Let me start with some caveats. First, it deliberately takes no ideological position about the question of public ownership of the means of providing public services. It’s a strictly mechanical cui bono look at the results.

Secondly, why only these three areas? Well, marketisation is mostly concerned about the future of services that serve a social need. So I am looking at buses – in London and elsewhere – and railways. I am not including aviation, for while air services are now in the mass market, they are not comparable to issues such as social services. Shipping is economically important but doesn’t affect people’s lives in such a direct and obvious way. And private road transport – people going around in cars and on bikes – is much more complicated. London Underground is worse still and will probably be the subject of a future article.

And the third caveat. Bus and rail were privatised earlier than many other socially-necessary services, and the way that this was done was slightly different from the approach taken under Blair.

But these examples are still instructive. Marketisation isn’t a simple thing; there are different ways of doing it. What happened to transport in the past can help us to predict the effects on other services depending on how they are privatised, or marketised, or whatever it is called at the time.

The period I’m talking about is from 1985 – when transport was mostly publicly-owned and operated – to 2000, when Labour had been in power for three years, and the last pieces had been sold off.

Table 1

Buses

So taking the story of the bus network first: what happened, who won and who lost? Well, in 1985, buses were mostly municipally-owned monopolies. There were some private operators, but they were generally the smaller ones, but it went – mostly in one big bang in 1986 – to a wholly deregulated system. Bus companies sank or swam based on the profits they could make. There were some subsidised services, but not many.

From the point of view of the passengers, services mostly shrank. Where they grew, they often duplicated each other. Competition didn’t work.

This isn’t to decry competition. Sometimes competition does work – it works in aviation, and that’s why your holiday is so cheap. But on buses it had some perverse effects. For example, before deregulation, there was one bus per hour from Leeds to Sheffield. Afterwards, there were three, but they all left at about the same time and cost three times more. And operators tended to ‘sweat their assets’ – in this case, by keeping clapped-out old buses on the road rather than replacing them with new ones. So, the passengers definitely lost.

Employees also lost out very seriously. It is arguable that this was partly because the municipal companies were overstaffed but, as noted above, this is about what happened rather than the underlying causes. There were huge numbers of redundancies, and some vicious anti-union campaigns. Wages for bus workers fell and, while the pensions law for buses said that staff pensions had to be ‘broadly comparable’ with the pension schemes they had before, ‘broadly comparable’ often meant less than half as good in practice.

There were some winners. Buses used to be quite heavily subsidised, but now they received almost no subsidy at all so you spent less on taxes and rates (in those days) – or, more realistically, the cuts of the late 1980s were paid for in part by the falling bus subsidy.

As for the owners of bus companies – they actually had quite mixed fortunes. Stagecoach made a fortune by using predatory pricing to drive other companies out of business and create local monopolies. Other companies didn’t do too well, as they had to keep costs low, and they struggled.

Overall, it could look like Table 2.

Buses

Table 2

Railways

The privatisation of the railways was slightly different. They moved from a single nationalised company – almost no private rail operations at all – to a franchise system. Railways weren’t deregulated in the way that buses were. There was an acceptance that the level of service would need to continue, and so rather than just privatising the whole thing, the existing services were divided up and let on contracts. This is much more similar to the Blairite style of marketisation.

So what happened? Well, starting with the impact on passengers, fares went both ways. Some rose – such as long-distance peak hour services to and from London, while some commuter fares fell. It was quite a mixed picture.

But the picture is much simpler when we consider the quality of service. The decline in service was very obvious, and for a very simple reason. The franchised companies took the money from fares – but the amount they got depended on how much people needed the service, not how good it was. In practice, it got much worse for the same reason the buses did.

The impact on employees was unusually mixed. Pension schemes were mostly protected to the extent that rail workers stayed in the same pension fund – none of the ‘broadly comparable’ schemes that applied to bus workers – so this didn’t work out too badly for them. There were quite a lot redundancies, but in some areas this backfired as the employers overreached themselves.

