Breaking-up of BR
On the 25th anniversary of the Act that privatised British Rail, PHILIP HAIGH looks back at the tensions, arguments and challenges it caused and talks to some of the individuals involved
Twenty-five years on from the Act that privatised British Rail, RAIL looks back at the tensions and challenges it caused.
BRITISH Rail ran its final train on November 21 1997 - a date largely forgotten in the history of Britain’s railways. RAIL 319 recorded the sale of Railfreight Distribution to English Welsh and Scottish Railway (EWS) on November 22 with a brief story tucked in a corner of page eight but not RfD’s final working under BR, which was the 2315 Dollands Moor-Wembley.
An earlier issue ( RAIL 302) gave more attention to BR’s final passenger train - sleeping car services leaving Edinburgh and Glasgow at 2355 on March 31 1997. That was five minutes before the contracts were signed to transfer ScotRail from British Rail to National Express.
Speaking at Edinburgh Waverley that night, BR Chairman and Chief Executive John Welsby said: “The handover of ScotRail marks the end of almost 50 years’ passenger operation by British Rail. The corporation has achieved a great deal over the years, and the millions of current and former railway staff have much to be proud of.
“They have laid the foundations on which Britain’s new railway organisation can build.”
Present at the celebrations to mark the switch was Blairhill station ticket clerk John Bowden who had joined the railway in June 1947, just six months before it was nationalised. He was once more working for a private railway company but, unlike Blairhill’s 1947 owner, the London and North Eastern Railway, his new company just ran trains. ScotRail did not own its tracks, stations or signalling. British Rail transferred its infrastructure to Railtrack, which the government floated on the stock exchange in 1996 to privatise it.
Margaret Thatcher’s government privatised several major industries in the 1980s. Gas, water, electricity and telecoms all switched from state-control to private shareholders.
The switch generally brought better services as the companies paid more attention to their customers. However, not everyone welcomed the move and complaints continue today about private companies charging high prices. At least with competition, it’s possible to find another supplier offering a better deal, which would not be the case with a nationalised monopoly.
But Thatcher didn’t touch the operating arm of the railway. Instead, she agreed the sale of BR’s subsidiary business such as its hotels and catering operations, wine cellars and laundries. The first hotels went in 1981. Sealink’s ferries and harbours in 1984 and BR’s heavy engineering workshops later that decade.
These disposals put BR into a tricky position. The cash they raised helped its finances but showed that privatisation was possible and that each side could still function whether or not the other was public or private.
BR was looking for private money and private investment throughout the 1980s and in railfreight it had some success, with Foster Yeoman investing in its own locomotives and wagons, for example. Pamphleteers and think tanks debated options; BR considered leasing the Slough-Windsor branch to a private operating company and others suggested the London, Tilbury and Southend route would be a good candidate for private operation. There was consideration of selling BR as a whole, or splitting it into regional track-andtrain companies, or creating a track authority on which operating companies ran trains. Different transport secretaries came with different ideas.
Transport historian and economist Terry Gourvish notes that the biggest hint came in 1989 from Anne Parkinson, the wife of Transport Secretary Cecil Parkinson. Gourvish wrote in British Rail 1974-1997 that she “presciently volunteered the opinion, on the footplate of the 1550 King’s Cross-Leeds train on March 9 1989, that the best option for privatising British Rail would be to create a separate track company, with a number of businesses hiring space to run their services”.
At the same time, BR was reorganising itself. Under the ‘Organising for Quality’ (OfQ) banner it was creating business units - three for passenger trains (InterCity, Provincial (later Regional Railways) and Network South East) and one for freight (Railfreight) – rather than its traditional, vertically integrated, regional structure. These business units were split into profit centres.
OfQ kept the link between track and train with each business unit responsible for the track on which it was the majority user. So InterCity looked after long-distance main lines and NSE the commuter routes around London for example. Clearly, some tracks were shared in use but not in maintenance.
