This video was made possible by Hover. Set
up an email address or website with a custom domain in about two minutes for 10% off at
hover.com/wendover. On Thursday, May 3rd, 1979, 31,221,362 voters
gathered at polling stations across the United Kingdom to decide on who would fill the 650
seats of the House of Commons. Now, any election is important, but this one held particular
significance. Over the years leading up to it, the country’s manufacturing industry
was collapsing, inflation was reeking havoc on the economy, mass strikes were plaguing
both the public and private sector, unemployment was exploding, and it was quickly becoming
clear that Britain was losing ground to Japan, Germany, the US, and other subjects of post-war
economic booms. Margaret Thatcher and her Conservative Party
proposed a solution: they would curb the power of unions, cut personal income tax, and privatize
nationalized industries—essentially, it was a complete rejection of the economic ideology
of the prior 30 years. However, in the view of the British public, the status quo was
what got them to the turmoil of the era, so Thatcher’s message resonated. Once the ballots
were counted, the Conservative Party picked up 62 new seats, bringing their total to 339—a
majority—and therefore making Margaret Thatcher Prime Minister of the United Kingdom.
The era of British privatization started quite quickly: first with British Petroleum, of
which Thatcher began started selling off shares just months following her appointment. But
then, in the new decade, the trend kicked into high gear with British Aerospace, British
Gas, Rolls-Royce, British Airways, British Steel, National Express, British Telecom,
British Leyland, the British Airports Authority, and dozens more state-owned enterprises being
sold off to the private sector. By the 1990s, the concept of a “state-owned enterprise”
was becoming increasingly obscure, but there was just one major sector that the sells-offs
had yet to really touch: the railroads. Thatcher, herself, didn't dare touch them.
Politically, it was tricky: in the country, trains operated at a loss to many rural areas
from which her party needed votes. Fully privatizing the industry would mean that those areas would
inevitably lose service, and the Conservative Party would inevitably lose votes. In addition,
in her view, railroads were one of the rare examples of sectors that just had to be publicly
run—they were just too tricky to run both efficiently and effectively with a purely
profit-seeking motive. Her reign ended, though, in 1990, after a leadership battle within
her own party, and her successors weren’t so cautious.
Conveniently, in 1991, the European Union acted first. It issued directive 91/440, which
read, “whereas the future development and efficient operation of the railway system
may be made easier if a distinction is made between the provision of transport services
and the operation of infrastructure; whereas given this situation, it is necessary for
these two activities to be separately managed and have separate accounts.” Essentially,
what this said was that the companies, organizations, or agencies that actually operated the trains
had to be legally separate entities from those that operated and owned the tracks upon which
trains operated. The reasoning stemmed from the EU's wish for private rail competition
against the government run systems. They were opening the door for companies to operate
rail services on any track in the European Union, as long as they paid for it.
Of course, that gave the government a perfect first target for privatization. On April 1st,
1994, Railtrack came into existence—a private company that now owned all of the tracks,
stations, and rail infrastructure in the United Kingdom. There was much work left to do, though:
British Rail’s trains went to three newly-formed rolling stock companies, their telecoms infrastructure
was sold to Racal Electronics, freight operations were split up and allocated to six newly-formed
private companies, and this process went on and on and on, but then came the question
of passenger train services—it was very clear that the solution to privatizing those
would not be a quick and complete sell-off. The crux of the problem was exactly what Thatcher
had identified when she decided not to privatize the railways: the public had come to expect
and rely on inherently loss-making rail operations. While running an 8:00 am train from Edinburgh
to London may be profitable, running a 1:00 pm train from Manchester to Buxton probably
is not. In order to run trains at the prices, to the places, and with the frequency the
public demanded, someone had to at least sometimes take a loss.
