Derailing Neoliberalism

Tom Haines-Doran

Workers at the United Kingdom's privatized railways are on strike, highlighting Jeremy Corbyn's calls for renationalization.

A Southern Rail train in West Sussex, England. Werner Wittersheim / Flickr

Interview by
Duncan Thomas

Govia Thameslink Railway (GTR), the private corporation running a notoriously poor service on Britain’s busy Southern Rail network, are currently embroiled in a standoff with their staff. While the immediate cause is GTR’s attempt to cut crucial safety workers, the dispute goes to the heart of arguments over who should own Britain’s railways and how they should be run. Unfortunately for GTR, with Jeremy Corbyn putting the renationalization of rail at the center of his Labour Party leadership campaigns, the issue has assumed an even greater prominence.

Jacobin’s Duncan Thomas spoke to Tom Haines-Doran, a researcher at the University of London, on the significance of the strike and the consistent failure of rail privatization.

Duncan Thomas

For those unfamiliar with the situation, could you explain why Southern Rail workers are on strike?

Tom Haines-Doran

Specifically, the strike is over attempts by a private operator to cut staffing levels at stations and on trains. More broadly, it is a response to a new, more aggressive attempt to break the power of rail unions.

Southern Rail is a brand name for local train services running from the southeast coast of England into London. It is owned by a private train-operating company called Govia Thameslink Railway, which is an unholy alliance of a private transport multinational, a Canadian pension fund, and the publicly owned French state railways.

GTR took over services in 2014 with a specific remit to reduce staffing costs, in the context of complex engineering upgrades taking place and chronic difficulties in keeping public spending on railways down. They have been in dispute with the workers and their unions on Southern services ever since. It has also become very clear that the company hasn’t hired enough staff to run its services, meaning that even on non-strike days, the company has been running a highly curtailed service, bringing misery to commuters.

Regarding the strike itself, it has long been the practice to employ a conductor on trains, who is responsible for many safety functions, including the operation of doors at stations. GTR proposes to replace guards with train staff providing “customer service” duties and checking tickets, while the drivers take over door duties. As the conductor’s union, the Rail, Maritime, and Transport union (RMT) points out, these customer service staff will not be properly safety-trained, meaning that in an emergency safety would be compromised relative to existing arrangements. Also, GTR are not guaranteeing that a train would need this second member of staff before specifying their duties.

This, as the RMT correctly believe, could be the thin end of the wedge: once you acknowledge that only a driver is needed to run a train, then in the future these second members of staff could be easily cut. Without them, wheelchair users and other passengers requiring assistance would be widely excluded from travel in the Southern area. The conductors’ strike is therefore about maintaining safety standards and providing the best service for passengers, as well as being more obviously about protecting members’ jobs.

However, GTR’s assault on Southern staff also represents a new stage in government strategy regarding the railways. One of the ironies of privatization is that it actually helped increase the power of trade unions. Work by labor studies academic Ralph Darlington shows that the RMT union took advantage of the fragmentation caused by the privatization of British Rail in 1993.

Combined with successful efforts to democratize the union by rank-and-file members, fragmentation allowed for bargaining at a more local level, which became more closely aligned with the experiences of workers on the ground. The rank-and-file elected a leadership, spearheaded by the greatly missed Bob Crow, which was much more prepared to fight employers and the government than the previous leadership had been. Successive governments have had to live with the reality of strong rail unions, who have been able to maintain or improve their members’ pay and conditions far in excess of workers in other sectors. It is only now that there seems to be a concerted drive to tackle union strength. As the rail unions are aware, losing the Southern battle will mean a repeat performance in other parts of the network, picking off workers in different sections one by one.

For foreign readers, it might also be worth mentioning why rail ownership and management is such a key political issue in Britain. While the island’s population density and relatively short distances between major conurbations make rail of great strategic importance to the economy, it has a resonance that goes well beyond this.

Railways have been a familiar theme in all kinds of popular culture, from literature to music and film. The railways came to symbolize everything that was wrong with the Thatcherite privatization craze from the 1980s onwards. Therefore it is not without accident that, despite the serious threats to the future of the National Health Service, and the many ways the austerity program has ripped apart the fabric of social life in Britain, it was the desire to bring railways back under public ownership that formed a central demand of Jeremy Corbyn’s two Labour leadership campaigns.

Duncan Thomas

I want to return to Corbyn later on, but could you first describe in detail how Britain’s privatization model works?

Tom Haines-Doran

I can only describe how the model doesn’t work! Or at least, how it doesn’t work in the public interest. What it does do is transfer public and individuals’ money into private hands on a mass scale.

The first thing to recognize is that the 1993 Railways Act turned a relatively straightforward institutional structure, with one publicly owned company responsible for the operations of the railways, into over one hundred separate private entities all needing to make a return to shareholders.

