Privatization in the UK Breaks Down, Putting Neoliberal Ideology Into Question

» If transit isn’t better operated by the private sector, why is it still being privatized?

European politics are in many ways defined by opposing views about the role of public services — a debate ignored or sidelined by the considerably more conservative U.S., where the supremacy of the free market is accepted by both major parties.

The socialists and social-democrats on the European left generally believe that offerings such as transit, electricity, gas, and garbage collection should remain in public hands, with infrastructure and operations run by the government. That point of view held sway throughout the post-war period, reaching its zenith with French President François Mitterrand’s mass nationalizations of industrial concerns at the beginning of the 1980s.

Right-wing parties, on the other hand, intent on increasing competition and spurring the market, have been fighting for privatization since the end of the Cold War. British Prime Minister John Major’s decision in 1993 to end the public monopoly of British Rail was the first major step in terms of transportation. European Union edicts in the following years, imposed by a liberal (in the traditional, non-American sense) right-wing majority on the Council, have forced national governments to privatize their public services and open them up to competition.

As indicated by the considerable political weight of the 20th anniversary of the fall of the Berlin Wall — a demonstration of the ultimate success of liberal democracy over other modes of governance, according to political scientists such as Francis Fukuyama — the strain of argument that proposes that the best way to run a society is to make its economy as free as possible is still accepted wholeheartedly by politicians in the West, from President Obama to German Prime Minister Angela Merkel. This despite the recession, whose cataclysmic effects have put into question whether the advance of the free market has produced more positive outcomes than possible alternatives.

Indeed, the celebrations revolving around the 20th anniversary of the defeat of communism in Eastern Europe mask the economic pain in many of the affected countries’ economies, suggesting that the imposition of western mores on the role of the free market have not necessarily produced the miraculous outcomes initially suggested by their proponents. The rapid rise of economies in the Middle East and in Asia, meanwhile, runs contrary to the claim that liberal democracy is the best way to advance public well-being; most of the countries that have become successful in the world market have state-run economies, state run corporations, and fewer human rights than we’re used to in the West.

Which raises the question: if the best-performing nations in the 21st century aren’t liberal democracies, should the West continue to hew so tightly to its existing governance strategies? How does this apply to transportation?

A review of recent transportation management decisions is indicative of the failure of this pro-market ideology.

There is considerable evidence that the most extreme examples of privatization, in which infrastructure is handed over to non-public concerns (a bit of a flash-back to the days of the railroad barons), have fallen apart rather quickly because of the inherent limits on the market. When corporations pay for new rail lines, for instance, they’ve got to justify their investment to their investors, and usually over a short period of time. The fundamental problem is that infrastructure pays off over a very long period. Governments, in contrast, have the ability to pay for new capital projects (or pay off debt) during recessions that bankrupt private enterprise.

Indeed, the collapse and subsequent nationalization in 2002 of the United Kingdom’s private railroad owner, Railtrack, was the first warning that something was amiss in the idea that infrastructure could be provided efficiently outside of the public sector. The similar failure of London & Continental, which managed the construction of the High-Speed One project, provided more evidence. Yesterday’s nationalization of Taiwan’s defunct high-speed rail line, constructed with private money, suggests that the problems are not limited to the British Isles.

But if it’s becoming increasingly apparent that private construction and management of infrastructure is problematic — France and Germany, for instance, have kept their tracks in public hands — it’s worth returning to evaluate the potential benefits of private operation of transportation. If a system in which the free market rules is supposed to create the most benefits for a society, it should have produced some valuable outcomes in Europe’s most free transportation market, that of the United Kingdom.

There, the non-profit Network Rail (which replaced Railtrack) — backed by government guarantees, making it pseudo public — leases rail route franchises to private corporations for five to ten-year periods. Those corporations, members of the Association of Train Operating Companies, are to pay a set amount to Network Rail for the use of track over the period. At the end of the franchise, the rate is renegotiated and another operating company can be brought in if desired.

The system, to describe it quickly, doesn’t work.

Take the example of the East Coast mainline franchise, which concerns services running from London to Glasgow, running through Edinburgh, Newcastle, York, and Peterborough. In 2005, Network Rail awarded the service to GNER for 1.3 billion pounds over ten years. By 2007, the company had to hand back its services because it could not handle the costs of the line, which had suffered ridership losses after the London terrorist attacks. That year, the contract was renegotiated with National Express, another company, which agreed to pay 1.4 billion pounds by 2015 to operate the line, which is the country’s busiest long-distance route, with 17 million riders a year.

During the summer of 2009, National Express announced that it would have to walk away from the line because of the recession and the government’s unwillingness to renegotiate the contract at a lower rate — unsurprising considering that just two years ago National Express had agreed to the contract and its price, which was to pay for necessary maintenance along the line. The failure of this private service should serve as a warning to other European companies whose services have been split from infrastructure maintenance operations: there is a disconnect in both philosophy and interests on the part of an operator and an infrastructure owner.