While OfQ was BR’s attempt to reform itself rather than be reformed, it did not silence those who wished to see it privatised. John Major had replaced Margaret Thatcher as Prime Minister (toppled by Conservative infighting over Europe) and Malcom Rifkind replaced Parkinson as Transport Secretary, but not before Parkinson had pledged privatisation at the Tory conference in autumn 1990.
Rifkind struggled with his options of selling BR as a single concern, disposing of it by region (the Japanese model), or business unit or creating a track authority and train operators. It was not a simple choice and some parts of BR were better suited to one option than another. Selling BR’s freight arm outright was the simplest part but InterCity and NSE offered no clear advantages between remaining vertically integrated or being split between track and train. The track option would more easily allow competition between operators but it made it much harder to plan major investments that needed both sides to be co-ordinated and delivered together.
BR was planning major investments. In 1991, it said it was working on four major schemes that would “re-draw the map of London’s railways”. They were a PaddingtonHeathrow line (a joint project with Heathrow Airport owner BAA), CrossRail with London Underground to provide a new east-west line linking Liverpool Street and Paddington, Thameslink 2000 to provide greater capacity and more connections through the City, and Kent Express which would use a new main line through Kent from the Channel Tunnel to provide fast commuters services. Twenty seven years later, Heathrow Express is long-established and Kent commuters have been using express services to St Pancras for a decade, but Thameslink 2000 is only just beginning to deliver its promises. Passengers must wait until next year to travel under London on Crossrail (which BR coloured
purple on its 1991 map, just as today’s maps use).
BR was also turning its mind to upgrading the West Coast Main Line ( RAIL 839). This was to show the difficulties of splitting track and train. The train side delivered the 140mph stock it promised but the track side failed and eventually delivered a 125mph line. But that’s to jump into the future, in 1991, there was no clarity from government about what option it would pursue.
In July 1991 the European Community published Directive 91/440 which called on member states to split infrastructure from operations and create open access for international services. Rifkind took this further and announced he wanted to see open access for domestic passenger and freight operations.
Many doubted Major’s Conservatives would be in a position to deliver anything. His government was struggling on many fronts and was widely expected to lose the election that was likely in 1992. Meanwhile, Labour was promising to halt all moves towards privatisation.
There were experiments with private services on BR lines. In addition to Foster Yeoman, and later ARC, Charterail under Managing Director Robin Gisby leased ‘piggyback’ wagons to carry lorry trailers and hired locomotives and crews from BR. It started in 1990 but became unhappy with the reliability of BR’s Class 47 locomotives and the price BR was charging. The venture folded in 1992.
The same year Stagecoach took to the rails by tagging day coaches leased from BR and painted in Stagecoach colours to sleeping car trains between London and Scotland. It lasted just five months.
Against expectations, Major won April 1992’s election. He might have lost 41 seats, and Labour gained 42, but Major returned to 10 Downing Street with an absolute majority. The inevitable reshuffle of cabinet ministers replaced Rifkind with John MacGregor. He pushed quickly to publish a White Paper three months later that ruled out selling BR as a single entity.
InterCity Managing Director Chris Green recalls the shock. “InterCity’s euphoria at becoming a true business on April 6 was dashed by the election results just three days later on April 9 when John Major won with a manifesto which committed them to privatising the rail network,” he told RAIL in 2018.
At just 24 pages, MacGregor’s paper was short but readers who persevered to the final page were left in no doubt what MacGregor wanted. That final page pledged that government would “before the end of this Parliament”:
Sell BR’s freight and parcels businesses to the private sector.
Establish a franchising authority and franchise a substantial number of passenger services.
Restructure BR to own and operate track and infrastructure separately from the operation of services.
Establish the rights of access for new operators to the rail network.
Establish an independent regulator to protect the interests of consumers and to supervise access to all track and charges for its use.
Provide opportunities for the sale or leasing of stations.