With that, a structure evolved. InterCity, British Rail’s long-distance brand, was
split into seven segments; Network SouthEast, which primarily operated commuter services
in and around London, was split into ten; while Regional Railways, which operated short-distance
services throughout the rest of the country, was split into eight. These twenty-five Train
Operating Companies would at first be owned and run by the government, but through time,
the operations of each would be franchised out to private companies. Now, each of the
Train Operating Companies were designed so that their advantages and disadvantages were,
in the view of a private company, somewhat balanced. That’s rather important since
any franchisee is contractually required to serve certain stations at certain times and
certain frequencies. For example, the InterCity East Coast franchise includes the super high-demand,
high-frequency east-coast service from Edinburgh Waverley to London Kings Cross—two of the
busiest train stations in the UK, between which any operator should be able to turn
a profit. However, this franchise also requires, for example, the operator to run at least
one train a day that leaves London Kings Cross between 11:30 am and 12:30 pm, and eventually
calls at the small Scottish town of Kingussie, along with a corresponding southbound service
that calls at the town before arriving at Kings Cross between 5:30 and 6:30 pm. Now,
only some 108 people use Kingussie Railway Station each day—most to get on the regional
trains running between Glasgow or Edinburgh and Inverness. A private company likely would
not choose to service a station where they’d be lucky to pick up a dozen passengers in
a day, so the intention of the franchising system was to balance things out—put a little
bit of the bad with the good—so that places like Kingussie would not lose their service.
To further balance things out, the government would accept bids from companies to operate
the different franchises, and what the government would receive could either be in the positive
or the negative. The government would look at all the serious bids and quite simply pick
the one that would make them the most money, in incoming franchise payments, or lose them
the least money, in outgoing subsidies. On the surface, it seemed like the perfect system—the
free market would force companies to compete to win a franchise and, in the end, the government,
and by extension the British taxpayer, would spend the least amount or earn the most amount
of money possible… but that’s just the view from the surface.
If you dive in and take a deeper look at the franchise agreement, the contract between
an operator and the government, cracks begin to show. This document is the draft of that
agreement for the InterCity East Coast Franchise—the one that includes Edinburgh to London Service—
published by the UK government during the latest tendering process in 2014. It begins
with definitions of terms, a statement of governing law, and other assorted legal declarations,
but then moves on to exactly how the relationship between a franchisee and the government will
work. For example, in Schedule 1.1, Part A, Section 4, it lays out the idea that franchisees
cannot alter the timetable without a long, arduous process of consultation with the government
and other stakeholders—including the public. Section 7 established the requirements for
operators to, on average, have the capacity for anyone to find a seat immediately upon
boarding on off-peak trains, and within 20 minutes of boarding for on-peak trains. Section
12 introduces the concept of breach performance levels—which, if a franchisee exceeds, will
put them in breach of contract. For example, the InterCity East Coast franchisee must not
exceed 0.0235 cancellations per 1,000 miles or 1,600 kilometers travelled in its second
year of operations, and by the end of year 10, if their franchise even lasts that long,
the level must be down to 0.0119. Schedule 1.2, Part A, Section 6 lays out the requirements
for alternate transportation in the event of train cancellation; this section outlines
the requirements for timetable publishing and poster display at stations; this one defines
the operator’s data reporting requirements; this outlines the requirement for operators
to accept folding bikes on all its services, and full-size bikes “wherever reasonably
practical”; this establishes the prohibition of the franchisees engaging in any business
except for the operation of trains and certain ancillary services like selling food onboard;
this lays out the train fleet for which the franchisee must take over the leases; this
outlines the franchisee’s ban on entering into any leases without government approval,
and the leases for stations, depots, and other facilities that it’s required to enter into;
and this section summarizes what that franchisee is legally required to help with for the operation
of the Queen or subsequent monarch’s train. So, the government tells franchisees where
they must operate, when they must operate, which trains they must operate, which facilities
they must lease, the maximum amount they can charge, how long they can operate: so the
question is, with very, very little ability to choose how to run their trains, where are
they supposed to compete? The answer is the bidding process. That’s
essentially the only step in this process where free-market competitive economics come
into play, but these forces pushed bidders to over-promise and under-deliver. They’d
say they expected a certain number of passengers, translating to a certain amount of profit,
leading to a certain hypothetical future franchise payment: the main number that the government
looks at in a bid. If those passengers didn't appear as predicted, then the profit didn’t
come either, and the franchisee would fail to make the payments upon which it bid. This
is a cycle that happened time and time and time again. GNER, owned by Sea Containers,
was the first operator of the InterCity East Coast Franchise, before it overbid in its
renewal, failed to make its payments to the government, and lost the franchise early.
