. Frequent train travellers have to plan ahead, booking months in advance to avoid massive fares. But there is still the risk that you will turn up on the day and the train will have lost its seat reservations for no apparent reason, and you will end up wedged between the door and the bathroom. Other than a music festival, a train is the only thing you might have to buy a ticket for and still end up spending an hour standing next to a toilet.
I feel sorry for the commuters affected by the Southern Rail chaos, especially because I hail from Croydon and have experienced that mayhem firsthand. As if being from Croydon wasn’t bad enough. When I was growing up, and periodically going to India to visit my grandmother, my classmates would often ask me about the trains. There was an exotic fascination with people sitting on top of the carriages. v
I was once ejected from a Southern train for sitting in first class when the train was full. I informed the guard that, as the section was empty and I would have happily moved for people with first-class tickets, I didn’t see what the problem was. He said: “It’s far more serious than that – you have to keep that area clear in case people in wheelchairs get on.” I apologised and said: “I didn’t realise people in wheelchairs were allowed in that section.”
He replied: “Yeah – only if they have a first-class ticket. Otherwise we kick them off as well.”
Last week Southern Rail staff went on strike, leaving thousands of commuters facing a slightly improved service. Southern’s non-stop calamities this summer have added support to the idea of renationalisation. This debate is something I watched with great interest. I’m a standup comedian who can’t drive. I have never learned. I don’t trust my hand-eye coordination. You’re looking at someone who once dropped a cricket ball on to his own head during a routine catching practice; I don’t think it’s a great idea to have me in control of a high-speed metal death robot.
So I rely on the train system in this country. And I can tell you from firsthand experience that our train system is a mess. Carriages are full of unhappy travellers packed together like sardines, who have inexplicably paid for the privilege of being incarcerated. Periodically, everyone has to flee for cover, either by lying across the laps of the passengers lucky enough to have a seat, or by climbing into the luggage racks on the ceiling to allow the optimistically named “buffet” cart to pass through just in case anyone wants to spend £50 on a packet of crisps or a single fruit pastille.
And it’s not cheap, either. Train fares have increased way out step with inflation, meaning the percentage of our salaries we spend on train fares is now six times higher than many of our European counterparts – and that’s if you plan ahead. If you want to travel from London to Manchester, and have not booked a ticket, be prepared to sell a kidney or stay at home. Frequent train travellers have to plan ahead, booking months in advance to avoid massive fares. But there is still the risk that you will turn up on the day and the train will have lost its seat reservations for no apparent reason, and you will end up wedged between the door and the bathroom. Other than a music festival, a train is the only thing you might have to buy a ticket for and still end up spending an hour standing next to a toilet.
I feel sorry for the commuters affected by the Southern Rail chaos, especially because I hail from Croydon and have experienced that mayhem firsthand. As if being from Croydon wasn’t bad enough. When I was growing up, and periodically going to India to visit my grandmother, my classmates would often ask me about the trains. There was an exotic fascination with people sitting on top of the carriages. v
I was once ejected from a Southern train for sitting in first class when the train was full. I informed the guard that, as the section was empty and I would have happily moved for people with first-class tickets, I didn’t see what the problem was. He said: “It’s far more serious than that – you have to keep that area clear in case people in wheelchairs get on.” I apologised and said: “I didn’t realise people in wheelchairs were allowed in that section.”
He replied: “Yeah – only if they have a first-class ticket. Otherwise we kick them off as well.”
Virgin Trains East Coast staff to strike in row over jobs
It’s interesting how far we have moved on in our attitude to renationalisation. In the 1980s and 1990s, we consistently elected governments that essentially based their economic policies on the boardgame Monopoly, where public services were flogged off to the highest bidder. We were in thrall to Rich Uncle Pennybags, the moustachioed, monocle-wearing mascot we now call Mr Monopoly. (This is clearly a terrible name, by the way. It’s like me changing my name to Grandpa Nishy Mouthjoker.)