The White Paper said BR would create Railtrack to own track and infrastructure and that it would remain public for the medium term but added that government would take powers to privatise it in the longer term. Government would require Railtrack to contract out its own support functions, such as track maintenance, “where that offers value for money”.
The White Paper also said government wanted to see investment in infrastructure continue, largely financed from charges to train operators. It was prepared to provide direct investment support for projects that might not earn an adequate financial return but were satisfactory when wider benefits were taken into account. Railtrack would need to consult train operators and would look for private sector contributions, it said. “Indeed, the private sector might wish to finance certain investments, eg new lines and station redevelopment without any recourse to public funds,” the White Paper added.
It’s clear from this that government hoped it would no longer have to fund expensive rail infrastructure.
Green remembers: “We were especially concerned at the proposed separation of track and trains to create competition on rail. We quickly discovered that this concept of rail competition was based on political and economic dogma rather than reality.
“We dealt with reality and knew that the railway production line was totally different to the freedom of a motorway. The rail network is a tightly planned timetable where trains have to be carefully pathed across junctions. The team was opposed to the creation of a separate Railtrack owning infrastructure and timetabling.”
MacGregor’s paper listed what it saw as the benefits of private sector involvement and liberalisation. It foretold of improved services from more concern for customers’ needs, competition and an end to monopoly, management freedom, clear and enforceable quality standards, motivation and efficiency.
It saw no universal template for franchise contracts and no standard duration. “The aim will be to balance the greater scope offered by a longer contract for private sector operators to tailor their service to passengers’ requirements and to invest on their own account with the benefits to be gained from more frequent exposure of franchised services to competitive tendering,” it said.
Government acknowledged InterCity’s success and said it would not sell it “at this stage”. It added: “The first priority is to improve the service to customers by introducing private sector management, culture, disciplines and incentives. It is not clear that the business as a whole could improve its performance sufficiently to allow
sale in this Parliament.”
Senior railwaymen continued to argue against MacGregor’s plans. They told him that they preferred vertical integration – track and train together – but MacGregor wouldn’t budge. His model allowed on-track competition, and competition is something Conservative governments traditionally support.
Franchising was coming for Regional Railways and Network SouthEast despite their heavy dependence on subsidy. Government grants accounted for 28% of NSE’s turnover and 70% of Regional Railways’ in 1991/92.
The White Paper noted: “It is clear from these figures that there is no prospect whatsoever of financial viability for Regional Railways, and none in the foreseeable future for NSE. Improved performance is, however, essential. The services of both business will therefore be franchised, with franchises designed to reflect regional and local identities.”
There came a clear acknowledgement that opening access to private operators would be difficult. It said there would be a formal framework for regulating access to the network and that the timetabling process would be important in deciding which services should have priority in allocating paths. There were also difficult problems to solve about charging different types of service for access to Railtrack’s lines.
The paper continued: “For passenger services, provision will need to be made to reconcile the requirements for franchised services with the opportunities to be provided for liberalised commercial services.”
An independent regulator would oversee track access and charging, promote competition and prevent abuse of monopoly power and anti-competitive practices, maintain the interests of passengers and ensure that network benefits (such as through ticketing and a national timetable) were maintained. There was a hint that franchising might not always be government’s preferred option when the White Paper said: “As long as London commuter services are franchised, any abuse of monopoly power will be controlled through the contracts between the franchising authority and franchisees. However, if in time the Government were to sell to the private sector any passengers services which enjoyed monopoly power the Regulator would be given the task of controlling fares and quality of service through licence conditions, using powers similar to those enjoyed by other regulators.”
Safety was of paramount importance, according to MacGregor’s paper. The Health and Safety Executive would be the independent safety authority (it incorporated the Railway Inspectorate). Railtrack and the
train operators would be responsible for safe operations and for any investment needed to ensure safety.