They tried to cut staff so much that they created a scarcity. And because railway staff take a while to recruit and train (lots of safety training is needed) the staff in place were in a very good bargaining position. Plenty of engineering, maintenance and customer service staff did lose out. On the other hand, quite a lot of train drivers were able to negotiate huge pay rises as they found that they had been tuned into a scarce and valuable commodity. They have not lost out.

As for the taxpayer, the experience of railways provides a real lesson for the current process of marketisation. In essential services, when the service is privatised, there is a decision to try to maintain existing provision and not just throw it to the market. This tends to involve getting some expensive consultants like PriceWaterhouse to look at the cost of operating the service in the private sector.

In almost all such cases – I only say ‘almost’ because I haven’t actually found an exception, but one might just exist – the consultants have found the same thing. They have said that the service costs much more – often about three times more – to operate than was actually the case before.

How does this happen? Well, it’s not just an accounting trick. As far as anyone can tell, what public servants are very good at is cutting and trimming. So, after round after round of cuts, they can still run a functional service, they can still keep the service doing basically what it was intended to do. It may not be very good: after all, we all know public services which are pretty ropey.

But when it comes to making a comparison with how much it costs to do the job ‘properly’ and in the private sector, it can create a nasty shock once it’s clear how much it will actually cost.

But there was one winner. All the extra money from subsidy, all the money saved from cuts, the complete lack of any need to attract customers by investing in the service to make it better, to make it a service that people would actually want to use, meant that the owners of the railway companies took money away in extraordinary volumes.

Having said that, and even given that it would take a fairly spectacular level of incompetence for a company to lose money in such circumstances, Railtrack (the company running the track and signalling) somehow achieved it. But even so, the owners won.

In 2000/01, Railtrack – a company whose income was almost entirely derived from public subsidy, made a loss of £534 million. At the end of that year, the company distributed £137 million in dividends to its shareholders. This prompted even the Blairite Stephen Byers to lose patience and to bring the company into a form of public ownership.

Using the table applied to bus privatisation, things look like Table 3.

Railways

Table 3

These tales of woe made good Tory-bashing copy a few years ago. But looking at the current situation, we need to consider what they tell us now.

One lesson is that the effects on the people concerned depend substantially on the way that a service is privatised, or marketised. It is important to remember that, while what happened to transport had features of marketisation about it, it’s not quite the same as what is being proposed now.

Indeed the Labour government has made some changes to the services. There is some municipal control of buses outside London. There is more central control of railways. And in London – although more due to Ken Livingstone than the government, it must be said – the approach to buses is different from Tory privatisations, but perhaps more like marketisation. In fact, the London example is the third area that is worth examining in some detail.

London buses

London buses have had a bit of a confused history in the last 20 years. The Tories’ original idea was to deregulate the system along with the rest of the country but, unusually, caution took over. Towards the end of the Major government, the operating company was broken up and privatised, although there was still a highly regulated system. A slow decline continued until Ken Livingstone became London’s mayor.

Livingstone didn’t restore the old system – he didn’t have the power to do so, even if he’d wanted to – but he reformed it to create a series of short contracts, with quality standards attached, and genuine competition for contracts. This competition was not just between private sector operators – one of his first moves was to take a bus contract back into public ownership because the contractors’ bids weren’t good enough.

From the passengers’ point of view there have been mixed results. Prices were reformed in a very broad-brush way and for most people they have gone down, but for some they have gone up  – it’s a kind of postcode lottery gone crazy. Overall, London bus fares are very cheap by national standards, and the quality of service has certainly improved as new quality standards have forced operators to replace old fleets, and large numbers of extra buses have been introduced.

From the London bus workers’ point of view, things have recovered quite a lot after a real decline following the Tory privatisation. This is probably more to do with a general tightening-up of the labour market in London, which meant bus workers could demand better pay and conditions, than with a political decision to improve conditions. But it was still an improvement.