But there has been a change in public opinion, if not in government policy. A 2015 poll revealed nearly 60% of us support public ownership of the railways. Last year, the East Coast service was reprivatised. The government had taken over the running of the line after the collapse of the previous private ownership and, in public control, it had become profitable to the Treasury and reported positive customer satisfaction. It is now run by Virgin Trains and, on Friday morning, staff announced strike action over two weekends in August. This means that I can’t get back to London from the Edinburgh Fringe. Once again, comedians are punished. Truly we are the most oppressed people in society.
Frustration with the trains is inevitable, given the daily difficulties commuters face. In France, a near fully publicly owned rail system managed to give its passengers fares far lower than the UK for almost exactly the same amount of public rail subsidy between 1996 and 2010. Furthermore, the French government has invested profits in private rail companies, which then invest in companies that run British trains. Including – surprise! – Southern. As we haemorrhage money, we are lining the pockets of Riche Oncle Sacs d’Argent.
Nationalisation might seem like the preserve of old-fashioned, duffel-coat-wearing, Red-Flag-singing socialists, but it also appears to be economically efficient. Labour adoped renationalisation as a policy at its 2015 autumn conference, and Jeremy Corbyn is trying to make this a key platform in his plans to be the next prime minister. Corbyn might be on to a winner here. Time will tell. Anyway, I had better head off – I’ve got to start booking some train tickets for October 2025.
Tuesday 19 July 2016
Southern is a story of rail failure. But the real agenda is to crush the unions
This is the most farcical privatisation even by the comedic standards of British railways – and the aim is to defeat one of the last holdouts of organised labour
Illustration by Nate Kitch
Aditya Chakrabortty in The Guardian
You work in an office, study at a further education college, want to visit your nan in her care home. Whoever you are, wherever you go, you rely on the trains to take you there. Except you can’t rely on them – not at all.
The only thing predictable about the service is that it’s always awful: the train you want is odds-on to be late or cancelled. If the next one is running, it’s so crammed you can’t get on. Every commute brims over with aggro. Wedged in overcrowded carriages, fellow passengers suffer panic attacks. The local newspaper reports how other commuters have missed work so often, they’ve lost their job; how students have missed exams or holidaymakers haven’t made flights.
Aditya Chakrabortty in The Guardian
You work in an office, study at a further education college, want to visit your nan in her care home. Whoever you are, wherever you go, you rely on the trains to take you there. Except you can’t rely on them – not at all.
The only thing predictable about the service is that it’s always awful: the train you want is odds-on to be late or cancelled. If the next one is running, it’s so crammed you can’t get on. Every commute brims over with aggro. Wedged in overcrowded carriages, fellow passengers suffer panic attacks. The local newspaper reports how other commuters have missed work so often, they’ve lost their job; how students have missed exams or holidaymakers haven’t made flights.
Rail minister resigns as Southern commuter chaos continues
You read about a single mother forced to give up being a lawyer in London because dodgy trains mean she can never get home to put her son to bed. And you and everyone else are paying thousands each year for this shambles. To stand for dozens of miles and have extra hours, needless anxiety and gratuitous misery added on to your daily commutes.
If any of this sounds like you then my commiserations – for you are obviously a Southern Railway passenger.
At any other time, this summer’s chaos on the trains would have dominated the front pages. Even amid the turbulence of Brexit, it is still producing political ructions as big as the 50-foot hole that opened up under a south London track yesterday. This month, the transport select committee held an emergency sessionto find out why the service is in meltdown. Last week MPs staged an urgent debate in Westminster Hall, where they laid into Southern as a “joke”, “awful”, “terrible” and “rubbish”. Then they lambasted the government.
In turn, Claire Perry admitted she was “ashamed to be the rail minister”, but vowed to try to fix the situation “until I am kicked out”. The very next evening she quit. The new transport secretary, Chris Grayling, spent Monday hurriedly holding meetings on Southern, which is “top of [his] priority list”.
Britain is hardly short of political crises at the moment, but Southern surely counts as one. In an era of private-sector failure, this is one of the most extensive. Consider: Southern runs among the most economically important train services in the country. It manages 156 stations, covers 414 miles of track, and is responsible for around 600,000 journeys each day.
