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Lessons From Uk Rail Privatization Germany

Lessons From Uk Rail Privatization Germany



A lecture to the annual seminar of Deutsche Bahn on the lessons from rail privatization in the UK

A lecture to the annual seminar of Deutsche Bahn on the lessons from rail privatization in the UK



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    Lessons From Uk Rail Privatization Germany Lessons From Uk Rail Privatization Germany Presentation Transcript

    • LESSONS FROM UK RAIL PRIVATIZATION Iain Murray MA MBA DIC Senior Fellow Competitive Enterprise Institute Washington DC
    • Railways Act 1996
    • The success of privatization Ridership up, revenues up, accidents down
    • Passenger Journeys Climbing Office of Rail Regulation, 2006
    • Revenues Rising Office of Rail Regulation, 2006
    • Unions Happy
      • Train drivers’ wages have soared
      • RMT’s bargaining position has improved
      • Position summarized by former ASLEF General Secretary Lew Adams
    • Lew Adams, Nov. 29, 2004
      • “ I was vehement that we wanted to stay in the public sector, and of course there were all the usual concerns trade unionists have regarding privatization, safety issues, job losses, protecting the conditions of service, and pensions.
      • “ But accepting the will of Parliament, it was time to look at the arguments. So we said to management, ‘Well, if that’s what you want, this is what we want.’
      • “ Today I cannot argue against the private entrepreneur coming into the rail industry. We are running 1,700 more trains per day since it was privatized. The entrepreneurs built traffic to the extent that we are having to build more infrastructure.
      • “ What is true is true: 4.2 billion pounds spent on new trains. We never saw that in all the years I’ve been in the rail industry. All the time it was in the public sector, all we got were cuts, cuts, cuts. And today there are more members in the trade union, more train drivers, and more trains running.
      • “ The reality is that it worked, we’ve protected jobs, and we got more jobs. If a private company is making more money, I look at that from a union’s point of view, ‘Well, that looks like a wage increase to me.’ And we can argue that.
      • “ And the more secure they are and the more productive they are in delivering train services, well, that means more jobs. I was there when the public railways had some 600,000 people and it came down to 100,000 in the time I worked in the rail industry. Now we are expanding on jobs.”
    • A Safer Railway
    • The Downside The infrastructure problem and the collapse of Railtrack
    • …with one exception
    • A Significant Infrastructure Problem
    • Accidents and Miscommunication
      • Ladbroke Grove crash – 31 dead
        • Cullen Inquiry blames lack of communication between Railtrack and TOC
      • Potters Bar – 7 dead
        • HSE blames miscommunication between Railtrack and maintenance firm
      • Hatfield – 4 dead
        • “ The accident at Hatfield was not caused by a broken rail. It was caused by total mismanagement by Railtrack and its contractors.” Chris Garnett, CEO of GNER
    • Poor condition of infrastructure
      • Decades of underinvestment
      • “ The key flaw in the old system was the Treasury’s obsession with controlling the requirement for cash, which makes no sense in a long-tem business like the railways” – Christian Wolmar
      • Railtrack 10 year Network Management Plan an improvement but inadequate
      • Railtrack focused on station regeneration
      • Separation meant slow approach to rail maintenance and renewal
    • National Audit Office 2004
      • The view of the rail industry, as reported by Mercer, is that under-investment, coupled with poor asset management, had resulted in the deterioration of network assets… While there has been a significant investment in new track since the Hatfield accident in 2000, the rate of track replacement in the preceding 15 years had been declining. British Rail estimated that in order to maintain track condition at a "steady state", around 800km of track needed to be replaced every year. This was not being achieved in most years, and it is therefore likely that the state of track, allied with management failings, has impacted adversely on the operational performance of the network.
    • Problems of Separation
      • Perverse incentives
      • Lack of strategic overview
      • Heightened information costs
      • Scapegoat for problems
      • Political interference
      • Lack of investor confidence
      • Over-regulation
    • Information Costs