The taxpayer lost, however. Bus subsidy in London had nearly disappeared (except for concessionary fares) by the end of the Tory government, but rose to nearly £800 million in 2005 – mostly paid for by non-Londoners through national taxes.

And the bus companies didn’t have it all their own way, either. They made reasonable returns, but they faced real competition and real costs, rather than just being able to milk this public service as a cash cow.

So the balance of winners and losers looks like Table 4.

London buses

Table 4

Target arguments

The business of procuring a public service through private sector suppliers and a pubic sector commissioning body – which is very much the theory behind marketisation – can deliver real benefits. But in this case, and others, only at a huge cost.

This analysis won’t be to some people’s taste. It looks only at the effects on the ground, and doesn’t consider wider questions, such as the public service ethic and democratic accountability.

But it does show that the impacts of marketisation and privatisation can differ substantially depending on how it is done. Some marketisations will damage services, some will ruin employees’ positions, some will be rotten value and will pour public money into private hands.

But not all will, and those that do will do so in different ways. By understanding the effects, we can target our arguments more effectively.

The last decade has been one of very few certainties in politics. Yet railway policy was one of the few areas in which you thought you knew where you were.

Everyone knew that the Tories despised railways. Margaret Thatcher travelled by train once in her premiership – and that was only when an entire carriage was set aside for her. Her memoirs barely mention the greatest engineering feat of her time, the Channel Tunnel, apparently because she is still sulking over the fact that only a railway tunnel was practical, instead of the road tunnel she wanted. When Thatcher was gone, the Tories set about breaking up the railways and privatising it. Roger Freeman, the minister in charge, said the result would be a cheap and cheerful service for secretaries and the like – this was intended as praise, not criticism.

On the other hand, railway policy appeared to be one of the last bastions of pre-Blair or ‘old Labour’ policy. During the last parliament of the Tory government, Labour repeatedly promised to renationalise the railways. Even as 1997 approached and specific commitments to renationalisation wavered, there were plenty of commitments to a publicly-owned and publicly-accountable railway system.

Yet anyone who has travelled on a train recently has had plenty of time to reflect that, in the fourth year of a Labour government, the railways remain firmly in private hands, and face a crisis on a scale unknown in the history of the industry.

How has this crisis come about? Labour is happy to blame the previous government, and opinion polls suggest that most people agree. But Labour’s role in the last few years has also been questionable, at best. The jury is still out over whether the Blair government has merely not done enough to tackle the problem, or has actually made it worse.

Safety and investment
Two themes continually recur in the story of the railway crisis – safety and investment. They were brought most dramatically to public attention on 12 December 1988, when three trains collided at Clapham Junction, killing 35 people and injuring over 500. The inquiry revealed a dismal picture of the state of the nationalised industry. Poor working practices, ancient infrastructure and overcrowded carriages contributed to a miserable travelling experience where accidents of this kind were more likely, and were likely to be more serious when they did happen.

The Tories’ natural instincts – ‘if in doubt, privatise it’ – failed them on this occasion. It is said that arch-privatiser Nicholas Ridley, after discussions with his senior civil servants, was the person who persuaded Thatcher that no workable privatisation scheme could be devised. Somebody somewhere must have been very convincing indeed.

Instead, a programme of large-scale investment in the nationalised industry was promised. As part of this investment an automatic train protection (ATP) system was to be installed, a system that not only stops trains if they pass red signals but also regulates their speed so that they can definitely be stopped in time if they do pass signals in error. The report into the Clapham Junction accident commented acidly that it had taken British Rail 30 years to install an earlier type of signal warning system, and that installation was still not complete. Cecil Parkinson, the then secretary of state, told us that this time it would be different – the system would be installed quickly and cost would be no object.