And it’s part of the largest train franchise in Britain, Govia Thameslink. Also known as GTR – majority owned by the Go Ahead group – it ferries commuters from across the south coast into London Bridge and Victoria. It takes tourists and business travellers to Gatwick and Luton airports. Its empire stretches from Peterborough to Tonbridge to Bognor Regis and Brighton. In a country that has, stupidly, bet everything on London, GTR is utterly crucial to the national economy.
And it does an appalling job. It cancels more trains than all the other rail firms in Britain put together. It boasts the worst record on significant lateness. It is the worst performing train operator of the lot. And it shows little sign of improving.
Its response last week to the cancellation of so many Southern trains was to issue a new timetable, removing one in six of its trains. Of all the oddities thrown up by rail privatisation, this must rank among the oddest: a train company in the business of running fewer trains.
Southern rail passengers protest at Victoria station, London, July 2016. Photograph: Matthew Chattle/Rex/Shutterstock
Perhaps the sheer stretch of GTR’s network is part of the problem, even though Perry claimed just two years ago that that would help it “deliver a step-change on key routes”. Running services into London Bridge during a botched overhaul hasn’t helped. And going by the evidence GTR has given to parliament, it also inherited investment-starved services. But GTR’s boss Charles Horton comes from failed franchise Connex. In his first interview in his current job, he advised passengers forced to stand to take a later or slower service. And with staff morale at rock bottom he has ended up in a huge clash with the unions.
Southern has been crippled by industrial action. Horton also regaled MPs with stories of “sick-note strikes”, although David Boyle – whose blogs on the Southern mess have become a must-read – has found no evidence to back that up. Boyle instead discovered that employees are so fed up they will no longer do voluntary overtime – leaving the company with too few staff for its advertised services.
But the fundamental problem must be the most farcical privatisation even by the comedic standards of British railways. Because this is privatisation in name only. GTR is paid billions by the government – which then takes their ticket receipts and even refunds customers if the trains are delayed. This makes it unlike any other train company in Britain – and gives GTR no incentive to attract more customers or to stop annoying them. In effect, Horton and his executives are government agents paid lavishly for failing to provide a service.
‘Southern cancels more trains than all the other rail firms in Britain put together.’ Photograph: Alicia Canter for the Guardian
We have a transport company that can’t really transport, and vast management fees paid to executives who clearly can’t manage. And the government acts as an apologist for a private company that’s meant to be providing a public service. Meanwhile, no apologies are forthcoming – in fact the boss of Go Ahead, David Brown, has just seen his annual pay soar above £2m, and the dividend payout to his shareholders has jumped to £37m. Someone is making a lot of money out of grotesque failure.
This is not just an issue for southern commuters, though – it’s a montage of everything wrong with business in Britain. Rather than strip GTR of its franchise, Tory ministers have instead made its conditions less onerous. Brown should be hauled in front of parliament to explain the chaos. Instead, he acts like an absentee landlord while officials at the Department for Transport say they couldn’t run the service as well as Southern does.
The question is why the government is going so easy on a failed train company. One answer comes from GTR’s dispute with the unions. The train firm wants to bring in driver-only trains, without guards to open and close the doors. The idea commands enthusiasm in Whitehall. It would certainly make rail management cheaper, if not safer.
But to strip trains of conductors requires the crushing of one of the last holdouts of organised labour. That’s not my extrapolation – it comes from DfT director Pete Wilkinson, who a few months ago told a public meeting, “We have got to break them [union members]. They have all borrowed money to buy cars and got credit cards. They can’t afford to spend too long on strike and I will push them into that place.”
Civil servants are supposed to be impartial, but this one wants to drive trade unions “out of my industry”. Mind you, Wilkinson has worked in Whitehall as well as in the City. He lives in Vienna but commutes to Britain. He’s a gamekeeper comfortable setting policy for the poachers. And he and his colleagues appear to be using Southern to take on the unions, in much the same way Thatcher used Ian MacGregor and the National Coal Board to break the miners.
An industrial dispute by proxy, a dysfunctional privatisation pushed by ideologues: our railways are in for an 80s revival for all the wrong reasons.