The result? The government will take over operations of the line in three days, forming a new public company called Directly Operated Railways that will take responsibility for National Express’ 3,100 employees along the route. Branding, names, and uniforms will all have to be altered to reflect the changes, all at the cost of the U.K. taxpayer. National Express is expected to renegotiate the line for private operations beginning in 2011. The government, which wasn’t able to profit from the “good” years of 2007 and 2008, is now having to commit to the line’s operations during the “bad” years of 2009 and 2010. In other words, a private company took the profit and the government was left with the losses.

In order to prevent a similar situation from occurring on train lines running from London to the West Country and Swansea, the government is providing a huge subsidy to private operator FirstGroup with the goal of preventing another company from defaulting.

From the perspective of British legislators on the left, the failure of National Express and the subsidies necessary to keep FirstGroup afloat suggest that a government comparator — a sort of “public option” — should maintain control over the East Coast Main Line with the goal of demonstrating the advantages of having a public sector operator. For the RMT rail workers’ union, the system is completely flawed. Says Bob Crow, general secretary of the union:

“This is a massive taxpayer bailout, which makes a mockery of the rail franchising system. These figures show that companies are being propped up by taxpayers’ money and it reinforces the RMT’s argument that the whole system has been an expensive disaster.”

Of course, the Association of Train Operating Companies sees the situation differently and has argued that the answer the the problem is not more government involvement but rather less of it. The organization argues that franchises should be expanded to up to 20 years to encourage more long-term investment and that private companies should run their own infrastructure. But private ownership of the rail lines in the 1990s proved such a financial and customer service disaster that that claim seems completely irrational. Private involvement meant poor maintenance, unchecked safety, and profit above service. Why should the UK repeat that mistake?

This is no minor discussion, because it gets at the heart of the neoliberal claim that the best, most efficient way to advance public services is to put them into private hands. The history of transportation in the UK is indicative of a system-wide failure.

The flaw in that right-wing argument is that it fails to ensure that both profits and losses go to the same organization. Because railroad services must continue to be provided during both good and bad economic cycles, no citizen-minded government will simply allow a corporation to stop services when a bad economy makes profitability more difficult to achieve. Rather, as proven by the examples noted above, what typically occurs when the government allows public services such as these to be privatized is that corporations will profit during healthy years and then force the government to either subsidize operations or take them over during less healthy ones. In the end, the government has assumed the losses and the private sector has won the profits. That’s a major problem if you want transportation to be well managed.

Transportation is just one type of public service, but the very nature of private involvement in the provision of rail services in the UK has demonstrated that the growth of the market has frequently produced the adverse effect of worse service and more government expense. Meanwhile, countries with transportation that remains in public or pseudo-public hands have been able to offer their customers far more straight-forward, reliable services. This is true both in Western social-democracies and in Eastern command-control systems; either way, the market’s involvement has been limited at best.

I do not intend to suggest here that liberal democracy’s effects have been entirely negative; on the contrary, it is undoubtedly true that the fall of the Berlin Wall brought considerably increased human rights to people on the eastern side of the Cold War. Nor is communism as it was construed by the Soviet Union any kind of solution — there is never a case to be made for mass suppression of peoples’ ability to assembly, press, or speech.

But the increasing opening of the market and its intrusion into the domain of public services is putting under threat daily necessities such as transport, which should be guaranteed rather than liable to the fluctuations of investor confidence. Though the failures of the market are rarely put into discussion in the United States, the expected expansion of public transit and rail offerings over the next decade should be done in such a manner that recognizes those flaws. Not to do so would mean increased taxpayer expense and fewer benefits.

Update, 12 November: A group called Bring Back British Rail has been founded. Its goals are self-explained.

46 Comments | Leave a Reply »
  • You are only focusing on rail privatization, and presumably only the failed ones. My understanding is that bus contracted operations have performed very well in many environments. The United States has been more or less immune to privatization of transit services. Our transit systems are often terrible. When anyone criticizes a government service like US transit for its failing, invariably excuses are made like insufficient funding or subsidies to highways. Of course, it’s axiomatic that such excuses are never available to private operators.

    I’m not dogmatic about privatization one way or another. I think it can make sense in some places, others not so much. Frankly, the UK rail privatizations were a debacle and should be a cautionary tale on the limits and downsides of such things. Clearly, you can’t fix a broken transit system just by outsourcing it either. Privatization is no panacea and comes with many downsides.

    My issue is that advocates of progressive transit solutions far too frequently turn things that should not be partisan into partisan debates, poisoning the waters and making progress hard. Did it ever occur to you that advocates demonizing “right wing” parties are doing a disservice to their own cause?

