British Rail: Understanding the Business Environment

Introduction

British Rail is a private organization overseeing the operation and sustenance of the national railroad in the UK. It is one of the oldest railroad organizations in the world, encompassing 15,811 square kilometers of standard gauge lines (UK railroad industry n.d.). Over a third of them are fit for electric transport. It came into existence in 1825 and had since undergone several transformations from a conglomerate of smaller railway suppliers to the “Big Four,” to British Rail (Freeman & Aldcroft 2018). The company was nationalized after the Second World War and re-privatized between 1992 and 1997.

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As it stands, 70% of the British Rail is now owned by foreign countries, namely Germany, France, Italy, and Denmark, whose railroads are public property (Topham 2017). Thus, British rail remains in a very unusual position, being private in theory, but being largely run by public companies in practice. The purpose of British Rail is to provide timely, secure, and high-class railroad services to the public as well as various businesses. Its primary purpose is to guarantee stable income for its shareholders, as British Rail is a private company.

British Rail is a natural monopoly (Charlton, Gibb & Shaw 1997). Due to the need for keeping services and maintenance standardized throughout the country, a subdivision of the British Rail, the Network Rail, has ownership over most of the railroad net in the UK. Competition is allowed between transport providers, but a very small percentage is owned by private entities. The majority of services are owned either by BR (British Rail), or foreign railroad companies.

There are no competing railroad systems, and since all shareholders are united under the banner of the British Rail, they provide uniform service. As a natural monopoly, British Rail strives to offer the lowest possible unit price to its consumers, as it is subsidized by the government (Stiglitz & Rosengard 2015). However, the amount of subsidies to the BR is smaller than that compared to other countries, due to having been privatized. As a private company, however, it is meant to generate profit. This factor, along with a lack of competition in the market and the absence of price regulation on BR fates, caused a significant increase in ticket prices.

The railroad industry has a large market in the UK. Fares cover over 6 billion pounds, while the other 6 billion comes from government aid. The total number of employees exceeds 190,000 people (UK railroad industry n.d.). The total number of passenger journeys per year as of 2017 is over 1.3 billion, whereas commercial railroad activity amounts to 270 million business trips (UK railroad industry n.d.).

This presents a very lucrative industry that promises to remain in profit due to the government compensating the difference needed for the sustenance of the road and the infrastructure. According to the association of train operating companies, over 49% of revenues received from fares go into railroad maintenance. The rest are equally split between staff costs, miscellaneous costs, and leasing trains. Fuel and energy costs take up a very small portion of the total toll, barely exceeding 5% (UK railroad industry n.d.).

In terms of competitive advantage, the railroad has a practical monopoly over large-scale cargo deliveries required for petroleum, construction, and other enterprises, as it is cheaper, quicker, and more cost-efficient than air and vehicle transportation. Trains have greater cargo capacity than air transport and are cheaper than vehicles. In addition, due to the vast expansion of the British railroad, it can reach every small or major city in the UK, even those that do not have ports or airports. In addition, unlike vehicle transports, the railroad is not subjected to weather conditions and traffic congestions as much. These are the main points that help BR achieve a competitive advantage over other industries.

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Overall, British Rail presents a very interesting organization in terms of legality, market position, profitability, and organizational structure. It is a half-private, half-public company funded by fares and the government. It has a natural monopoly over the industry and a very strong standing in its transportation niche when compared to air and vehicle transport. Nevertheless, being in an exclusive position has a toll over the quality of service of BR, and there are political agendas that seek to nationalize the company, thus removing its ambiguous economic status.

British Rail and Stakeholder Theory

Stakeholder theory is a theory of moral and ethical business conduct developed by Ian Mitroff and Edward Freeman in 1983, which was the time of popularity of shareholder capitalism (Bowie 2017). The theory emphasized a focus not only on the interests of shareholders but also on various internal and external stakeholders that encompass every aspect of the business. Internal stakeholders include the workers, the managers, and the owners. External stakeholders, on the other hand, are the customers, the shareholders, the society, and the government, among others (Bowie 2017). Communities, in some scenarios, can also be considered stakeholders. Since British Rail is a public transportation system, the influence and importance of stakeholders are much greater than in other private companies.