To simplify, there are three levels to the structure. At the bottom is the publicly owned Network Rail, which manages the physical infrastructure of the railways. This replaced the shareholder-owned Railtrack in 2002, which collapsed after a fatal train crash at Hatfield in 2000 caused by its failure to properly maintain the track. At the top are the train operating companies (TOCs), which manage passenger rail franchises. A franchise runs for a given amount of time, and gives TOCs the right to run services in specific geographical areas of the rail network. In the middle are three privately owned rolling stock companies (ROSCOs), which I’ll explain shortly.

TOCs vie against each other in government-sponsored franchise bidding competitions, with the winners being, effectively, those that promise the greatest savings of government subsidy. TOCs are “special purpose vehicles,” which means that they are allowed to distribute dividends to their parent companies, but their parent companies are protected from having to rescue TOCs in case they run into financial difficulties — a relationship that has been described as a case of “heads they win, tails we lose.”

Overbidding by TOCs in franchise competitions has seen them subsequently walk away from contracts or be injected with additional state funds. TOC owners have very little capital tied up in their operations. As well as leaving fixed infrastructure management to Network Rail, they also hire their trains from one of the three ROSCOs, which are owned by banks and pension funds. These are the most lucrative part of the railway for private investors, producing extraordinary returns on capital employed. It has been estimated that the high hiring charges mean that the cost of building new trains is recovered by ROSCOs within five years. Despite this, ROSCOs will continue to charge TOCs exorbitant rates during the useful life of the stock, which is usually about thirty years.

One of the main arguments for privatizing British Railways was that it would create economic efficiencies, and thereby reduce public subsidy and create attractive fares. However, public subsidy to the railways is now approximately double what it was in 1993, in real terms. This calculation excludes the £38 billion of “private” debts racked up by Network Rail. These have now been reclassified as public debt, which effectively has meant that government subsidies have been in recent times more like four times those paid to BR. It’s a similar story with fares: these have increased by nearly 25 percent in real terms since 1995. Overall, this suggests that the amount of money going into the railways is much higher than under public ownership.

Supporters of privatization counter these figures by pointing out that the number of people using the railways has increased massively in recent years. However, this increase actually began in the 1980s, sometime before privatization took effect. Moreover, official figures show that the money going into the railways as a proportion of journeys made is now the same as it was before privatization. In an industry with high fixed costs, one would expect to see individual journey costs dropping as the utilization of the infrastructure increases. And this ignores the extra subsidy given to the railways in the form of Network Rail debt, as I have already mentioned, which when taken into consideration would make this picture look significantly worse.

So, what accounts for these increased costs since privatization? Studies by accounting scholars such as Jean Shaoul show that railways in Britain have been loss-making for a very long time — probably since at least the 1910s and 1920s, whether in public or private ownership. Because of this, they have been reliant on state subsidy.

Privatization introduces additional “stakeholders” to the railways, namely shareholders and private providers of loans, who have claims on revenue generated. In order to meet these additional claims in a loss-making industry, other stakeholders must lose out — meaning taxpayers, in the form of extra state subsidies, and passengers, in the form of fare hikes and/or degradation of service. This is not to argue for a reduction of subsidies, but that these subsidies could be much more usefully employed improving services and/or cutting fares rather than being distributed to shareholders and financial investors.

During its last years, British Railways had become probably the most economically efficient of the European railways, even though it had been deliberately underfunded by successive governments. Therefore, any form of privatization was destined to disbenefit passengers and/or taxpayers. These disbenefits could have been reduced with a proportionate reduction of private interests, but in an inherently loss-making industry, only a fully publicly owned system reduces leakages from the system to zero.

Altogether, the renationalization of railways is a hugely popular political demand, which even commands majority support from Conservative voters. Since it has failed both technically and politically, this begs the question: what is the point of privatization?

Duncan Thomas

I’ve a feeling you might have already hinted at the answer to that question. Could you say something more about how rail privatization fits into the overall neoliberal project to upwardly redistribute wealth?

Tom Haines-Doran

First, we need to unpick what we mean by neoliberalism. Most people treat this as an ideology, and it is certainly true that successive governments (including the 1997–2010 Labour administrations) have had an “ideological commitment” to privatization as an aspect of neoliberalism. This ideology rests on economic models that contain “unchallengeable” assumptions about the economic efficiency of private-sector management and the inability of public management to act in the interests of the public.

However, we need to add a material basis to this ideological commitment. Why persist with a policy that has clearly and consistently produced the opposite of its aims for such a long time?

Perhaps the purpose of privatization, whatever the statements made by politicians and think tanks, is precisely to increase public expenditure on railways. Here, David Harvey’s notion of accumulation by dispossession is useful. Harvey argues that, whatever the ideology of neoliberalism, its effect in practice has been to redistribute wealth to a financial elite, not through the usual capitalist method of exploiting the labor power of workers, but through using processes like privatization to shift existing wealth from poor to rich. So neoliberalism is a specific class project, whereby one class dispossesses another of its wealth and resources.

