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British Rail Sidetracked

by Erik Sandblom

This article has been adapted from one in the Swedish magazine TĹG, the August 1996 issue. It gives a good overview of how British Rail was privatised.

The former British government succeeded in privatizing all of British Rail before the Labour party won the election on May 1st. Passenger rail traffic has been franchised, but the freight and Eurostar high speed and services have been sold outright. The British railway administration Railtrack has also been sold.

The Brits were railway pioneers, and now Britain is among the first to privatize the railways, and is certainly the fastest. The whole railway business has been reformed since late 1993, and now everything is sold.

Passenger services have been split up in order to ease entry into and exit out of the business; this facilitates competition. A precondition of putting rail services out to tender is that vehicles are available. This has been achieved by creating three rolling stock companies, ROSCOs. They lease vehicles to the train operating companies, TOCs. The tracks are of course maintained by Railtrack.

Passenger services are subsidized by the Office of Passenger Rail Franchising, OPRAF. Certain especially lucrative franchises instead pay a kind of licensing fee to OPRAF. Freight services are not subsidized.

Passenger services have been fragmented

The Train Operating Companies bid for the right of operating a certain train system on a certain line or from a certain station. The TOCs promise to maintain frequencies and not raise ticket prices, and for this they get cash from the OPRAF. They lease locos, cars and multiple units from the ROSCOs. They were created by dividing up BR's fleet into three, roughly equal in quantity and quality. All three were privatized during the winter of 95-96. The TOCs are responsible for minor maintenance, while the ROSCOs perform major refits and such. The TOCs pay track charges to the regulated monoploy Railtrack, which was sold on May 20th and immediatly rose substantially on its offering price. Track charges are watched by the Rail Regulator, which also is in charge of licensing the TOCs.

Though the ROSCOs theoretically compete with each other, many contend that this is nonsense since a TOC has very specific needs due to the nature of the railway it operates. Therefore many TOCs have no choice about which ROSCO they use. This may change in the future as more new standardized equipment is purchased. There is a trend in train building towards making more interchangeable parts and components, in order to lower production costs yet still cater to different needs.

Privatization has not meant that the government has washed its hands of financing the railways; this is the role of the Office of Passenger Rail Franchising, OPRAF. OPRAF gets its money from the central government and divides it up among the TOCs. The bank NatWest says that all of former British Rail now gets almost 2 billion pounds per year from the government, much more than before the reform. However, the figure is set to fall yearly.

The British privatization, though uniquely far-reaching, does use some very common ingredients. For example, France and Sweden, to name just two countries, also have put commuter traffic out to competitive tender. In France, operators operate the trains for 15 or 20-year periods, and in Sweden the period is around four years. A short period increases downward pressure on prices, but a long period increases the inducement to buying new trains. British franchise periods are usually seven years, but those involving a requirement to buy new trains usually run to 15 years.

Bus companies run trains

The bus company National Express will run the trains London -Nottingham/Sheffield/ Leeds, and gets subsidies in the beginning. But on average, NE will pay OPRAF one million pounds annually for the franchise. Many of the passengers on the routes are business travellers. NE has also bought the Gatwick Express franchise, which costs NE 12 million pounds annually on top of the buying price.

Network SouthCentral, which has been taken over by a subsidiary to Générale Des Eaux called CGEA Group, will be subsidized by 85,3 million pounds; this will be lowered to 34,6 million by the year 2002. Since June last year, Network SouthCentral, now part of the Connex network, has been running a denser schedule, with trains running as often as the Underground trains. The trains and stations will also be renovated.

CGEA Group has also put in bids for running services in Germany. They believe that a good record in Britain will be an asset in similar contests on the Continent. The EU-directive about separate railway administrations and train operating companies will give private companies access to the rail market just as in Britain, CGEA Group hopes.

Virgin buys the Eurostar

The passenger services through the Eurotunnel have not been franchised. The British share of the Eurostar service has been sold to London & Continental Railways, where Virgin plc is a shareholder. L&CR has fewer constraints than the other TOCs, though they have to build the new railway from London to the tunnel entrance. The railway is thought to cost 3 billion pounds, and the government will contribute 1,4 billion.

Virgin started as a record company, but now has an airline and a soft drink, among other businesses. The record company was sold to finance expansion into other businesses. Virgin is known for smart marketing and for being able to increase sales. L&CR is planning to introduce (has introduced?) some new tickets,

This may seem peanuts, but keep an eye on Eurostar in the future. The handling of ticket sales were heavily criticized, keeping passenger volumes at just three million in 1995, instead of 13,5 as budgeted. Ticket bookings untill recently were done on SNCF and BR's system, but a typical desirable Eurostar customer books his or her ticket at a business travel agent which uses the airlines' booking systems. This problem has now been solved and Eurostar tickets are available through several booking systems.

Passenger numbers are increasing, and when the new railway between London and the tunnel is ready in 2003, 30 million passengers are hoped to make the two and a half hour trip, 30 minutes faster than now.