To replace them, the government awarded the franchise to National Express in 2007, who
would operate the services under the National Express East Coast brand. However, just two
years later, it emerged that they too had forecast more passengers than emerged in reality,
were not able to make the payments they had bid on, and so they lost the franchise in
2009. After this experience, the government temporarily re-nationalized the railway under
the “operator of last resort” scheme that had been set up for this exact situation.
The succinctly named “East Coast” company, owned and run by the government, operated
the line until a new bidding process was opened in 2013. A joint venture between Stagecoach
and the Virgin Group won the bid, and operated services under the Virgin Trains East Coast
Brand. It turned out that passenger, and therefore revenue, growth had not matched the levels
they based their bid upon, therefore they were hemorrhaging money, therefore they could
not make their franchise payments to the government, therefore they lost the franchise in 2018,
and once again, the government re-nationalized the line and operated services under the London
North Eastern Railway Brand. Throughout this nearly 25-year cycle, only
one period stood out from the rest. Between November 14th, 2009 and February 28th, 2015,
when the line was run by the government owned “East Coast” train operating company,
things went… well. In its final full year of operation, it was tied for fourth among
23 train operating companies in terms of overall passenger satisfaction, fifth for punctuality,
fourth for value for money, and, even while being one of the most popular train companies,
it generated over £1 billion in profit over the years that went straight back to the government
and, by extension, the British public. Therefore, when it was announced that the franchise was
to be reprivatized, many asked why? Why should the government hand over a well-run, well-liked,
well-profitable company to private hands which will, at best, just take a portion of those
profits away from the British government and people?
Over the following years, this and other related questions, doubting the merits of this almost
entirely unique franchise model, grew louder and louder. By the start of 2020, an increasing
number of railways stopped operating under the franchising model: instead, they were
run as concessions, where the government contracts a company to operate trains while taking the
financial risk themselves; open access operators, where private companies simply pay for track
access, typically on the most lucrative routes, without any additional agreement with the
government; or the operator of last resort model, such as with the East Coast franchise,
where a line is renationalized and government-run. Simultaneously, it was getting tougher and
tougher to find new, reputable bidders for franchises up for renewal. Many were extended
through direct award, where the government skips the competitive bidding process, which
goes against the original vision of rail franchising. All around, the viability of the franchising
model was coming more and more into question both domestically and internationally, where
complete rail privatization was something few countries had even considered—let alone
implemented. Like with so many things, though, March, 2020
dealt a death blow to the United Kingdom’s privatized railroads. With the onset of stay-at-home
orders in Britain, passenger numbers fell through the floor, and it became very clear,
very quickly that no franchisee would be able to fulfill their obligations to the government.
Therefore, after years, even decades of debate on whether the railroads should be renationalized,
it just happened… in a day. Secretary of State for Transport Grant Schnapps issued
a letter to Parliament, stating that all franchisees would immediately be shifted to a concession
model. The government would pay all their costs, plus a small management fee equal to
no more than 2% of the company’s costs in the year leading up to the pandemic. Under
any definition, even if private companies were operating the trains, this was a nationalized
railway. Originally, this was to go on only for six months, just as a temporary measure,
but in the final days of that period, on September 21st, another announcement was made: after
24 years, rail franchising, as an operating model, was done… forever.
Now, as of yet, it’s not yet known exactly how the country’s railways will operate
once the provisional recovery measures lapse. The most we know comes from the Transport
Secretary, who said in the initial announcement, “The model of privatisation adopted 25 years
ago has seen significant rises in passenger numbers, but this pandemic has proven that
it is no longer working. Our new deal for rail demands more for passengers.
It will simplify people’s journeys, ending the uncertainty and confusion about whether
you are using the right ticket or the right train company. It will keep the best elements
of the private sector, including competition and investment, that have helped to drive
growth, but deliver strategic direction, leadership and accountability. Passengers will have reliable,
safe services on a network totally built around them. It is time to get Britain back on track.”