Believe it if you like (I don’t), but history took a different course. In 1992 the Tories unexpectedly won another general election; Thatcher, Parkinson and Ridley were all gone; and public spending programmes were about to be slashed to ribbons. The railway plan was probably doomed anyway but the Major government was re-elected on a manifesto promise to privatise railways (in fact it said ‘franchising’ rather than ‘privatisation’).

So work started on producing the scheme that Ridley had concluded was unworkable. The Major government can’t be faulted for the money and effort it put into it. Armies of civil servants worked on the project, and two new regulatory bodies were set up, called OPRAF and ORR (not Ofrail – the jokes were too obvious). Over £450 million was spent on private sector lawyers, management consultants and accountants to help the process along.

Bewildering
The result was an extraordinary creation. A unified railway was broken into countless parts. The plan was that 25 train operating companies would hire trains from three rolling stock companies, to run franchised services on track owned by a separate public sector infrastructure company but maintained by a multitude of contractors and subcontractors, on access contracts specified and let by one of the regulatory bodies and based on prices approved by the other, in competition with other train companies, known as ‘open access’ operators, subject to guidance issued by government, funded by subsidy directed at … well, you get the idea. The sheer number of contractual relationships in the system was bewildering.

If that wasn’t confusing enough, halfway through its final term the government changed its mind about keeping the infrastructure company in the public sector and rushed to sell it off in the middle of its negotiations with prospective train operators. This bizarre and damaging volte-face raised the princely sum of £1.5 billion to fund a tiny pre-election tax cut.

Just before the 1997 election, the last piece of the jigsaw was sold off and the new structure for the railways was put in place. Come the election, of course, they were slaughtered anyway, and it was left for the incoming Labour government to decide what to do with it.

John Prescott denounced the system as a national disgrace and talked of change, or at least of recognising the need for change. The scale of the problem was so great that drastic action seemed a logical step.

Flawed mechanism
The real problem, though, was not just that the industry was fragmented. In fact, some of the fragmentation was already starting to be undone. The fragmented system was supposed to promote competition, but competition between passenger services could never be meaningful. This meant that the number of train operators reached a ceiling, and then some of the companies merged. Other mergers between different parts of the industry were waved through by the competition authorities, as earlier intentions to keep different sections of the industry separate were quietly forgotten.

The most serious problem faced by the railway system was where the money was going. There was plenty of money swilling around the system, but the mechanism for investment was totally flawed.

Train operating companies (TOCs) make their money in two ways. First, they receive subsidy. The amount of subsidy rose substantially as a result of privatisation, partly because it was recognised that the fragmented system would start off inherently less efficient. In most cases, companies won contracts based on very high levels of subsidy in the early years, with that subsidy declining in later years. (Some of the companies have shamelessly blamed their problems on falling subsidy, as if this was a recent decision by the government, rather than a result of contracts they freely entered into.)

In principle, this subsidy should filter down to Railtrack, the infrastructure company, in the form of fees paid by the TOCs for running over its track. The theory was that if the TOC wanted a better service from Railtrack, it would acquire it by paying higher fees. Suppose, for instance, that the TOC wanted to run more and faster trains. This would mean that Railtrack’s track and signalling would need to be improved so the track access charge would rise to raise the money to pay for the improvements.

Second, the train companies collect and keep the fares from the passengers. This is the difference between the railways’ franchise operation and contracted-out services, such as London buses, where the fares accrue to the body commissioning the service.

The trouble with allowing train companies to keep revenue from fares is that the risks and rewards don’t line up. The theory was, if a TOC wants to run more and faster trains it would run a better service as a result, and more fare-paying passengers would want to use it. The TOC would be rewarded for its early investment by raising more money from passengers in later years.

In reality, the number of passengers using the railways has very little to do with how good the service is. This is especially true of the very large commuter franchises – for their passengers, trains are the only sensible way of getting from home to work.