Framed this way, money leakages to shareholders and financiers would not represent a failure of privatization, but its main purpose, and extremely lucrative to certain sections of society despite the political difficulties it generates. Again referring to the work of Jean Shaoul, the main winners are the private providers of finance — investment banks, pension funds, and the like. In my current work I am investigating the relationship between this financialization of the railways and public policy.

Duncan Thomas

As mentioned before, Corbyn has made the renationalization of rail a key part of his campaign. What do his proposals involve and do you think they go far enough from a socialist perspective?

Tom Haines-Doran

At the center of Corbyn’s proposals is to take passenger franchises into public ownership when their contracts expire. As campaigners for renationalization argue, the fact that this would be a good idea has been well evidenced in recent times, not least in the case of East Coast Main Line.

The East Coast franchise, which runs inter-city services from London to Yorkshire and the East of Scotland, was returned to public ownership in 2009 following two disastrous periods in private ownership. These private companies had won successive East Coast franchise bidding competitions with contracts that included heroic assumptions of revenue growth. Both walked away from their contracts with little financial penalty, with the first allowed to distribute significant shareholder dividends to its parent company.

Under public ownership, the service attracted improved customer satisfaction ratings, ran more trains on time and, crucially, returned millions of pounds of investment to the Treasury which could be ploughed back into the railways, rather than distributing this surplus to shareholders. The case showed in practice that public ownership of franchise can bring significant benefits to passengers and taxpayers, which perhaps explains why the service was recently re-privatized.

There are limitations to this approach, however. Firstly, the renationalization of franchises as they expire eschews the more direct approach of immediate renationalization of all passenger services. Short of a full socialist revolution, this would almost certainly involve the need to buy out private investors from their contracts at great expense, thus negating many of the cost savings inherent in renationalization.

The problem is that only four of the fifteen passenger franchises are due to expire in the course of the next parliament, which would do little to alter the overall ownership picture. It is possible that some franchises could be terminated early, because franchise contracts usually contain break clauses when the TOC is not meeting certain criteria. For example, GTR has already triggered break clauses in its contract, and Labour is right to argue that it should be immediately renationalized. At best, then, the renationalization of franchises would only make gradual progress under a Corbyn-led government.

The second limitation to Corbyn’s approach is that, although TOC owners make impressive returns on capital employed, their absolute profit levels are relatively insignificant compared to the overall industry costs, much of which are tied up in fixed infrastructure and rolling stock. Until 2014, Network Rail was allowed to borrow on private credit markets in order to finance the maintenance and expansion of the infrastructure. As private-sector borrowing, it was more expensive than if the government had borrowed the money itself.

The arrangement had the advantage for the government of keeping Network Rail debt off the public balance sheet. But it was also a lucrative investment opportunity for the financial sector. In 2014 this debt was renationalized, adding £38 billion to the national debt. Now that Network Rail is recognized as a public body, supporters of renationalization should argue that, since interest rates are so low, the government directly should borrow to invest in our rail infrastructure, especially in modernizing the railway through schemes like electrification. Corbyn has separately addressed the need to invest in infrastructure through a “national investment bank,” and it seems that rail infrastructure would be part of it.

However, this still leaves the trains themselves in the hands of the ROSCOs, which are the most profitable part of the railways for private investors, yet don’t seem to be part of Corbyn’s plans. Like with the franchises, if these were to be renationalized overnight, the government would have to pay the full market rate, which would probably be prohibitively expensive.

A longer-term solution would be to recreate BR’s engineering division, which would build all new trains for the network, retiring outdated ROSCO-owned stock as soon as possible. Not only could these trains be manufactured on a not-for-profit basis, thus reducing overall industry costs, but this would also create many highly-skilled jobs in the industry itself and also in the supply chain. This would slot neatly into the Corbynomics approach to economic recovery based on investment in infrastructure fit to create greater prosperity for all while decarbonizing the economy.

Duncan Thomas

Even with that kind of maximum program of renationalization, it is not a new idea, do you think it goes far enough in articulating a forward-looking, twenty-first-century model of public ownership?

Tom Haines-Doran

Some campaigners have used the slogan “bring back British Rail.” Apart from its obvious alliterative appeal, many have recognized that this is a strategic mistake. While British Rail did become very good at keeping the system running on a tiny budget, this starvation of funds didn’t make for the kind of state-of-the-art system that is needed today. In addition, it was run by a “fat controller” bureaucracy that, while competent, was only really answerable to the Treasury.

What is being talked about now could be much better — a “people’s railway,” with a governing structure that includes passenger groups and rail workers with real power to shape management decisions, alongside government representatives that, in a capitalist society, would inevitably have the final say over the overall budget. Much would depend on Corbyn doing a reverse-Thatcher by purging the Treasury of neoliberals and stuffing it with economists and consultants with a more left-wing view of economics — a challenge that is not limited to rail, of course, but is fundamental to any serious left government project.