In the case of BR, the three key stakeholders are the external shareholders, which are represented by various foreign companies, the passengers/clients, and the government. Foreign companies, as shareholders, have considerable power over BR. Since the government holds only about 20% shares in the company, they cannot directly control BR over the rest of the shareholders, meaning that all decisions are usually made collectively.

Naturally, shareholders have a high level of interest in how the company is performing, in order for their investments to remain profitable. With high scores in both power and interest, these stakeholders are placed in the upper right portion of the power-interest matrix. As key subjects, they must be well informed and always considered when making decisions on a corporate level.

Passengers are customers of the British Railroad. Although individually, none of them possesses much power, as a group they have a very potent influence on the company’s profits (Renninger & Hidi 2017). If this stakeholder group diminishes in number, it means that the railroad is experiencing serious problems with its management and decision-making. Due to being a decentralized and heterogeneous group, the interests of passengers in the internal affairs of the railroad is relatively low (Renninger & Hidi 2017).

It only sparks when there is a scandal in regards to the spending of the government money, or if the prices grow too fast. In addition, the matter of quality of service is of concern to the passengers as well. Therefore, with high power and low-interest scores, this stakeholder group should be managed to keep them satisfied.

Lastly, there is the government. Although for most companies the government plays a regulatory role, with high levels of power and low levels of interest (Dahan, Doh & Raelin 2015), it is not the same in the case of the British Railroad. The government is both a stakeholder and the owner of BR, meaning that it has a hand in everything that goes on in the company, both internally and externally. Although the government cannot decide the direction of the company through shareholder mechanisms of conduct, it can impose laws, regulations, or declare an outright nationalization of the company, which some political parties have been proposing several times during the last 20 years (Ford 2018).

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The government is interested in high yields, which would mean less tax money going into funding the railroad, but at the same time is tasked with the protection of the interests of the society. To keep it appeased, the prices for tickets must below.

As it is possible to see, there are several conflicts between the interests of different stakeholders. Shareholders have an interest in greater yields, which often results in increased prices for fares (Danielson, Heck & Shaffer 2008). These interests conflict with the interests of the passengers, who would prefer to spend less on travels. The government has contradicting interests within itself, as it is interested in high yields as well as smaller prices.

This situation is usually solved in several different ways. Some railroad companies like those in Italy and Germany focus on cargo transportation as their main source of income, while treating passenger races as service to the state. Others utilize their virtual monopoly over railway transportation to impose higher prices on customers regardless of the public backlash. It is possible for BR to use the former approach, especially considering that the company is partially funded by taxpayer money anyway. The course to increase prices will antagonize the stakeholders and make nationalization ideas take root in the political background, thus potentially turning both the public and the government against itself.

British Railroads and the Prospects of Nationalisation

British Railroad has been nationalized before. Under the name of British Railways, a united chain was formed from the nationalization of the four main private transportation companies (the Big Four), in the aftermath of the Second World War (Freeman & Aldcroft 2018). The newly formed entity was put under the control of the British Transport Commission. During the times of nationalized railroad industry, its net has been expanded and reformed several times, as the government sought to keep the venture profitable and accessible to customers. Due to the government’s easy access to credit, it was possible to close down inefficient routes and construct new ones, which formed the backbone of the existing railroad industry. Nevertheless, these transformations also resulted in higher fare prices than one would normally expect.

Experiences of successful privatization and nationalization efforts vary from one country to another (Hodge 1999). Privatization of the railroad was supposed to help improve the amount of value for money the customers receive, while also cutting down costs due to more efficient management and competition. At the same time, privatization should also provide the government with more control over the issue and the ability to interfere with the most critical activities needed to improve the functioning of the sphere by appealing to shareowners. Nevertheless, many politicians, managers, and economists in the UK agree that privatization of the railroad caused a market failure for the British citizens, for several reasons (Strether 2014).

Market failure occurs when the instruments available to the free market are not enough to keep the prices at a fair level (Fike & Gwartney 2015). In such a way, the process became a significant challenge for the economy because of its pernicious impact on the economy and market, along with the unexpected consequences and outcomes.