Now, there has always been and will always be debate on whether the privatization of
the UK’s railways was a failure. It brought the highest number of passengers onto the
rails in the country's history—higher even than during the golden age of rail transport
in the early 1900s—but it also brought, by most measures, some of the highest fares
in all of Europe. It increased the public’s satisfaction in the railroads and brought
it to one of the highest levels in Europe, but, counterintuitively, it also pulled the
government’s rail subsidy up to its highest level in history. Quite decisively, after
privatization, the decline of the UK's rail industry turned around for the better, but
what's not clear is how much of that can be attributed to the privatization itself—rather
than the increased focus that privatization brought to the rails. What is clear, though,
is that the experiment, itself, failed in proving the resilience of the franchising
model. Despite positive public sentiment about the railways as a whole, an overwhelming majority
of the British public supported renationalization. Therefore, it did not start a domino effect
of rail privatization across Europe and the world, it did not convince the general public
in its merits, and it proved, most of all, that the model was fundamentally flawed as
it only worked in the best of times, and the worst of times will always eventually come.
While the privatization and deregulation of the air transport industry, for example, rail's
most direct competitor, is almost universally viewed as a success that brought lower fares
and industry growth to the point that state-owned airlines are now largely a relic of antiquity,
the same cannot be said for rail. No country has really cracked the nut of fully privatized
passenger train service in the 21st century. While many have taken half-measures such as
privatizing freight, the rails, awarding concessions to private operators but taking on the financial
risk like the UK now does, or even doing as the UK did before and effectively fully privatizing
railways, none have landed on a privatization model successful enough for other countries
to replicate it en mass. So, even if the UK’s privatization experiment accomplished some
of its goals, it failed on the most elusive one: it failed to convince the UK public and
the world that the privatization of railroads was the best path forward for passenger train
travel in the 21st century. What the past year has proven time and time
again is just how important digital presence is. Have a nice, clean digital presence is
getting to be almost as important as having a nice, clean physical presence. Whether you’re
still in school or in the big, scary world of employment, this still applies and one
of the quickest and easiest ways to improve your digital presence is with a custom domain
from Hover. Even if you don’t want to build a website just yet, it’s worth getting one
for three main reasons: first, you can redirect it to your LinkedIn, YouTube, Twitter, or
any other page, so when you share those with someone, it’s just one simple link; second,
you can set up a custom email address at that domain, which just looks and feels so much
more professional than one ending in @gmail, @yahoo, @icloud or something else; and third,
domains are going away with every minute, so if you want one that corresponds to your
own name, company name or anything else, it’s worth getting now before it’s gone. Hover
makes all of that super simple and quick, they help you find super-unique domains with
their over 400 extensions, their pricing is very transparent and fair, and best of all
you can get 10% off and help support this channel by going to hover.com/wendover. So,
professionalize your web presence and get your domain before it’s gone for 10% off,
once again, at hover.com/wendover.
Thank god for wendover. I don´t think I've ever watched so many plane videos.
Great video. Not the worst pronunciation of Kingussie I've ever heard, but still not correct.
love me some wendover
very good video, covered most of the points that i could have thought of - only obvious thing missing was perhaps the fate of railtrack
This is a really really good video.
It shows exactly why franchising is such as stupid system, and some of the problems with DfTs over-prescriptive approach to the railways.
However at the end it’s a little off. Yes rail franchising as an operating model is done - it was on its last legs anyway - and we now have a concessionary model. But I wouldn’t call it any more or less ‘nationalised’ than before. And I’d say that Japan has a ‘successful’ fully privatised network.
But debates over nationalisation vs privatisation miss the actual factor in why rail networks are successful; vertically integrated infrastructure, operations, and developments around stations.
I am disappointed - Wendover does not appear in that video once!
Sam if you’re reading this: thank you
I'm not sure if "Grant Schnapps" is a screw-up, or just one of his pseudonyms.
Wendover productions is a top notch channel. I highly recommend it to everyone inclined towards this sort of content.
I don't understand the argument that seems to be leveled that privatisation has led to more passengers. Surely a bigger population has led to more passengers? I don't think many people are choosing their mode of transport or rail provider that way.