Railtrack was to prove a thorny problem between the Department of Transport and the British Rail Board. With the prospect of losing its train and freight operating arm, Railtrack was to be the board’s only part.
BRB Chairman Sir Bob Reid saw Railtrack as a subsidiary of his board. The Department saw it more as an independent company, with the BRB a handy host for it. The way that MacGregor directly appointed board members and shadow Railtrack directors made clear that it was no subsidiary. In appointing the blunt and tough Robert Horton as Railtrack chairman designate, MacGregor was clearly signalling that Railtrack was to be its own body. He was also making clear that resistance was futile and that privatisation was coming, whatever the BRB and senior railwaymen thought.
They were not the only ones resisting MacGregor’s headlong charge. Even Conservative backbenchers were concerned, not least Transport Committee Chairman Robert Adley. That trade unions, some lobby groups and the Labour Party were opposed goes without saying but they were in no position to derail the government’s plans.
Adley’s criticism that the Government had failed to set privatisation any targets in relation to wider transport policy echoes today with successive governments unwilling or unable to set transport policy. Nevertheless, the Railways Bill published in January 1993 was passed to become the Railways Act on November 5. From then, just four years elapsed before BR’s final train. In that time, Railtrack was floated, the freight companies and other subsidiary parts of BR were sold and all train operators franchised.
BR’s OfQ reforms had, perhaps unwittingly, made franchising easier by splitting passenger operations in handy chunks. These chunks alleviated government fears that InterCity or NSE were too big to attract private interest, given all the uncertainties swirling around privatisation. Hindsight suggests their fears were false but, at the time, government struggled to create interest in its train operators.
BR’s train operating units had to establish contractual relationships with Railtrack, not least how much they would pay for track access. These charges had to include a commercial return for Railtrack and the way they treated capital costs left some train operators facing much higher costs than they had under OfQ. Secondary users faced steep increases now they were being asked to pay for what they’d previously had on the coat-tails of primary users.
It was clear the Department of Transport faced a tricky problem. If access charges were high enough to make Railtrack a sellable prospect, they would be too high to attract interest in franchises. And the opposite was equally true. There was tension between complex and clever charging models devised by the Treasury and the practicalities of running a railway.
The Treasury would have operators bidding by auction for train paths that would be packaged into a timetable with a price attached. However, Railtrack would face costs whether or not trains ran and so there was a balance to be found. BR proposed a charge to cover Railtrack’s fixed costs. Railtrack developed a model that identified short-run costs such as wear-and-tear and long-run electricity supply and track maintenance and then divided what remained between a line’s users.
Office of the Rail Regulator (ORR) Chief Economist Chris Bolt recalled in 2018 that ORR had to assume what the costs might be of operating, maintaining and renewing rail lines, noting that Railtrack management “had very little idea of what those costs would be”.
Operators were charged wear-and-tear costs as a variable charge, which Bolt recalls gave them an incentive to increase services but with little regard for the impact on performance. These low charges gave Railtrack little funding to expand the network to cope with operators’ extra trains. With government in a hurry, there was never going to be time to develop a perfect charging model and no surprise that there were quickly calls for a review.
Transforming the 25 train operating units (TOU), now grouped under geographic headings rather than the business units of OfQ, was challenging. To have any chance of attracting private interest, BR needed to be able to explain each unit’s costs and revenues. And while BR could not bid to run franchises, its managers could and were encouraged to form management buyouts. These managers would at least know some of the history which perhaps helped cover any cracks of incomplete information.
Despite ministers’ impatience, it took BR until October 1993 before it had the first TOU in shadow form, Gatwick Express. The rest would follow in 1994 and franchises for three – South West Trains, Great Western and London, Tilbury and Southend – were signed before 1995 closed. SWT and GW started private running on February 4 1996.