Friday 8 November 2013
Rail privatisation: legalised larceny
Train operators invest little cash but take massive profits. This wasn't what the Tories promised
A London commuter train: no free seats, no free Wi-Fi – but good news for shareholders. Photograph: Dan Kitwood/Getty Images
"It needs access to private capital, access to private management, it needs more money into the business, and all this will become possible." David Cameron on Royal Mail, October 2013
As they flog our public assets, government ministers always promise one thing: that they will be better cared for by the new private owners. Sure, they may look like hedge funds out for a fast buck, but we must consider them investors, who will plough in their own millions to burnish the family silver.
Thatcher said it in the 80s; and now, during this second coming of popular capitalism, her grandchildren are saying it too.
While giving away Royal Mail at a bargain-basement price, David Cameron promised the result would be a flood of private cash. When a unit supplying the NHS with blood was handed over to private equity, Jeremy Hunt's officials pleaded the need for investment. And you'll hear that justification over and over again, as the coalition privatises a further £15bn worth of companies, departments and assets currently held by the public.
Never mind ownership, ministers will soothe us: lie back and think of the investment. So let's do that. Let's go back to the last great privatisation and see how much investment it yielded.
Tuesday marks the 20th anniversary of rail privatisation, the day when the government finally pushed through the legislation to break up and sell off our train services. Throughout the flotation process, successive transport ministers pointed at the goodies to come. Take this reliably bouffant pledge from Steve Norris: "There is not the slightest shadow of doubt that, freed from the constraints of public sector financing, train operators … will generate substantially greater investment in the railways because of the privatisation of British Rail."
Was he right? I asked academics at the Centre for Research on Socio-Cultural Change (Cresc) to calculate how much companies such as Virgin and First Group are investing in their services. They looked at their return on capital employed, which is to say the amount train operators made on the money tied up in their business. A low ratio would indicate an industry doing as Norris and his colleagues foretold: ploughing cash into delivering a better service. A really high ratio would indicate the opposite: barely any cash going in.
The figures are astonishing. In the financial year ending in March 2012, the train companies gained an average return of 147% on every pound they put into their business. Forget about high: that is stratospheric. It suggests that – despite all the promises made by the freshly rehabilitated John Major – the train operators are investing barely anything, but making bumper returns.
If you're a pensioner, imagine a savings account that promised to give you next year a 147% return on your cash, rather than the 1% you'll typically get now. If you're a first-time buyer, imagine selling up next year at a 147% markup – impossible even in primest, most central London.
Other businesses would kill for the kind of low-investment, high-returns that Arriva, Stagecoach and the rest are making from their train sets. Big supermarkets get about £1.08 back for every quid they put in: all that stock ties up a lot of cash. Even the supposed profiteers over at Barclays would punch the air at a 10% return. For every pound the railway barons put in, they get £2.47 back.
And that most recent figure isn't a fluke. The Cresc team went back all the way to the start of the electronic database in 2004, and found that year after year the pre-tax return on capital employed was never less than 100%. Just as remarkable are the train operators' dividends: pretty much all the profit after tax was paid to shareholders.
No wonder Richard Branson is a billionaire with his own private island. No wonder Tim O'Toole, boss of FirstGroup, and Brian Souter, head of Stagecoach, are on more than a million quid a year each. They are rewarded handsomely for handing over every spare penny to their shareholders.
But by the same token, no wonder passengers in cattle class can't get free Wi-Fi, or even a seat on the evening train out of Euston: there's no cash left to make the services worth the often excessive fares. The really big improvements, such as the west coast mainline upgrade now enjoyed by Branson's business, are funded by taxpayers. Heads they win, tails we lose.
A train lobbyist reading this (hi there!) will tell you that measuring investment by the operators is barking up the wrong tree. Arriva and the rest are essentially commissioned by the government to run a line. But that ignores three things. First, the industry never stops banging on about its role as an "investor". Second, free cash without having to pony up much actual investment is very welcome to the Branson empire, among others.
And finally, if the operators are merely there as middlemen, to sell us tickets and clip them, then why do we need them? Specifically, why is Cameron so desperate to give the publicly-run east coast mainline to the private sector?
