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Privatising Network Rail is a disastrous idea

Privatising Network Rail is a disastrous idea

Britain is fast becoming an island of ideological obstinacy with the risk of becoming a global laughing stock. This isn’t because of our ruling class’s predilection for porcine fancies, but the rather more serious failure to safeguard the country’s longer term strategic and infrastructure needs. The latest suggestion that Network Rail might be privatised not only flies in the face of public opinion, given the massive popular desire to renationalise the whole rail industry, but also eschews vital policy goals such as combating climate change and modernising vital public services.

One of the stated aims of rail privatisation under John Major’s government in the 1990s was that it would reduce public subsidy and spending while improving efficiency and modernisation in the sector, drawing in vast amounts of private investment. In the words of the Prime Minister, privatisation was justified because “no government would ever provide the railways with adequate funding”. As we now know, these were “heroic” assumptions with no evidence to back them up premised on abstract theories of how economics works in natural monopoly and infrastructure sectors that has no foundation in practice. Then as now, privatisation was ultimately a political rather than an economic decision.

Privatisation led to the breakdown of the rail system in the early 2000s. The fragmentation of the network into a hundred small private pieces meant organisational chaos and a contracting out culture in which there was no “centre” to accept overall responsibility for customer safety, let alone strategic management of the industry. What free market economists euphemistically call “market failure” was finally recognised by the New Labour administration in bringing the infrastructure company, Railtrack, back into public ownership as the arms-length public company, Network Rail. But it baulked at any further nationalisation, wedded to its own market rationalities.

The current government seems set on proving Marx’s maxim that history repeats itself; first as tragedy, and then as farce. The railways were originally nationalised in the 1940s not as some grand plan to create a socialist nirvana, but because the private rail system was failing in its mission to provide for a modern capitalist economy. If potential plans to re-privatise Network Rail are realised, the experience will be repeated.

Outside the UK, privatisation’s failings have been recognised and condemned across the globe. In most other countries that have control over their public finances, privatisation has been halted and reversed. In the water sector, city and regional authorities from a diverse a collection of countries as Argentina, France, Mali and the United States have been taking concessions back into public ownership. In Germany over 100 privatised electricity franchises have been taken back into public ownership since 2005 as citizens in cities as diverse as Hamburg, Berlin and Stuttgart recognise that essential services are deteriorating while public subsidies flow into the coffers of private vested interests.

In the UK, the story is now well known of how our privatised utilities have failed to deliver modernisation of infrastructure or better and cheaper services to customers. In the energy sector, the privatised companies, the National Grid and the big five utility companies regularly makes profits in the £billions per annum, yet have presided over a situation where with most of our largest power stations are coming to the end of their natural lives, the grid is completely out of date to cope with the demands of decentralised renewable energy, and fuel poverty rates are soaring. It has been estimated that by the mid 2020s the country will have only 1 per cent of spare capacity for power surges when the recommended amount by engineering experts is ten times this.

The important take home point is that private interests are incapable of undertaking the massive amounts of capital investment that are required to modernise and safeguard national infrastructure and essential services. Private companies by their very nature are institutions established, and in the UK required by law, to deliver maximum short-term profits. They are not the vehicle to deliver patient capital for longer term strategic public policy objectives and it is a conceit to pretend otherwise. In a time of austerity, where economic growth and margins on capital investment are particularly low, this lack of “institutional fit” is even more pronounced.

The Labour Party’s new policy of renationalising the railways has been criticised by some as hideously expensive and as a throwback to the 1970s. But, public subsidy of the privatised rail system has been far greater than under the nationalised days of British Rail with, according to the authoritative recent report by CRESC, a far worse performance in terms of investment and prices for customers. The performance of the briefly nationalised East Coast mainline in returning a profit to the public purse also stands as a corrective to this analysis.

Moreover, it is the detractors of the nationalisation plan that are on the wrong side of history. Combating climate change and delivering a modern, efficient and inter-connected transport system for the twentieth century requires massive public intervention and ultimately some kind of guiding public ownership is the most effective means of delivering. The proposal put forward by Labour of a model that involves employee and customer representation on company boards, while maintaining operational independence for management, is a forward thinking proposal that draws upon best practice from elsewhere. And the flipside of austerity is that there has never been a cheaper time for governments to raise money for public investment projects. It would also enhance democracy too by delivering more public engagement and participation in the economy.

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