Freight should have proved simple to sell but there were arguments between BR and the Department of Transport about how to restructure BR Railfreight into companies that could be sold. Eventually BR formed three geographic companies, Loadhaul in the North East, Mainline in the South East and Transrail in the West. There was no perfect answer; Loadhaul faced competition from National Power running under open access, Mainline depended heavily on the construction market that in turn depended on the economy and Transrail was rather small and vulnerable to takeover by either of the others.
After all the angst, all three went to Wisconsin Central which formed them into EWS. Wisconsin was also to buy Rail Express Systems and the Channel Tunnel part of Railfreight Distribution that was left once Freightliner had been separated and privatised with a management buyout.
With the freight companies came their rolling stock but TOUs saw what had been their stock shift to three rolling stock companies for eventual sale. There was some logic in this because the passengers franchises were let on deals typically of seven years and rolling stock lasted much longer. Leasing trains reflected airline practice but, unlike airliners, many trains were fixed to their routes and so franchises had little choice in what they leased.
Although the 11,000 vehicles went to the rolling stock companies (ROSCOs) with a value of £ 2 billion, they were later valued at £4.3bn, which meant a sharp increase in lease costs. Government sold the ROSCOs for £1.8bn in 1996 (Porterbrook for £ 527m, Eversholt for £ 580m and Angel Trains for £ 672m). The following year all three had been sold on for £ 2.7bn. Labour politicians claimed the stock was sold too cheaply but its threats to overturn privatisation helped reduce interest and so reduce the sale price.
The charges ROSCOs could levy were set to earn a 10% return over the life of a new vehicle. Older stock was discounted so that operators were left unaffected by the higher operating costs of old trains. This indifferent pricing was aimed at encouraging operators to replace old trains with new.
In deciding Railtrack’s shape, there was precedent in OfQ’s route groupings but also in BR’s earlier regional structure. With consultant’s advice, Railtrack took shape as a planning board with 10 regions, called zones to differentiate them from what had gone before.
Chairman Bob Horton decided to create a company that had little engineering expertise. It would own the track, signalling and structures but rely on contractors to maintain and renew it. Instead, Railtrack would concentrate on selling track access. It would lease all but 13 major stations to train operators. In this, Horton sowed the seeds of Railtrack’s collapse just a few years later.
In stepping aside from direct engineering work, Railtrack left a large chunk of British Rail’s civil engineering department without a home. BR created an Infrastructure Services division in 1993 with 14 units based on OfQ structures and seven design offices. Reorganisation followed to form seven maintenance and seven track renewals units which could be sold once they had contracts cemented with Railtrack’s zones.
Chris Bolt remembers that the contracts with these maintenance and renewals companies included provisions to deal with changes in service levels. However, he adds that Railtrack didn’t have enough contract management expertise to use these provisions and so the balance between maintenance and renewals became inefficient.
Railtrack established itself on April 1 1994 with a holding company and an operating company and took on 11,000 staff. From that date onwards, BR was no longer an integrated nationalised railway operator. Its board now concentrated on selling its subsidiaries although franchising itself sat under the Office of Passenger Rail Franchising (OPRAF) and its director, Roger Salmon.
There were problems along the way. Sales took longer than first thought. Government told OPRAF in April 1994 to have 51% of franchises let by April 1996 and this looked like a tall order. In the event, it managed two of 25 franchises by this date, South West Trains and Great Western Trains
The time it took to thrash out access contracts between Railtrack and operators proved a major problem. There was also the
important question of government subsidy. Every mainland operator started its private life with subsidy except Gatwick Express (£ 6m premium in 1997/98) and these subsidies ranged from Thameslink’s £ 2.5m in 1997/98 to ScotRail’s £ 280m. The vertically integrated Island Line on the Isle of Wight started with a subsidy of £ 2.3m in 1996/97.
The sale of LTS Rail to a management buyout was cancelled when allegations of ticketing irregularities by the MBO surfaced. In Scotland, Strathclyde Council raised several complaints which led ScotRail to be the final franchise rather than one of the first. OPRAF also curtailed open access opportunities, fearing that the prospect would harm its chances of selling franchises.