    A Republican mayor in Charlotte championed a light rail system there. A Democratic mayor in Chicago is privatizing everything in sight. One Democrat in Louisville, the current mayor, wants to build a 23-lane expressway across the waterfront. Another Democrat, a candidate for mayor in the next election, wants to tear the existing waterfront freeway down.

    When it comes to transportation, the debate isn’t between left and right, Democrat and Republican. It’s between people who get it and people who don’t. We need to stay focused on policy, not politics. Nothing will set back the cause of progressive transportation more than turning it into yet another partisan divide issue.

    Of course, there are hard core people on the right who will never support anything but cars and planes. Some are dogmatically against almost any government program. But if you style your entire response to people outside your clique as if everyone who is Other is a man of the extreme right, you are playing a losing game in my view.

    We need to be building a big tent movement in favor of livable cities and progressive transit.

    • Nathanael

      I think an important distinction needs to be made here: *contracted operations are not exactly privatization*.

      Ordinary contracted operations can suck, but they can also be pretty good, and when all available contractors suck, the underlying government agency can just bring things back in-house. At least if it owns the infrastructure.

      And the vehicles are part of the infrastructure. The ROSCO system in the UK is widely considered a failure and a haven for rent-seeking.

      Contrast Metrolink in LA, which owns its tracks (mostly), owns its trains as well, and only contracts out the actual operations — which means when the contractor kills people they can be sacked, which they were. The government agency is in control at all times, even if there’s an intermediate layer of contracted corporation between the agency and the front-line employees.

      From my understanding, this is how some of the bus systems work in the UK: buses models are specified and possibly provided by the transport agency, even though the bus operator runs them? Am I mistaken?

  • Aaron -

    I appreciate your comments, but when I talked about the left and right-wing in this post, I’m referring to European politics, where there is a very clear split between ideologies on this matter. While people on the left believe that public services should be public, the European right-wing is happy with the idea that those services should be passed over into the private sector. As the post documents, that can cause major problems.

    The question of whether transport should be privatized or not, by the way, is a very different question from whether public transportation, for instance, is a good idea. These are two different issues; I addressed the first in this post with the assumption that the latter is a given.

    Note that from the beginning, I pointed out that Democrats and Republicans in the U.S. are basically on the same side on this issue.

    Whether or not something should or should not be a partisan issue is a different question than whether it is. This blog is about how politics work with respect to transportation, and I’m not going to shy away from pointing out clear ideological differences when they do exist.

  • Fair enough. I certainly don’t think we should shy away from controversy when there are core issues at stake.

    By the way, the operative term in “your blog” is “yours”. Every blogger has a right to do what he wants with his own platform. I’m just a commenter :)

  • Geoff

    Excellent post. Ignoring the politics part, economically it’s interesting how the “free market” is championed, and how those individuals react to different situations (good economy when they’re making money, and the bad economy when they are losing it and want help to keep shareholders happy and maintain their bottom line).

    As for the US, there’s a good reason why passenger rail is not privatized, it would never last, and currently it is not profitable and won’t be any time soon. Private bus systems are different because the capital costs are much lower.

  • Chaz Dube

    I think this post is being wildly unfair. You’re not examining both sides on fair terms. US rail systems all receive massive capital costs subsidies in addition to usually fairly high operating subsidies. The total annualized cost of most rail systems are less than transparent, in that those paying their costs don’t necessarily realize how much they are paying. As more general fund money subsidizes transit, this is getting worse, not better. At least the PPP deals mentioned above have more transparent economics.

    The record of PPP outside in Europe is quite good, from municipal and intercity buses to airports, toll roads, and metro systems. Until you make a fair comparison of standardized performance metrics across both types of systems, you really can’t make any kind of inference about the relative quality of the 2 approaches. Your comparison is not particularly useful, because you don’t have a proper methodology.

    Furthermore, grouping all PPPs together is absurd. Private participation in public transit is quite common in the US, too, but it takes many forms. Much procurement – most often vehicles and construction – is at risk, a soft form of PPP. Private operators in the US have a long-standing role and comparable performance to public operators. Many public transit agencies contract their demand responsive (ADA, senior and other social service) transit, their rural transit, and often school bus services. Sometimes the transit operator provides the vehicles; sometimes the PPP is just for maintenance. These services perform just as well on average as the publicly operated ones and usually have comparable or better reliability and smoother costs. Capital participation is also common and has been very effective from the bond market to direct at-risk investment in projects like the Orange County Toll Roads. PPPs vary not just according to the scope of services, but also according to jurisdictional laws and contract terms which can provide key points of flexibility or create massive difficulties.

    Grouping all PPP vehicles into one basket is a pointless, counter-productive task. There is an extensive literature on this subject with lots of lessons learned. Prudent jurisdictions will draw from this experience and take a conservative approach which manages risk appropriately. However, completely abandoning these relationships is just a non-starter. We would be wiser to examine the lessons of failures than to abandon private investment entirely.

