‘A Very Costly Industry’: The cost of Britain's privatised railway

Abstract

This paper is concerned with the financial performance of the British passenger rail industry since privatisation in the mid-1990s. This experiment, which not merely transferred a state-owned and fully integrated industry into the private sector, but dismantled it into over 100 separate entities, has generated considerable and highly critical academic literature. A major contention of this literature is that, contrary to the predictions of its proponents, privatisation has largely failed to improve efficiency and has actually increased costs, or more exactly, costs are higher than they would have been, had privatisation not taken place. However, although various writers have put forward diverse arguments to support this position, robust data on the overall costs of the (now highly fragmented) industry have been lacking. Further, a proper assessment of the additional costs (or otherwise) of privatisation can only be made in light of ‘counterfactual’ estimates (necessarily speculative) of the costs of the state-run industry if privatisation had not occurred. This paper aims to fill this literature gap by: (1) constructing a robust series of the overall operating costs of British passenger rail services since privatisation, (2) projecting, using reasonable assumptions, what operating costs would have been if privatisation not taken place, and (3) estimating the increase in such costs arising since privatisation. The results, whilst they can only be broadly indicative, are nevertheless clear. Even after conservative assumptions, rail privatisation has resulted in considerable additional costs: it was a major public policy error.