When this article was written, in the summer of 96, the trains to Paris were 60 % full, and the Brussels trains only 30 %. One Eurostar train takes as many passengers as two Boeing 747 jumbo jets. In the summer of 1996, there were sixteen departures per day in each direction between Paris and London, so capacity is huge. Virgin's boss Richard Branson says that the Eurostar trains have so far only scratched the surface of their potential. "The airlines will find many more of their business passengsers changing over [to the train]", he said at a press conference in May 96.

Wisconsin Central buys freight services

Freight services have been divided up in companies which have been sold with locos, cars and staff. The container train business Freightliner has been sold to its management. Freightliner transports containers from deap sea ports to inland points. This work is done with 60 locos, but they are considering buying 40 more locos second hand. Three years ago, Freightliner lost 36 million pounds on revenues of 70 million.

Freightliner may get competition from the English, Welsh & Scottish Railway, which may run container trains. Together with some banks, the American company Wisconsin Central Transportation in February 96 bought the three former British Rail companies Loadhaul, Mainline Freight and Transrail, for 225 million. Wisconsin has also bought RES Rail Express System. All four companies have been merged into EWS.

The freight business has thus been divided up into several companies, only to be merged again. Ed Burkhart, Wisconsin's boss, says that it would cost 20 % more to run the companies separately. One source says that half of EWS 7600 employees may lose their jobs.

EWS in May 96 ordered 250 diesel electric freight locos from General Motors Electromotive Division in the USA for about 250 million pounds -- more than what Wisconsin payed for the whole company the same year! Motors will be built in the state of Illinois, while final assembly will be done in the province of Ontario, Canada. The locos will develop 3000hp.

Several other companies use similar locos, Class 59. English National Power uses them for coal transports to power plants. NP bought them partly because they were available before the privatisation spectacle started. Now, Railtrack demands that new loco types go through extensive testing before they may be put into service, and a small company cannot carry that cost. Railtrack's safety authority is called the Electrical Engineering & Control Systems Safety Assesment Panel, EECSAP.

NP and Direct Rail Services are two companies that have started rail freight services with their own vehicles and staff. (This is forbidden on the passenger side.) DRS is a subsidiary to British Nuclear Fuels which was started to guarantee BNF's transport of nuclear fuel to Sellafield. The line in question was unprofitable and in danger of being closed.

DRS and NP's experience is, according to the Railway Gazette, that it is hard to start a train operating company due to red tape. Insurance is particularly difficult as the TOC is responsible for accident costs up to 155 million pounds, even to third parties such as house owners along the railway. If 250 locos cost 250 million pounds, you can guess what the accident responsibility means for a small company!

Further, line knowledge is a safety requirement, and if a driver has been absent from a line for more than six months, he or she has legally "forgotten" the line. As TOCs do not want to lose their drivers to potential competitors, it is very hard to find drivers.

When the trains stop to change drivers, in one case they do that 20 metres from the platform in order not to pay fees for use of it, writes the Railway Gazette.

Controversial reform

When in opposition, the Labour party opposed the plan, and said they would tear it up. To prevent that, the ruling Conservatives hurried the reform process and sold as much as they could; in the event, the Labour government left the reform intact. One tory involved in the process says that this privatization has generated more resistance than any previous ones.

A pressure group has been formed, Save Our Railways, which in December succeeded in delaying the sale of the three first TOCs, by revealing irregularities. The three TOCs were

The Financial Times thought Railtrack should not have been sold before the privatized TOCs had been tested in "real life", becuase this made it more difficult to estimate how much they could be charged for track access in practice. The Railway Gazette, however, pointed out that the track access charges had been fixed for several years to come. The FT thinks that most of Railtrack's future profits will come from rationalizations.

Too generous

Railway Gazette said that conditions are too generous to Railtrack and too hard on the TOCs. They say that the TOCs, not Railtrack, are responsible for costs arising from disturbances in the traffic. Railtrack should answer for this, as better tracks make for fewer and less serious disturances. Further, Railtrack stock holders received dividends of 69 million pounds only few months after the sale.

But it turns out that Railtrack has underspent on infrastructure maintenance by 100 million pounds due to "an external financial contribution determined by the treasury". This seems to mean in plain English that the treasury has ordered a profit to be made, regardless of the company's responsibilities. Railtrack's future profit is in one way guaranteed since track access charges won't be changed before 2001, and these conditions seem to accept eating at capital by not performing proper maintenance, the Railway Gazette writes.

The new Labour government has promised to impose further regulatory constraints on Railtrack. One such regulation may conern the use of some prime real estate in city centres.

Though the track access charges have been fixed for five years, there is no guarantee of the subsidy level to the TOCs, though this would be a breach of contract. The government could say that the state of the nation's finances forces a lowering of subsidies. If that results in less traffic, Railtrack's stock holders will lose out, the Railway Gazette notes.

Railtrack has been sold by inviting subscriptions to stock issues. Those who could buy stocks payed in installments, the first one was 190 pence. On May 20th 1996, the first day the stock was traded, it closed at 220,5 pence, 30,5 pence higher than the first installment. This gives a stock market valuation of the fully payed company of 2 billion pounds. The stock holders own 16 000 km track, 2500 stations, and more than 40 000 bridges, tunnels and viaducts. Rather a biggish railway club.

Sources: Spring 1996 issues of the Financial Times and the Railway Gazette, and facts from Lennart Malmsten. Thanks.

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