  • Andy K

    One thing I would like to see discussed in detail is privatized airlines, and how well they really do, and how private they really are. Seems like they are continually filing for bankruptcy. How much do we subsidize them (not including user fees tacked onto ticket prices).

  • Russell Warshay

    I don’t think that is very productive to attempt to view every economic sector through the same ideological lens. If this article was about European airlines, instead of rail, the private sector would come out shining.

    Rail does not benefit from privatization as much as other forms of transportation. This is because the barrier of entry is so high that there can be few competing firms, and in some markets, only a naturally occurring monopoly can survive.

    Also, citing the current recession as an example of the shortcomings of free markets is a bit disingenuous. Markets definitely contributed, but just about all of the quantifiable causal factors were initiated by a U.S. federal government entity, or sponsored entity. Catalytic factors were from both the public and private sectors.

  • Deacon

    Excellent Post. I’ve looked at the different services across the globe and the 3 that stand out are the TGV, ICE and the Japanese Shinkansen, Korea and Spain seem to be following suit, a few years more and I think they’ll be able to stand with the top 3. The USA should look at these systems and find a solution unique to our situation. Even if it means asking those countries for help. We don’t know shit about the subject for the most part, they do, kind of makes sense to ask.

    Looking from the outside in I’d say a system that might work in the UK would be the one the Japanese have, while they’re busy trying to fix their cock up of a system they might as well give the Japanese system a go.

    The USA is in a Unique position. There’s essentially a clean slate from which to start. The big question is whether the powers that be can pull together in the same general direction to design a system that would work with our sprawling ways. Acela has proven that even at a half decent speed it can be profitable, If it where to run at top speed with upgraded infrastructure and new standards from the FRA it could make even more money. Build it and they will come.

  • Russell Warshay

    To Andy K., in the U.S., the reason why there are constant Chapter 11 filings is because of the pension system. Legacy airlines have high pension costs. New airlines can enter the marketplace without this burden. Chapter 11 shifts the pension burden from a company to the Federal Government.

  • Yonah, I’m not sure what you mean by “pseudo-public.” Do you mean the JR companies? Those companies are still viewed as separate from the other private railways in Japan, but they answer to shareholders, abandon low-performing rural lines, and have the same model of line operations as pre-Amtrak America.

    Even then, they’re crucially different in some aspects. For example, they engage in real estate development near stations to generate extra revenue, as does the private operator of Hong Kong’s MTR, whereas Western passenger rail operators are limited to just rail operations.

    I could even turn around and say that the successful public rail operators are those that are pseudo-private, like SNCF. Besides the fact that SNCF has significant private ownership, it acts nothing like Amtrak. It tries to minimize the number of employees needed per train. Those employees are lavishly paid because of union rules and French labor laws, but there’s nothing like the labor redundancy you see on American passenger rail. It also minimizes construction costs for LGVs, both by picking cheaper technology, e.g. ballasted track instead of slab track, and by avoiding urban areas, serving intermediate stops at outlying stations.

  • eldondre

    Seems like the post is trying make the conclusion rather than derive it. The recent survey of eastern european countries provides fodder for both sides, this posts obvious socialist bent, as well as supporters of liberalization. While the changeover wasn’t unanimously heralded, there seemed to be a common sense trend…specifically, the more successful the country had been at adapting and transforming, the more popular the change itself was. countries that have been mired in corruption and ineptitude like Ukraine look back on communism sentimentally. It’ worth remembering that no system is perfect and that under any system, it needs to be both protected from individuals gaining control but also from the governments that enforce them (the current recession’s heart lays at the US governments ability to print an almost infinite amount of money in the world’s reserve currency creating bubbles across the globe). however, the market’s great successes have been the small things from toothpaste, air conditioning, and running water. the government is usually involved in larger investments whether it be public-private partnerships or as owner. which approach works best may even be dependent on a given situation or a country’s political system or even culture. As for Europe and transportation, it’s pretty obvious that deregulating the air market has been a huge positive. I look forward to this returning to transportation rather than my daily dose of pravda

  • Mike

    Chaz makes an interesting point in his first paragraph, bringing to mind a question that i’ve not seen addressed among discussion of transport privatization failures (principally being discussion of UK rail). Is private operation always doomed to fail, or does it fail when public and private “conspire” (not in a criminal sense, but in a shared self-delusion) to remove necessary public subsidies from a transport service, in the vain hope that a private operator will be so much more efficient that the service can survive and thrive nonetheless? If government remains committed to providing necessary financial support (subsidy), could a private operator actually produce a higher quality service at a lower cost? I’m inclined to say yes, in some cases, if government plays its role (including, crucially, definition of the franchise or contract agreement) wisely.

  • Mike, the successful cases of privatization – Hong Kong, Singapore, Japan – are those where the private operators don’t need any subsidy.

    Eldondre, is there anyone with any economic credentials who’s tried to spin the crash of Eastern Europe as a positive for deregulation?