Economic growth
So, while the number of passengers using the railways increased substantially in the second half of the 1990s, this was not because the railways’ private owners and operators had done anything to make the service better. It was because the country – and especially those parts of the country most dependent on commuter services – enjoyed steady economic growth. More people had jobs to go to. The public sector-owned London Underground enjoyed the same rise in passenger numbers in the same period without the dubious benefits of privatisation.

This was a boom time for train companies. They were collecting large subsidies and, through no effort of their own, their fare revenue had gone up as well. And because they had a captive market, they could sustain this level of profit without having to do anything difficult or expensive like investing money to improve the service they were paid to provide.

In fact, many of them quickly realised that they could make even more money if they made their service worse. They could save wage costs by laying off train drivers. So what if this meant that when a driver didn’t turn up because he or she was ill there would be no-one to take over and the train would be cancelled? The passengers would buy their season tickets come what may. The TOCs could pay less to the rolling stock companies by running trains with four carriages instead of eight. It didn’t matter that the passengers were now packed in like sardines – there were just as many of them and they were paying just as much money.

Granted, the regulators had power to impose penalties on companies whose services got worse. But these penalties were puny in comparison to the sorts of profits that could be made. So the money in the system never went into improving track, signalling and the like. The TOCs let the service deteriorate, paid their token penalties, and watched the money roll in. Huge sums in public subsidy, intended for upgrading railway services, went straight into the pockets of the TOCs’ shareholders while the fabric of the system continued to decline.

In the meantime, the ATP system announced by Cecil Parkinson failed to materialise. The government’s expensive consultants warned that the cost of installing it, and the risks associated with the technology, would be unattractive to the private bidders hoping to take over the railway. So it was quietly abandoned.

Fatal accidents
Three fatal rail accidents during the period of the Labour government have since focused attention on the malaise. It is too simplistic to blame these specific disasters on privatisation (although the two worst accidents, train collisions at Southall and Ladbroke Grove, almost certainly would have been prevented by ATP). The underlying problems behind the accidents were underinvestment and poor quality control. Much the same as those to blame for the Clapham Junction crash – which reminds us that a unified, nationalised system is capable of producing fatal accidents as well.

Even if the answer was not going back to the British Rail system, it was clear in 1997 that something radical had to be done. Instead, Labour set about trying to make the flawed structure work better. They blamed poorly-drafted, rushed contracts, as they tried to manage the privatised system better, as if this would overcome the flaws in the system.

A Strategic Rail Authority (SRA) has been set up to provide a more unified regulatory system. But, far from dismantling the failed franchise system, the SRA is hoping to solve the problem by issuing a new round of franchises. The difference, it claims, is that this system will not be rushed so the bad deals obtained under the Tories can be avoided. The franchises will be much longer, it says, more like 20 years than the seven years that was common in the first round of contracts.

In theory, these arrangements should reduce the impact of the worst abuses. Unlike under the Tories, contracts should not be signed at any price, and longer contracts will remove some of the disincentives to investment from TOCs (in the old system, there was no point in commissioning improvements that might not be in place until your contract was already over). It may be that the SRA will be able to act as a coordinating body and facilitate some investment agreements.

But these changes are small and leave the main problems in place. Worse still, they will mean that Labour becomes politically committed to the system – its fingerprints are now on it. Now that Labour has put its own regulatory structure in place, and has overseen letting the long franchises, it cannot simply blame the problems of the system on the mess left by the Tories. It has to be able to answer the question: what did it do to make that mess better?

Start again
However, there is still time to start again. Paradoxically, the opportunity has been provided by the most recent multi-fatality rail accident at Hatfield. ‘Paradoxically’, because the accident was small in transport terms (though this is of course no consolation to the victims) and not so clearly connected to privatisation. But its effect has been to set the various actors in the system in conflict with each other and reveal the potential chaos that came with fragmentation.

A combination of factors led very swiftly from this accident to the current crisis in the whole rail system. Railtrack, already sensitive to its extreme unpopularity, sought to control the problem by launching a major programme to check track conditions across the whole network (the Hatfield accident having been caused by a broken rail which apparently had not been checked and maintained properly).