Capitalism is meant to be about private firms taking risks and reaping the rewards. The rail network on the other hand is about the public taking the risk and racking up huge debts, even while the private firms reap excessive rewards.
Look at those investment return figures again: that isn't the triumph of liberalisation; that's legalised larceny. It hardly bodes well for the next wave of sell-offs.
Tuesday 11 June 2013
The truth about Richard Branson's Virgin Rail profits
I once called Richard Branson a carpetbagger. A new report reveals that I was correct to say he built his business empire with millions from the taxpayers – only it's worse than I thought
Richard Branson: 'subsidy junkie'. Photograph: Sipa USA/Rex Features
Just over 18 months ago on this page, I called Richard Branson a carpetbagger. Surveying his greatest business hits, from trains to planes to cable, my piece noted a common method: the Virgin boss liked to move into industries sheltered from too much competition, pull subsidies out of taxpayers and then cash out.
That was the story of Virgin Rail (now 49% owned by Stagecoach); of Virgin Atlantic (where the same role is played by Singapore Airlines) and it certainly fits Virgin's takeover last year of Northern Rock, where Branson was really the frontman for the serious money from America and Abu Dhabi.
Sir Richard was not best pleased. Faster than you could say "stroppy tycoon on the phone", a response in his name appeared in the Guardian, accusing me of a "vicious" attack full of "vitriol". But admirable hand-waving aside, he did not rebut my argument: that for all of his talk of enterprise and getting employees "really motivated and steamed up", Branson has built his business empire with millions from you, me and other taxpayers.
Well, last Friday a report was published that, I'm sorry to say, proves me wrong. He's an even bigger subsidy junkie than I thought.
Produced by academics at Manchester University's Centre for Research on Socio-Cultural Change (Cresc), and published by the TUC, the study looks at how Britain's railways have fared over two decades of privatisation. It's a hefty publication – more than eight months in the making, running to 166 pages and with more detail on the rail network than any commuter will ever need.
But it boils down to one key finding: the only way Branson and the vast majority of train barons make their profits is through handouts from the taxpayer. And while you may know about the direct payments taken by Virgin and others, the Cresc team has also analysed another, indirect transfer from the public purse to private hands. By now, it's worth £30bn – yet it is barely acknowledged either by Network Rail or Westminster.
Let's deal with the open-air subsidies first. If you tot up all the direct subsidies Branson's west coast mainline service received between 1997 and 2012, and convert them to today's prices, you get a sum of £2.79bn handed over by us – before a single ticket has been sold. And it is certainly before you factor in the service's upgrade (worth around £9bn, and paid for by the public), and the fleet of Pendolino trains (again, largely subsidised by the government).
By 2012, Virgin Trains enjoyed spanking new rolling stock, a more frequent service and a superfast line that whisked passengers from London to Manchester in just two hours. With all that going for it, plus a booming economy up till 2007 and rising fuel prices, the company couldn't help but pull in the customers.
Most of the improvements were subbed by taxpayers, with Virgin paying the state an agreed amount in the last two years of the franchise. Yet Branson and his shareholders could declare a cumulative net profit of £538m and trouser £499m in total dividends. No wonder some canny infants like to play with train sets.
These sums are what got Virgin interested in rail in the first place. In his biography of Branson, Tom Bower records a phrase used by the billionaire's lieutenants while weighing up the west coast deal: "It's a licence to print money. Can't go wrong."
But there is another undisclosed source of cash enjoyed by Virgin and the rest of the industry. Network Rail has been cutting the track access charges levied on the train companies. Under its predecessor Railtrack, the fees were worth around £3bn a year; they're now nearly half that, at just over £1.5bn a year. This is an indirect subsidy given by the public to the train operators, and Virgin is the third-biggest recipient. So important is the handout that, were it taken away, Cresc estimates the company would have made a loss of up to £257m last year alone.
Just so there's no doubt on the numbers, the Cresc report was shown to the Association of Train Operating Companies weeks before it was published. The trade body had time to dismantle the maths; but while it evidently doesn't like the conclusions, it hasn't repudiated the figures. Years of indirect subsidies have left Network Rail £30bn in the red. This is debt guaranteed by the public, although very few people know about it.