  • newboldphilly

    Privatized public transport is still subsidized public transport. Can anyone show me a formerly publicly operated transit system that started turning a profit after x-years of privatization?

  • Mike

    Alon, okay, but that doesn’t answer the question: in situations where subsidy IS needed, can a private operator, properly subsidized and properly bound by contract, provide a better service at a lower cost?

  • EngineerScotty

    The big problem with this debate is that frequently, neither side is interested in imperical evidence. Privatization is either viewed as good or evil, and this viewpoint is considered to be an axiom of the universe, not a point to be investigated.

  • Newboldphilly: the Hong Kong MTR is profitable. So are SMRT, and the mainland JR companies. In the semi-public realm, Tokyo Metro is profitable – it gets a little bit of subsidy, but its profit plus corporate tax payments are about ten times as high as the subsidy.

    Mike: I don’t think so. Subsidized private companies always engage in rent-seeking. This creates the worst of both worlds – government money means service decisions are made by politicians, and private operations means the government isn’t accountable to the voters when costs spiral out of control.

  • David

    This post with respect to the UK situation seems to have been written as if everything was hunky dory prior to privatization. It was *because* the government, in both Labour and Conservative incarnations, had underinvested in the railways so as to keep both fares and their own costs down that privatization was proposed as a way to resolve the government’s inability to act. Some of the sentences in this post could practically be rewritten substituting “public” for “private” and they’d be just as true. Why not just create a mock post from 30 years ago titled “Public ownership in the UK breaks down, putting Socialist ideology into Question”? And then you can go to great lengths to describe the break down and what’s wrong with public ownership. It would be just as useful as this post, which you can take any way you like.

    I don’t think we’ve actually found an ownership and governance model for transportation, especially passenger rail but also road and transit, that actually works without also being a massive drain on the treasury. I doubt it’s even possible to come up with a sustainable model for rail if intercity freeways continue to be, well, “free” (and similarly for transit when roads are free). The downward pressure on fares from the availability of apparently free alternatives like cars on the road prevents the mode from capturing enough revenue to cover its costs.

    Berating neoliberals for failing to come up with a model for transportation that works all the while ignoring the fact that various socialist attempts have failed just as miserably is a bit rich.

  • David, what do you mean “I don’t think we’ve actually found a model”? Japan has a perfectly good model: toll the freeways, privatize rail operations gradually to allow them to make a profit, and let the local governments run subways. It got this model by accident, after JNR overexpanded so much it collapsed under its own debt.

  • Although I’m agnostic on the fundamental left-right debate, I do think that the global financial crisis has reminded everyone of a crucial principle that Yonah rightly points out: no company deserves to profit unless it’s also capable of taking losses. Privatization is at its worst when private operating companies have so much political influence, and negotiate from such strong positions, that they can essentially eliminate downside risk. Effective operating contracts for bus services, for example, require a robust government function — as both regulator and customer — that can maintain a healthy tension with the vendor. Often, vendors can simply outbid government for the best management talent, and this sheer inbalance of skill weakens government’s hand.

  • Andrew S

    I think Aron M. Renn’s comments were right on. Let’s not be too dogmatic. Privatization of rail systems in the UK may have been problematic, but there are a great many publicly provided systems on this side of the pond that have their share of flaws, too. Bus service operated by private companies seems to be a decent way to procure service in many jurisdictions. Let’s not pretend that public ownership = good, all the time.

  • "Chairman Obama, rebuild this wall!"

    This blog’s red theme now makes sense. Really should add a hammer and sickle to the header. I mean, c’mon, oppression is a small price to pay for more choo choo trains.

    Walter Duranty’s grandson?

  • EngineerScotty

    Come on, Chairman.

    Everyone knows Obama is a Nazi, not a communist. And a jihadist to boot.

    Didn’t you get the memo?

  • David -

    There was plenty of underinvestment in British railroads before privatization, but to argue that everyone came together in favor of privatization is inaccurate; at the time, there was significant Labour opposition to the project.

    To argue that we haven’t found a “model” dismisses the significant successes in other European countries whose rail networks were constructed and operated until very recently by almost entirely public actors. These are places to look for realistic solutions.

    Alon -

    I think you make a good point about the success of the SNCF, for instance, coming from the fact that unlike Amtrak, it is able to operate without the direct interference of political interests. An American public authority doesn’t have to be like Amtrak, as you put it, but could by all means act more like SNCF. Either way, I argue that it would still respond better to the transportation needs of the country than a private service.

    I have some problems with your descriptions of the success of privatized Japanese rail services. If anything, there’s evidence that suggests that the private companies that replaced JNR were able to succeed only because the government simply forgave a huge amount of the initial construction debt.

  • Whatever happened to JNR, its remnants could only succeed if all that construction debt was forgiven. Kakumoto himself argued for privatization, on the grounds that public ownership is what led to political interference, leading to overbuilding, and wrote the article you link to partly to argue against similar overbuilding of roads.

