In October the government refused to provide further subsidies to the ailing Railtrack and put it in receivership, thereby appearing to justify those who had criticized the hasty British Rail sell-off by a Conservative government in the mid-1990s. Railtrack’s demise has shattered the underlying belief that if it is performing an essential public service, a subsidized, regulated private company is too important for the government to let it fail. How could this happen in a country that in the last decade has privatized with inventiveness and flair all the essential public utilities and infrastructure, such as water, electricity, gas, and telephone networks?

The restructuring and sell-off was meant to shake out British Rail, the U.K.’s subsidized, vertically integrated, state-owned railway monopoly, which was losing its competitiveness and was costing the government and taxpayers more and more. By mid-1990 demand for rail transport had contracted significantly. Between 1953 and 1993, the share of rail within transportation modes decreased from 17 to 5 percent in terms of passenger-kilometers, and freight tonnage was halved, with a market share reduction from 42 to 6.5 percent. At the same time, maintenance and operating costs were rising together with the need for new capital investments. That required ever greater subsidies to the rail industry, even though these were already high at almost £2 billion ($3.3 billion) per year.

During 1994–97 British Rail was unbundled, restructured, and divided into more than 100 private companies, including rail passenger and freight operators, companies that maintained the track and equipment, and companies that leased rolling stock. Both public offerings and management buyouts were used as privatization techniques. Some British Rail managers who knew the correct internal costs of the rail industry bought some rolling stock companies and sold them soon after, reaping huge profits. Railtrack was put at the center of this new system to manage the network, that is, the tracks, stations, yards, and signaling and other equipment, and under a strict regulatory regime was authorized to charge the train operating companies that used this infrastructure. The privatization of the railway infrastructure, in addition to the train operations was, and still is, unique in Europe.

In 1998, the second year after privatization, total profits in the industry as a whole were some £1.1 billion ($1.8 billion), while total subsidies still exceeded £1.8 billion ($3 billion). The pursuit of profits from all sides gave rise to adversarial relationships and a lack of coordination among too many private players, with recurrent disagreements between the rail regulator, Railtrack, and the train operators. Perhaps the most critical issue was that Railtrack had no evident incentive to invest in the rail network it owned. In this situation of a growing backlog of capital maintenance, railway passengers started to feel the heat as the crumbling rail infrastructure led to poor service; drastic speed restrictions; and expensive, urgent repairs. Many angry commentators argue that these chaotic conditions were responsible for two major recent railway accidents in Paddington and Hartfield.

In mid-November it became clear that Railtrack needed a massive influx of capital, £3.5 billion, to keep going over the next few months to pay creditors and replenish its working capital, that is, money needed to run the business over and above its income from access charges. Most of the money is needed by the end of March 2002. Railtrack expects to have £5 billion of debt by March 31, the end of the company’s fiscal year, up from £3.9 billion at the end of its last fiscal year.

Who will eventually inherit Rail-track’s operations? For the time being there are only two publicly confirmed bidders: the govern-ment’s nonprofit distribution company with a stakeholder board representing the wider industry, and the German WestLB Panmure investment bank, which has proposed a collaborative effort whereby private bidders and the government jointly buy the rail network.

Privatization clearly helped make financial flows transparent in the previously state-owned railway sector and has changed the traditional organization and culture of the U.K.’s railways. Nevertheless, private involvement in the transport sector should not be seen as an end in itself, but as a potentially useful way to achieve the real objective of increased efficiency and better services for users. In the case of Railtrack, the private sector was not a magic bullet that could make the government’s costs disappear, as in the end all costs must always be met, either directly by charging users, or indirectly by taxpayers when direct revenues do not suffice. In addition, as is often the case in the railway industry, restructuring is complex, and when coupled with private sector involvement has some painful social consequences that can spill over into the political arena. Eventually, it was the political irritation about a company that relied on taxpayers for most of its funding, mainly via the regulated access charges paid by the subsidized train operators, and yet paid dividends to its shareholders, that weighed heavily in the government’s decision to pull the plug on Railtrack.

The company’s sad track record provides many lessons for railway companies in other countries that must restructure in search of increased efficiency and better service, while at the same time facing contracting markets, rising operating costs, and ever greater needs for government subsidies.