What all this resembles is a looking-glass version of capitalism. The public are handing money to private businesses for them to take a clip and pay us back the rest. Just in case that wasn't ludicrous enough, remember that Virgin's parent company is listed in British Virgin Islands, a sunny tax haven that is a stop pretty far from Wigan. And as we've seen repeatedly with the east coast line, the ones who don't make a profit can simply walk away, dumping their service back in public hands. Heads they win, tails you lose.
Branson is not the sole offender here; he's simply the most flamboyant representative of a completely rotten system for siphoning money from the public into private hands. The entire industry, as Treasury adviser Shriti Vadera put it in 2001, is peopled by "thinly capitalised … profiteers of the worst kind". And as a former investment banker, she'd know what those looked like.
But the Virgin boss also loves to shout about the virtues of private ownership of public good. At the moment, he's lobbying hard to take control of the east coast mainline. If successful, he'll doubtless try to replicate his previous sweet deal, state-subsidised Pendolinos and all. And just like now, it will be us paying for it.
Wednesday 29 August 2012
Rail is a gigantic scam for siphoning off public money
Branson and FirstGroup have both gamed a disastrous privatisation. The case for public ownership is compelling
'Nearly 20 years after John Major’s disastrous privatisation, this is the reality of Britain’s railway: a byword for bewildering fragmentation, unreliability and exorbitant cost.' Illustration by Belle Mellor
Barely a month since the private security firm G4S crashed and burned in the runup to the London Olympics, we're back in outsourcing la-la land again. This time the battle is over the monopoly franchise to run passenger trains on Britain's most lucrative rail route, the west coast mainline.
Ministers have given the 15-year contract to the privatised bus operator FirstGroup, with a licence to increase fares by up to 11% a year, reduce services, downgrade catering and close ticket offices. Richard Branson, whose Virgin Trains has had the franchise since the 90s, is crying foul, and on Tuesday launched a legal action to halt the handover.
Labour wants MPs to be able to scrutinise the deal. But the transport secretary, Justine Greening, is determined to plough ahead regardless, potentially tying the hands of government for the next three parliaments. And the controversy follows uproar over plans for an average 6.2% rise in rail fares from January.
Commuters now routinely spend 15% of their income travelling to work on what is now the most expensive rail network in Europe. No wonder coalition MPs are lobbying for some relief from the drive to load more of the costs on to passengers: it is now cheaper to fly on half the popular routes around Britain than travel by more environmentally friendly rail.
The heavily subsidised rail privateers, whose top five executives paid themselves an average of £1m last year, are also supposed to cough up a bigger share. But there's little sign of that happening – and the west coast mainline deal helps explain why.
Forget the special pleading by Branson, who's made over £200m from rail privatisation. Virgin's own record is poor. But his accusation that FirstGroup is gaming the system is widely shared by industry analysts and insiders.
Greening claims FirstGroup offers the best deal for taxpayers. In reality it's based on heroic growth expectations of 10.6% a year and payments to government that are heavily loaded on to the contract's last few years. The company in fact has an incentive to dump the franchise as those payments come due, because they dwarf the cost of the bond penalty.
If FirstGroup – which is walking away from the Great Western franchise – defaults, it wouldn't be the first time. That's what happened with Bermuda-based Sea Containers and National Express, who had the contract for the east coast mainline before the last government was forced to take it over. But by then, both ministers and corporate executives would likely be long gone.
Nearly 20 years after John Major's disastrous privatisation, this is the reality of Britain's railway: a byword for bewildering fragmentation, unreliability and exorbitant cost – and a gigantic scam for siphoning off public money into the pockets of monopoly contractors.
Branson has raged at the government's "insanity" in awarding the west coast mainline franchise to FirstGroup. But it is the system itself that is irrational. Privatisation was supposed to cut public subsidy by boosting competition, investment and innovation.
In fact, it has done the opposite. Government funding has at least doubled in real terms, while fares have also increased, largely because of privatisation – including the costs of fragmentation and duplication; dividend payments to investors; contractors' profit margins; debt write-offs; and higher interest payments to keep Network Rail's debts off the government's balance sheet.