    SNCF has largely escaped the problem of politics because of the TGV. Before the LGV Sud-Est was built, it was as political as Amtrak or DB. It broke out of the political domination cycle when, after the French government kept sabotaging the project, it floated bonds on Wall Street. In addition, unlike JNR, SNCF keeps its commuter and intercity books separate: it operates the RER and TER with local money, essentially under contract, while treating its profitable intercity operations as its core product. Amtrak doesn’t even do commuter rail, but it has shown little interest in pursuing HSR more than incrementally, or it obtaining private sector funds to do so.

  • Alon -

    Thanks for your point about SNCF’s involvement of private funds in floating bonds. Such private money can be elemental in providing the impetus for serious public investment.

    I think that in some ways this post was misconstrued as arguing that any private money at all in transportation is a bad idea, something I don’t agree with. Rather, the fundamental point I was trying to make was that entirely private supervision or operations has the unfortunately common end result of an eventual bail out from the public sector, even as services decline in quality.

    Using private investments — allowing a maximum payoff (such as a 30% private involvement) — without assuming serious risk or sacrificing too many potential profits in “good” years can be a fine method for ensuring efficient and productive transportation.

  • Sean

    The most recent economic recession as not caused by the government- you teabaggers need to get familiar with the truth, but you wouldn’t be teabaggers if you had any understanding of reality.

    Government deregulation of the financial sector, specifically the Gramm-Leach-Biley Act, allowed for the creation of these esoteric financial derivatives that wrecked the economy.

    The private sector- in this case the big banks- used their newfound “freedom” to figure out new B.S. ways to make a quick buck by making bets on bets and when their strategy failed, they went begging to Uncle Sam to bail them out. No wonder there is no money for infrastructure investment in this country.

  • Sean

    Hey Mike, public transit has never made money nor should it. It is a public service, which is why it is publicly funded. Does the military make a profit? The court system?

    Roads don’t make money either- we should stop building them and tear down the ones we have.

  • Sean

    Mike-

    Better yet, let’s put a toll booth at every intersection and privatize city streets. That is sure to work.

  • Sean

    Deregulation of the airline industry allowed a bunch of low cost airlines to spring up, and they are able to charge low fares by paying their pilots poverty level wages and skimping on safety. Southwest was recently fined by the FAA for allowing planes with CRACKED FUSELAGES to fly.

    So please, tell me that airline deregulation was a good thing again.

  • David M

    Interesting article. Keep in mind that the system in the UK is not full privatisation, it is a franchise model. In exchange for the franchise and a certain amount of public money, the operator has very strict rules under which to operate, such as the frequency of trains, replacement of rolling stock, station maintenance, etc. If those rulles are not met, the Government can nationalise the franchise and then put it out for re-tender (or just operate it).

    In the UK, as franchises are up for re-tendering, the government is reducing the number. The thinking now is that a few (maybe around 6 or so) regional based franchises controlled more tightly by the government is better than the 28 franchises of yesteryear.

    It is a model that is really a public-private partnership. The one lesson is privatisation of the railways wouldn’t work. Railtrack ( a private company) was placed into administration mainly because it was under investing and not doing it’s job to safely maintain the railways.

    It seems that we never learn. Railways were privately built and there were many of the all in competition with each other and all struggling and all not providing the service the country needed. The Railways were “grouped” in 1923 into four major railway companies and then nationalised in 1948 as British Rail. What goes around, comes around.

  • Yonah, the LGV Sud-Est wasn’t built with a maximum payoff; I don’t think any rail line has. It was built by a state-owned company, which borrowed money from the private sector and then paid it back once the line started to make money.

    Sean, the New York City subway was profitable until about the 1920s, when inflation halved the value of the dollar while the operators were forbidden from raising the nominal fare. In Tokyo, Osaka, Hong Kong, and Singapore, the subways are still profitable, and so is commuter rail.

    The idea of tolling streets isn’t as stupid as you make it look. Some cities, including Singapore, Stockholm, and London, toll their CBDs in order to reduce congestion and raise revenue. In the US, the Obama administration is looking into replacing the gas tax with a VMT tax, which amounts to tolling every road.

    And low-cost airlines are no less safe than legacy airlines. They actually make everyone safer, by inducing people to switch from a less safe mode of travel, cars, to a safer one, planes.

  • Nathanael

    “You are only focusing on rail privatization, and presumably only the failed ones. My understanding is that bus contracted operations have performed very well in many environments.”

    So do contracted rail services — most commuter rail agencies in the US use them. But that’s a totally different ball of wax.

    *Contracted* services are *entirely* different from privatization of profit &/or risk. They have their own problems, but they do work pretty well. With contracted services, management remains in government hands, as does revenue risk, and the contractors get a set fee, negotiated in advance.

