This paper uses a social cost-benefit analysis (SCBA) framework to assess whether rail privatisation in Britain has produced savings in operating costs. The paper shows that major efficiencies have been achieved, consumers have benefited through lower prices, whilst the increased government subsidy has been largely recouped through privatisation proceeds. We also find that output quality is no lower (and is probably better) than under the counterfactual scenario of public ownership (pre-Hatfield). The achievement of further savings is key to delivering improved rail services in the future. This paper finds that a privatised structure, where shareholders demand a return on their investment, has led to significant improvements in operating efficiency -it remains to be seen whether the new regime, with a not-for-profit infrastructure owner, will deliver the same efficiency improvements.JEL classification: H43, L92. * Pollitt and Smith are both at the Judge Institute of Management, University of Cambridge. Smith is funded by the Railtrack Studentship in Rail Regulation. The authors wish to thank Luisa Affuso for kindly sharing data with us (data which was generated during a rail research project sponsored by the ESRCgrant number: R000237928). The authors also acknowledge comments from David Newbery, Luisa Affuso, Stephen Gibson and two anonymous referees. All remaining errors are the responsibility of the authors.
I: IntroductionOver the period 1994-1997 the British railway industry was fundamentally transformed.In 1994 the industry was in the hands of a single, vertically-integrated operator -British Rail -owned by the government. By 1997, BR's activities had been transferred to the private sector. In the process, the industry was restructured into more than one hundred companies, thereby removing much of the vertical and horizontal integration of the preprivatisation structure.Since its reorganisation, and subsequent transfer to the private sector, the rail industry's outputs have grown sharply. Between 1992/93 (the last year before restructuring began 1 ) and 1999/00, passenger miles and freight tonne-miles grew by 21%and 19% respectively, whilst train miles were also up significantly (passenger train miles grew by 13% over the period). During this same period, total industry operating costs 2 fell by nearly 6%, suggesting that significant efficiency improvements have been made.However, the privatisation of British Rail has been the subject of much criticism in recent years, particularly in the aftermath of the Hatfield accident 3 . In October 2001 the Government announced that it had decided to put Railtrack into administration -with the company to be replaced by a not-for-profit company, limited by guarantee. Railtrack's finances had been crippled by the cost of Hatfield, and cost over-runs on the West Coast Main Line project 4 .1 See Section III.2 (a). 2 Operating costs (excluding depreciation). 3 A train derailment resulting from defective track, which resulted in four people being killed. 4 The ren...