Taken together, those privatisation costs amount to around £1.2bn a year, according to a new thinktank report (Transport for Quality of Life's Rebuilding Rail), while genuine private investment is estimated at barely 1% of the total funding of the railway. It's hardly surprising that the mainly publicly owned rail systems in the rest of Europe – several of which now run bits of Britain's privatised rail – are cheaper.
The solution could not be more obvious. It's to rebuild a publicly owned and integrated railway. That can be done at zero or minimal cost, by bringing back each franchise into public ownership as the contracts expire. Freight apart, it can also be done under EU law, and with built-in local control. And saving the £1.2bn-a-year costs of privatisation over time would be the equivalent of an across-the-board cut in fares of 18%.
Rail renationalisation has long commanded large majorities in opinion polls. So you might imagine politicians would fall over themselves to sign up to a policy that's popular and saves money. The fact that they don't says something about the continuing grip of discredited ideology and corporate interests on Britain's political culture. Even a respected public transport pressure group like the Campaign for Better Transport, which now relies on funding from privatised transport companies, shies away from campaigning on the issue.
Labour is at last inching in the right direction. Its transport spokesperson Maria Eagle has floated the possibility of extending public ownership to rail services, and this week called for the east coast mainline to be kept in public hands. But with Tory defence secretary Phillip Hammond declaring the Olympics has changed his mind about privatisation and Liberal Democrat Vince Cable pressing the case for the outright nationalisation of banks, Ed Miliband can afford to be a bit braver. Last year he called for a break with the neoliberal model. Rail could be the place to start.
Friday 3 July 2009
Privatisation has been a train wreck
With National Express abandoning a franchise, the system is bankrupt. Railway nationalisation is the only rational solution.
guardian.co.uk, Thursday 2 July 2009 18.30 BST
The temporary nationalisation of the east coast mainline service should be another nail in the coffin of the privatisation of the railways. It shows once again what a bad deal for taxpayers the privatisation of the railways has turned out to be.
The government says it plans to return the franchise as quickly as possible to a private contractor, but it should instead take the opportunity to retain the line in public hands. Following, as it does, the fiasco of Railtrack, which brought the national rail network to the brink of collapse in 2002, and the collapse of Metronet, in charge of two thirds of the misguided public private partnership (PPP) on the tube, this is the right time to plan returning the entire national rail network to public ownership. If the government tossed aside the ideological blinkers of the Treasury and got that message, they would do themselves a great deal of good among passengers and taxpayers alike.
It is a complete con for the National Express group to walk away from the contract, leaving a gap in the national rail budget, forcing the state to bear the cost while the service is re-franchised – possibly at a lower value than the National Express contract – but insisting on its right to continue to operate other franchises unscathed. National Express says it has received "clear and detailed" legal advice that it does not have to hand back its London to Essex franchise and East Anglia routes. So it wants to run away from a problem on one line and let the rest of us pick up the pieces, while continuing to make profits from other lines.
The attempt of National Express to avoid any consequences for their other franchises from their abandonment of the east coast service is just another example of the privateers trying to take the public sector for a ride. As Lord Adonis says, "It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."
Time and again, we have seen the nationalisation of losses and the privatisation of profits. It's also the latest demonstration that it is a fairy tale that privatisation means the private sector takes the risk as well as taking its profit. In truth, every time a privatisation of a vital public service fails, the public sector picks up the tab. This culture of parts of the private sector fleecing the taxpayer has to stop.
Part of the problem is that civil servants are taken to the cleaners in the construction of the privatisation contracts by the private companies' sharper legal teams. One of the rationales for the tube's PPP was that it made no sense to hand billions of pounds of public money for tube upgrades over to London Underground management and civil servants who had such a poor record of delivering. Yet, these same civil servants were left to draw up the detail of the PPP contracts. They were completely turned over by the private sector.
But the real issue is that it is inherently wasteful to run these services on privatised lines. The nature of the privatising companies is that a significant proportion of the profits of their activities have to be paid in dividends to shareholders rather than reinvested in the service. This is money wasted. A publicly-owned company would be obliged to reinvest any revenues back into the transport system.