    This bears little resemblance to the sort of privatizations which failed. It’s very different from the “franchise” model, where the company has every incentive to overpromise at first, then under-deliver, rake off as much cash as possible, then bail out. “Franchised” utilities need to be kept under super-strict regulation to work at *all*. In contrast, contracting with private firms to do work on public utilities seems to work just fine. It’s done routinely; my local water commission has a small staff of its own (routine maintenance, meter reading, customer service) but contracts out any major work. Many cities contract out road repairs, and why not?

    The “contracting” model has advantages over straight-up public sector employee operation: it has more flexibility with replacing workers if there’s a record of terrible performance (get a different contractor!); and becomes clear quickly if the public sector is not providing enough money (nobody bids!). The more fully “privatized” schemes often *lose* these advantages by creating private monopolies, with their inherent problems.

    Airline deregulation has allowed for a large number of airlines to run continuously on the brink of bankruptcy, and a large number of airline bailouts. Even the “low cost airlines” routinely go bankrupt. Warren Buffett famously said that if the Wright Brothers’ plane had been shot down, it would have saved investors a fortune.

    And this is with almost all airports, and air traffic control, being government-owned and government-operated! But the economics of airlines are far worse than the economics of railroads.

  • Nathanael

    “Using private investments — allowing a maximum payoff (such as a 30% private involvement) — without assuming serious risk or sacrificing too many potential profits in “good” years can be a fine method for ensuring efficient and productive transportation.”

    Isn’t that called “issuing municipal bonds”? This is the normal way to use private investment in a public project, and it’s very effective. The interest rates you need to offer are *very* low compared to the interest rates most corporations pay.

  • not only in European countries would do it but in a developing country like only in Indonesia, also was to privatize the public company that actually controlled the needs of society, the privatization was done because no one judged competition and needs to be fixed again. these steps make a lot of state companies controlled by foreign powers, although not really a fair competition but this will continue to be done. in Indonesia still think will be better and cheaper if the company is primarily state privatized the transportation field.

  • Peter Eldridge

    I work in the UK rail industry and have done since 1983.

    My first thought on reading the article is to ask “What does success look like?”. Since privatisation the number of passenger miles travelled has increased by 50%. In the previous 45 years the number of passenger miles was roughly constant. The number of train services has increased. The railway has become even safer. The cost to the Treasury of running the service has increased a lot.

    The Train Operating Companies (TOCs) bid for a franchise in which the Government specified a minimum level of service, restrictions on fare increases and agreed a fixed contract price. This meant that the TOCs took the risk on revenue. If they increased passenger traffic and reduced costs they made more money. They responded to these incentives by trying to carry more people; for example, by making more use of their rolling stock to improve timetables.

    Railtrack had the job of maintaining the infrastructure and selling capacity to train operators (passenger and freight). They were the company who would decide whether or not to open lines or electrify existing ones.

    Since privatisation there have been many changes in the franchising regime. The current model has short franchise lengths and more direct Government management than in the days of British Rail.

    I have some thoughts on the franchise model.
    The private sector will normally do what it has incentives to do. The result is more train services and more passenger traffic. There has been one particular TOC with a twenty year franchise. That TOC has invested in doubling single line routes and building new stations and routes because they can see the benefit within their franchise life. Conversely Railtrack had no great incentive to electrify because the return on investment took longer to arrive than its contracts were expected to last.

    To me the history shows that you need to get the basic structure right by giving each party an incentive to do what will result in the best total outcome. I think that does not require the rail industry to be all public or all private but it probably does require the Government to have a clear idea of what that outcome should look like.

    The most recent franchise failures illustrate the “winner’s curse”. In order to win a franchise bid you have to pay more than the opposition. Consequently you end up paying more than the franchise is worth. In a boom you get away with it. In a recession you do not.

    All these are my personal views only.

  • Norman Brown

    Enjoyable discourse. When this subject comes up I invariably recommend Eliot Sclar’s book “Privatization- you don’t always get what you pay for” to serious readers. He analyzes many different operations, highway departments, fire departments, transit systems, health providers that have moved back and forth between the public and private spheres. The thrust of his argument is that privatizations tend to succeed to the extent that the operation can be made to resemble an actual competitive market. In that regard ease of entry and exit to the marketplace, number of potential participants, information disequilibrium and moral hazard are all important factors. Regardless, there was one repeating theme though that is especially important with regard to mass transit and that is the tendency, even the desire, of private operators to “sweat” the assets, use the capital with which they are charges to its maximum value, use it up, wear it out, that is particularly problematic with transit properties.

  • AlexB

    Many commenters have hit upon the main problem with this post already: it seems to be reaching for a pre-determined conclusion. It reads as an opinion piece disguised at information. I don’t really disagree with the point, but I think it would have been much more helpful had it simply analyzed different transportation organizational types, each with a different level of privatisation. The best point of the post was that the public should share the profits as well as the losses with the rail operators.