      • The privatisation of maintenance and renewals work, through the establishment and sale of infrastructure companies, resulted in many former British Rail engineers being lost to Railtrack. Moreover Mercer found that, at the time of privatisation, employment by Railtrack was viewed as lacking in career prospects compared to the opportunities outside the company. For these reasons Railtrack lost much of its rail expertise and engineering skills. Infrastructure maintenance contracts were fixed price and closed book - in other words Railtrack didn't have a clear idea of what work was being done for the price paid. Railtrack had also failed to establish a register of asset condition. The combination of the loss of experienced staff, limited access to its outsourced contracts and the lack of an asset register meant that Railtrack had inadequate asset knowledge to run its business effectively.
      • - National Audit Office, 2004
    • Political Interference
      • “ In 1998, even though on practically every measurement for safety and performance the industry was improving at a prodigious rate, John Prescott [Deputy Prime Minister to Tony Blair] labeled Railtrack a “national disgrace.” He personally appointed a new regulator, a sharp, ambitious lawyer named Tom Winsor. Winsor issued a demand for 12.5 per cent better performance, on pain of the biggest ever fine in corporate history. He boasted: “I’m not knocking Railtrack. I’m knocking it into shape.” In 1999 performance improved by 10 per cent, but Railtrack still copped a £10 million fine.”
      • -Peter Oborne, The Spectator, Oct 18 2001
    • Railtrack Credit Rating
      • Privatization: AA-
      • January 28, 2000: single A (concerns about tougher regulation, political hostility, rising investment costs and poor project management)
      • June 2001: Fall from FTSE-100 does not affect credit rating
      • October 2001: double C (administration)
      • November 2001: double B+
      • On October 3, 2002, HM Government rejected the private equity funding model in favor of direct government support
    • Over-regulation
      • “ Four people were killed at Hatfield, where [Railtrack] really was culpable. It has been pointed out since that traffic accidents claim that many people most days of the year. The reaction was disproportionate: Trains were slowed close to walking pace as a hunt was made for rails in the same condition as the one that caused the Hatfield crash. None was ever found. Since Hatfield, running the company has been close to impossible, and the management has become paralyzed by fear of being jailed on manslaughter charges as much as by lack of investment.”
      • - Oborne, op. cit., on the effects of Hatfield
    • Lessons from Railtrack Failure
      • Privatization is meaningless if the industry is not free to use private sector solutions.
      • Enforced separation of infrastructure and operations increases information costs to a level that may affect the viability of the industry, and could potentially introduce distorting regulatory costs if one aspect is regulated more than the other
      • Political risk can reach crippling levels if the industry is not protected from arbitrary government decisions.
    • Lessons from US Deregulation
      • Light regulation that targets neither grids nor flows allows the private sector the most latitude to bring its skills to bear.
      • Freedom to secure contracts at mutually beneficial levels is good for the industry.
      • Removing regulation can lower costs and raise capital investment to substantial levels if the industry is free to choose its own routes.
    • Lessons from Both
      • Excessive regulation degrades the industry as much as public ownership—in general, the less government involvement the better.
      • Regulations, laws or ownership structures that lead to underinvestment or disinvestment are bound to be harmful. Investment in rail infrastructure and equipment cannot be shortchanged without eventual significant damage to every party involved.
      • Private investors will not put capital in unless they see an opportunity to make money on their investments.
      • Regulatory stability is important to maintain investor confidence.
      • The complexities of rail operations require smooth information flows. Vertical integration helps to achieve this.
    • Considerations for Privatization High Low Information Costs High Medium Cost Delayed Quick Ease of Privatization High Low Competition Separated Model Integrated Model
    • Suggested Route Map to Privatization of Amtrak
      • Congress lock-boxes funds for infrastructure expenditure
      • Get key personnel on board with experience of private railroad operations
      • Restructure to sell off non-core lines
      • Prepare slimmed-down company for sale or IPO
      • If necessary, create regulatory body with minimal powers
    • Implications for DB
      • Strongly recommend an integrated model to
      • - retain knowledge/ reduce information costs
      • - provide strategic overview
      • - resist interference from politicians and regulators
      • - maintain investor confidence