The TOCs went along with this plan, even though it meant huge disruption to their operations. It is not entirely clear why they did so – but with 25 different TOCs, it seems likely that 25 different routes to this decision were taken. Doubtless, in each case, it was a combination of the following: underestimating the likely disruption; assuming that they could be insulated from the cost, either because it would all fall on Railtrack, or because there’d be some kind of government bale-out; a sense that they were no more popular than Railtrack and might not improve their chances of renewed contracts if they were seen to stand in the way of a safety measure; and realising that once sufficient numbers of the TOCs had acquiesced in the plan, there was no point in the rest holding out.

Meanwhile, the safety authorities played their part in the crisis. In autumn 2000, the Railway Inspectorate was especially sensitive to its political position. A few years earlier, it had approved the privatisation arrangements for the rail industry. As a result, it now found itself accused of being a soft touch and therefore sharing culpability for the accidents that had occurred since privatisation. Within months, it was due to be asked to approve safety arrangements for the London Underground public-private partnership, which was being attacked for undermining safety by repeating the fragmented system imposed on the railways.

Farcical
The safety authorities’ (over)reaction to Hatfield was to impose huge numbers of speed restrictions all over the network. Within a matter of days there was no railway timetable you could rely on, and if you did find a train your journey could be hours longer than expected. Services between major cities were slower than they were a century ago. Farcical stories became commonplace – such as trains being cancelled because not enough speed restriction signs could be found.

It didn’t help that the wettest autumn on record put parts of the network under water for days at a time. (Actually it did help Railtrack, which was able to avoid some financial penalties by attributing problems to flooding rather than its track programme.)

Time passed. A crisis that most people had expected to last maybe a week or two seemed to have no end. Ministers made repeated promises to the public that the situation would be better by the end of the week, but had no means of actually delivering the promises. They resorted to calling the heads of the railway industry in for summit meetings every day. These meetings seem to have done nothing apart from create the impression of activity.

The many companies that make up the rail industry also seem bewildered at the depth and duration of the crisis. Suggestions have begun to circulate that some of the companies, in taking the actions that precipitated the crisis, may have broken contractual terms or acted outside their legal powers. The large number of lawyers who are needed to run the huge contractual matrix of the industry have scented blood. It seems quite possible that the industry will self-cannibalise as the many companies that form the industry sue each other into oblivion over who should pay for the chaos.

Labour noise
In the meantime, Labour makes lots of noise. John Prescott has hinted that some of the biggest companies could lose their operating licences over the shambles. But what good would that do without a new structure? The tragedy and farce of the last few months provides an opportunity for decisive action by the government. It does not have to depart from the ideas of the third way and the public-private partnership to restructure the railways.

It could set up a public-sector infrastructure company, through which the public funds needed for improvements would be directed. This would avoid the problem of the TOCs salting the subsidy away. Giving the infrastructure company responsibility for all aspects of the fabric of the system, rather than separating track maintenance from rolling stock provision, as happens now, could provide a more unified safety structure. It could also provide service contracts rather than franchises, allowing meaningful comparisons to be made with the likely costs of providing equivalent services in the public sector, which would ensure that private sector involvement was on the basis of value for money rather than profiteering.

This approach could drive out the main structural problems in the railway system. It would not be a return to the old British Rail system, and would be consistent with Labour’s approach to public-private partnerships elsewhere, so no political loss of face would be involved. It would certainly be expensive, involving the costs of nationalising the infrastructure and paying penalties for terminating contracts. But the current system is expensive, and shows no sign of being anything other than hopeless.

There is a remarkable political consensus for radical reform – even the Daily Mail accepts that privatisation was a mistake and the current structure is a mess. This is the best opportunity Labour will have to undo it – and because of its emerging complicity in the system, it may well be its last. If it stops panicking and accepts the challenge, the prize could be very great indeed.

Bernard Hughes is a member of the ILP.