    I think the underlying argument for privatisation is that the pursuit of profit will streamline a company. The money will go to the most efficient places, especially if there is competition. If the demand for the service is too low and the cost of the infrastructure is too high, no company can do a good job and will eventually need to be bailed out.

    The argument for public operation is that a well and properly funded agency with good management can accomplish amazing things. Intelligence and money are not exactly always aligned in the government. More often than not, a government bureacrat’s main job is not to get fired, and they are given just enough money to maintain things in a mediocre but passable way.

    What opportunities are there to maximize public control and investment with private greed?

    Perhaps the post could have analyzed the following situations, or something similar, and provided a more nuanced view:
    1) fully public: infrastructure is owned, operated and maintained entirely by a department of the government.
    2) mostly public: most everything is owned by the government, but government grants a monopoly to operate to a heavily regulated company. this is the UK system, right?
    3) half public half private: public ownership of basic infrastructure, private company pays a fee to run trains on the track. Any company can bid for the right.
    4) mostly private: government uses its unique powers to support or provides a subsidy for a company that builds, operates, and maintains rail transit. In many ways, this was the case in the 19th century US as the major railroad companies were granted land in the west for free.
    5) totally private: I don’t think this even exists, except maybe in the case of US freight. Government always has to get involved in transportation somehow, even if it is just in ROW acquisition.

  • Cameron Slick

    We could have saved high-quality, 1930′s style High Speed Rail in this country if in the late 50′s we provided private railroads with a subsidy to keep their tracks in good shape to maintain fast speeds are reasonable, quality service. By the mid-1960′s, to some fault of their own, many passenger railroads in the midwest were in degrading shape, and the newly completed freeways made it so much less attractive to take the train. Giving a minor subsidy to the railroads then would have cost a lot less than Amtrak.

    The Big Government company Amtrak by the way, has a better on-time performance than any airline and has the least bit of hassle when it comes to refunds, frequent traveler points, and cheaper cocktails.

  • Airline deregulation has allowed for a large number of airlines to run continuously on the brink of bankruptcy, and a large number of airline bailouts. Even the “low cost airlines” routinely go bankrupt. Warren Buffett famously said that if the Wright Brothers’ plane had been shot down, it would have saved investors a fortune.

    Southwest and Jetblue haven’t gone bankrupt, and neither have Easyjet and Ryanair. They may do so in the future, though – even before deregulation, airlines were marginally profitable. For example, Howard Hughes needed his Hollywood money to fund his aviation hobby.

  • Jake

    Why don’t private rail companies succeed? It does’t make sense. Obviously they’d need help for upstart costs from the government because the Infrastructure costs so much but… What about all the old private rail companies in the United States? Pullman and all that. There was no public rail company until AmTrak. Why did it work then, but not now?

  • Pullman and the St. Louis Car Company both delivered defective subway cars to New York, which sued them into bankruptcy. The problem was that by the 1970s there weren’t a lot of train manufacturers left in the US, and Buy American provisions and federal regulations of buses and trains reduced the amount of competition among manufacturers further.

    The rail carriers were burdened with legacy costs and could not by law abandon underperforming lines without getting ICC approval. They couldn’t even merge without an approval process, which often took years. The PRR and NYC wanted to merge in 1958; with governmental red tape, they merged in 1967. The railroads that had enough freight business to subsidize money-losing passenger rail, like ATSF or Seaboard, survived until Amtrak took over the money-losing part. The ones that didn’t, like the PRR, went bankrupt.

  • Nathanael

    “To me the history shows that you need to get the basic structure right by giving each party an incentive to do what will result in the best total outcome. I think that does not require the rail industry to be all public or all private but it probably does require the Government to have a clear idea of what that outcome should look like.”

    Hell yeah.

    “Why don’t private rail companies succeed? It does’t make sense. ”
    Government-subsidized competition. If all the better-than-dirt roads were private toll roads paying for *all* their own costs, private passenger railroads would be quite successful and profitable, and this was proven in the 19th century.

    We seem to have come to a consensus in most countries that transportation is a public good, and that government should therefore fund roads, airports, etc. In most countries they include rail in that; only in the US and a few others does it get disparate treatment.

  • Nathanael

    Also it’s worth noting that privately-run streetcars and urban railroads — which often continued to be extremely popular even after public roads were paved to subsidize cars — generally suffered from municipal price controls, and were unable to raise prices even enough to keep up with inflation. This left them with insufficient money to even maintain their systems. Eventually the systems were taken over by the municipalities.

    This was actually the stated *INTENT* of refusing to allow them to increase fares in the case of New York City, but it seems to have been more of an accident in some other cases.

  • John G

    I think that the privatization of public transit is a really dangerous idea. People are talking about here in Toronto. A coalition has formed and they are trying to advocate against it. I encourage everyone to take a look at their in-depth video which shows why privatization has failed around the world:

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