Iryna Terlecky had been a Department of Transport civil servant before moving to BR and then being seconded to John Swift’s Office of the Rail Regulator (ORR). She told RAIL of the pace and volume of work involved: “I remember meetings with 30-40 people in the room: OPRAF lawyers and officials, ORR lawyers and officials, DfT officials, lawyers and economists, representatives from big consulting firms working on the franchising proposition – you name it, they were there. Money appeared to be no object. It just had to get done – however many people it needed and however many very late nights.”
Meanwhile, preparations to float Railtrack were under way, not least with the production of a share prospectus containing more than 250 pages of close-typed information. It revealed a profit of £101m on a turnover of £ 2.3bn for the year to March 1995.
Of Railtrack’s prospects, the document said: “The directors see little prospect for significant revenue benefits accruing to Railtrack from increased rail usage in the near to medium term as spare capacity is available to the train operators which is likely to be absorbed before any such demand generates a requirement for additional train paths or for the expansion of the rail network.”
The company would need to cope with access charge payments from operators that would fall 2% every year for the first five years and there was to be a performance regime that would see Railtrack making significant payments to train operators if current performance levels continued. Nevertheless, the directors said Railtrack had a promising future. The shares sold to 660 institutions and 645,000 individuals and Railtrack became quoted on the London Stock Exchange as a fully fledged plc in May 1996.
A brave new world awaited. It was to be a fascinating ride. And some of the problems that the Government is today wrestling in its Rail Review are the same ones MacGregor wrestled with 25 years ago. It has been unable to avoid committing taxpayer money to infrastructure upgrades, and any thought that it might have avoided this was surely naive.
It was all very predictable. As John Welsby wrote with British Railways Board Policy Director Alan Nichols in a 1998 paper for the
Journal of Transport Economics and Policy: “The most significant problems may turn out to be those of success. Increasing volume and demand for infrastructure was not adequately addressed in the privatisation design, and the indications are that the private sector will be reluctant to invest to increase the capacity of the system.”
Chris Bolt told RAIL that many different decisions would have been made at privatisation had there been any inkling that Britain’s railways were about to witness a doubling of passenger numbers over the next two decades.
Government did have to pay for this increase in rail capacity. John Swift recalled: “ORR secured, for the first time, a government commitment to the railways over a five-year period, which involved the payment over that period of a substantial sum of money for Railtrack to spend on the infrastructure.”
After decades of governments throttling BR’s spending, this was nothing less than the railway deserved.
Network SouthEast 465160 calls at Bickley with an Orpington-Victoria service on September 28 1996, during the final days of nationalised running – Connex would begin its operation of the South Eastern franchise just a fortnight later. Government opted against privatising British Rail’s individual business sectors including NSE and Regional Railways in their entirety because of their dependence on public subsidy.
Cecil Parkinson was Secretary of State for Transport from July 24 1989-November 28 1990. With a number of options being explored by the government for privatising British Rail, it was Parkinson’s wife Anne who had reportedly first suggested separating track and train operations.
73207 prepares to depart London Victoria with a Gatwick Express service on July 17 1993. A dedicated service to the airport commenced in 1984, and became the first portion of BR’s InterCity sector to be converted into a separate train operating unit in March 1994 in the run up to privatisation. National Express would go on to take over the franchise in April 1996.
Prime Minister John Major celebrates the Conservatives’ General Election victory outside 10 Downing Street on April 10 1992. Although widely expected to lose the election, his overall parliamentary majority of 21 would enable his government to oversee the break-up and privatisation of British Rail within the next five years.
New Great Western livery is worn by an HST set passing Slough on November 9 1996, with the 0830 Paddington-Weston-super-Mare. Power cars 43135 and 43185 provide traction. Great Western and South West Trains had become the first private operators to take over parts of BR’s passenger operations eight months earlier.