Furthermore, privatisation is justified on the grounds that the private sector is driven, through the rigour of competition, to be more efficient and more responsive to passengers' needs. This is a fiction in the case of a natural monopoly like a railway. Apart from the brief period of competition among bidders for contracts, there is no day-to-day competition at all – no one is going to build a rival railway line and poach passengers from the private franchisee. They are under no pressure from any competition at all. In such circumstances, it is more rational, and makes more sense in terms of sustaining investment, for rail services to be publicly-owned.
Nor is it the case that public ownership of the rail network naturally has to involve poorer management than the private sector.
There are many publicly-owned rail companies all over the world that provide services that British transport users can only envy. The task is to build up good quality management, including the best management from around the world, overseeing real investment that meets the needs of rail travellers.
It shouldn't just be the east coast service that's nationalised and it shouldn't just be temporary. Ultimately, the rail network would
be more rationally run in the public sector.
The government says it plans to return the franchise as quickly as possible to a private contractor, but it should instead take the opportunity to retain the line in public hands. Following, as it does, the fiasco of Railtrack, which brought the national rail network to the brink of collapse in 2002, and the collapse of Metronet, in charge of two thirds of the misguided public private partnership (PPP) on the tube, this is the right time to plan returning the entire national rail network to public ownership. If the government tossed aside the ideological blinkers of the Treasury and got that message, they would do themselves a great deal of good among passengers and taxpayers alike.
It is a complete con for the National Express group to walk away from the contract, leaving a gap in the national rail budget, forcing the state to bear the cost while the service is re-franchised – possibly at a lower value than the National Express contract – but insisting on its right to continue to operate other franchises unscathed. National Express says it has received "clear and detailed" legal advice that it does not have to hand back its London to Essex franchise and East Anglia routes. So it wants to run away from a problem on one line and let the rest of us pick up the pieces, while continuing to make profits from other lines.
The attempt of National Express to avoid any consequences for their other franchises from their abandonment of the east coast service is just another example of the privateers trying to take the public sector for a ride. As Lord Adonis says, "It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."
Time and again, we have seen the nationalisation of losses and the privatisation of profits. It's also the latest demonstration that it is a fairy tale that privatisation means the private sector takes the risk as well as taking its profit. In truth, every time a privatisation of a vital public service fails, the public sector picks up the tab. This culture of parts of the private sector fleecing the taxpayer has to stop.
Part of the problem is that civil servants are taken to the cleaners in the construction of the privatisation contracts by the private companies' sharper legal teams. One of the rationales for the tube's PPP was that it made no sense to hand billions of pounds of public money for tube upgrades over to London Underground management and civil servants who had such a poor record of delivering. Yet, these same civil servants were left to draw up the detail of the PPP contracts. They were completely turned over by the private sector.
But the real issue is that it is inherently wasteful to run these services on privatised lines. The nature of the privatising companies is that a significant proportion of the profits of their activities have to be paid in dividends to shareholders rather than reinvested in the service. This is money wasted. A publicly-owned company would be obliged to reinvest any revenues back into the transport system.
Furthermore, privatisation is justified on the grounds that the private sector is driven, through the rigour of competition, to be more efficient and more responsive to passengers' needs. This is a fiction in the case of a natural monopoly like a railway. Apart from the brief period of competition among bidders for contracts, there is no day-to-day competition at all – no one is going to build a rival railway line and poach passengers from the private franchisee. They are under no pressure from any competition at all. In such circumstances, it is more rational, and makes more sense in terms of sustaining investment, for rail services to be publicly-owned.
Nor is it the case that public ownership of the rail network naturally has to involve poorer management than the private sector.
There are many publicly-owned rail companies all over the world that provide services that British transport users can only envy. The task is to build up good quality management, including the best management from around the world, overseeing real investment that meets the needs of rail travellers.
It shouldn't just be the east coast service that's nationalised and it shouldn't just be temporary. Ultimately, the rail network would
be more rationally run in the public sector.
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