Legalised larceny

05 November 2013

Aditya Chakraborrty used his column in the Guardian today to describe rail privatisation as 'legalised larceny.' Train operators, he said, invest little cash but take massive profits. This wasn't what the Tories promised twenty years ago. Here is a taster of what Aditya said...

As they flog our public assets, government ministers always promise one thing: that they will be better cared for by the new private owners. Sure, they may look like hedge funds out for a fast buck, but we must consider them investors, who will plough in their own millions to burnish the family silver. Thatcher said it in the 1980s; and now, during this second coming of popular capitalism, her grandchildren are saying it too.

Tuesday marks the twentieth anniversary of rail privatisation, the day when the government finally pushed through the legislation to break up and sell off our train services. Throughout the flotation process, successive transport ministers pointed at the goodies to come. Take this reliably bouffant pledge from Steve Norris: 'There is not the slightest shadow of doubt that, freed from the constraints of public sector financing, train operators … will generate substantially greater investment in the railways because of the privatisation of British Rail.'

Was he right? I asked academics at the Centre for Research on Socio-Cultural Change to calculate how much companies such as Virgin and First Group are investing in their services. They looked at their return on capital employed, which is to say the amount train operators made on the money tied up in their business. A low ratio would indicate an industry doing as Norris and his colleagues foretold: ploughing cash into delivering a better service. A really high ratio would indicate the opposite: barely any cash going in.

The figures are astonishing. In the financial year ending in March 2012, the train companies gained an average return of 147% on every pound they put into their business. Forget about high: that is stratospheric. It suggests that – despite all the promises made by the freshly rehabilitated John Major – the train operators are investing barely anything, but making bumper returns.

No wonder Richard Branson is a billionaire with his own private island. No wonder Tim O'Toole, boss of FirstGroup, and Brian Souter, head of Stagecoach, are on more than a million quid a year each. They are rewarded handsomely for handing over every spare penny to their shareholders.

But by the same token, no wonder passengers in cattle class can't get free Wi-Fi, or even a seat on the evening train out of Euston: there's no cash left to make the services worth the often excessive fares. The really big improvements, such as the west coast mainline upgrade now enjoyed by Branson's business, are funded by taxpayers. Heads they win, tails we lose.

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