Study claims privatisation cost £51bn more than BR

THE privatised passenger railway could have cost £51 billion more to operate than if British Rail had remained in state hands, a new study suggests.

A Very Costly Industry - the cost of Britain’s privatised railway was written by John Stittle of Essex University and Sean McCartney of the University of London. It was published on May 20.

The £51bn figure represents a best-case scenario of British Rail reducing its costs by 2% per year from 1997-98, had unit costs remained stable at 1993-94 levels. Even so, the projected figure of £132.5bn is still less than the actual cost of running passenger services from 1997-98 to 2013-14 of £154bn, a difference of £21bn.

However, while under the ‘steady state’ scenario British Rail would have been more efficient than the privatised railway in most years from 1997-98 to 2010-11, the authors conclude that if passenger growth had been matched, the cost per year of the privatised railway would have been less in each year from 2011-12 to 201314. In the last year examined in the study, British Rail’s hypothetical costs are estimated as £10.2bn, while those of the current passenger railway were £9.3bn, excluding freight operators.

Based on historic accounts, the authors suggest that BR’s unit costs of running the passenger railway would have fallen as traffic levels have increased. They also say that while expectations might have been a reduction in unit costs, and “possibly even a profitable industry without need of public subsidy… this has not happened: costs and subsidy have both increased. The privatised industry has incurred higher costs than would have been incurred by British Rail.”

They add: “One has to posit a serious deterioration in British Rail’s efficiency in order to eliminate its relative cost advantage over that 17-year period [from 1997-98 to 2013-14].”

The study “rules out” the need for all companies in the rail industry to make a profit, and the “leakage” of dividends and interest payments for the projected higher overall costs: “In the opinion of the authors, the cause is more likely to be found in the perverse decision to dismantle an industry that was historically vertically integrated for very good reasons, and the dysfunctionality of the resulting structure.”

The paper also examines finance costs. Based on BR’s debts at the end of 1993-94, it suggests that in 2013-14 prices it would be £4.3bn, with interest charges of £215 million. This compares with Network Rail’s debt of £32.98bn in 2013-14, which accrued interest charges of more than £1.5bn.

Stittle and McCartney conclude: “The evidence and analysis presented in this paper strongly suggest that in cost terms alone, the dismantling of British Rail was ill-judged and has proved to be a major public policy error… proponents of privatisation argued that the private sector would improve efficiency and provide better value for money over the ‘dead hand of the state’. But this was largely an illusion, and indeed now, in a farcical twist that nobody could have foreseen, many of the franchises are actually run not by private enterprise but by stateowned European rail operators - the very ones that British Rail was outperforming in the 1980s.”