The primary instrument of the free market is competition. By offering similar services, companies are forced to compete for customers, thus resulting in better prices and better services for the same amount of money (Banister & Button 1991). However, this model does not work in the railway sector, due to it being a natural monopoly. Splitting the sectors between different owners would result in redundancy, which is not economically profitable, and forfeiting the control of the company to various shareholders does not improve the efficiency of a monopoly.

One of the strongest reasons for market failure is that there is no need for risks and investments. The company already owns a large portion of the railway traffic, meaning that investing in improving the network beyond its current condition is unlikely to gain additional market share or result in explosive profits. It is associated with risks to profitability. At the same time, by raising fares, BR has a safe and secure way to increase revenues, even at the expense of the customers (Brake & Nelson 2007).

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This practice puts BR at odds with the government as well as some of the political forces, who believe that re-nationalization would improve the situation, or, at least, would not escalate the issue. As it stands, the main three failures of privatization are as follows (Ford & Plimmer 2018):

  • Poor value for money. With 90% of profits being returned to shareholders, only 48 million dollars is returned by the railroad to the government. In comparison, the state-run East-Cost mainline returns an operating profit of circa 800 million dollars.
  • Affordable fares. Privatization did not manage to solve the problem of high fares, which continue to be the highest in Europe.
  • Additional investments. Privatization did not attract additional investments to renew the existing train park. The average age of the train in the last two decades increased from 16 to 18 years.

In such a way, privatization or nationalization can introduce serious instability to the financial market by providing new shareholders with an opportunity to raise fares not being afraid of rivalry or other outcomes as they become monopolists. At the same time, re-nationalization can be considered a solution to the problem only if it establishes the competitive environment needed for the development of the sphere and its growth.

Protectionism – Is It a Problem?

There is an argument that the nationalization of the British Railroad is a protectionist measure set up by the British government. Society is concerned that a public asset, such as the railroad system, was privatized and controlled by corporate entities from other nations. Such attitudes fit perfectly into the global picture of the economy, which experiences the rise of protectionism in all countries.

The neo-liberal economic theory of the free market formulated and promoted by the famous Milton Friedman states that protectionism is the death of the free market, as it leads to stagnation and loss of profit (Friedman 2009). The adepts of his economic views, which have dominated the financial landscape for several decades, believe government interventions to be ineffective. According to Friedman (2009), markets are capable of self-regulation, if they are left untouched. Government interference, however, creates unbalanced systems, which are more prone to crises.

After the fall of the Soviet Union and the collapse of its planned economy, neo-liberal economics was implemented in Russia as well as in many of its satellite states (Davenport 2017). In addition, experiments with free-market trade were done in the Middle East as well as various Asian countries. The results varied from one place to another. For the majority of East European states, a free-market economy and the opening of borders to various goods, products, and services of well-established West European companies caused the death of local heavy industries, which were unable to compete (Bošković & Bugarinović 2015).

Ha-Joon Chang, a South-Korean economist, states that free-market policy is used as an economic tool to ruin local markets in less-developed countries, thus establishing permanent foreign dominance in the market. He claims that every large industrial nation, including the US, UK, Japan, Russia, and South Korea had used interventionist policies and protectionism in order to help local industries grow until they are ready to compete (Chang 2002).

At the same time, protectionism has proven to be unsustainable in the long term. The example case is the Soviet Union, where nearly every industry was shielded from competition. Without the need for innovation and challenges beyond following the central plan, the majority of services and goods were underdeveloped, lagging behind western technologies by at least 20 years (Freris 1984). A lack of competition, therefore, creates stagnancy, which is not beneficial for the country or its economy. A protectionism is a tool for developing the industry to a competitive level, but prolonging it would inevitably cause long-term damage.

The failure of neoliberal economics to improve the economic status of nations without a developed industry is the reason behind protectionist policies that are being used throughout the world (Rose & Wieladek 2014). Even economically powerful countries such as the USA are implementing protectionism as a political tool, whether to preserve its own industry in competition against China or to impose trade sanctions upon other countries (Shen 2015). To achieve a measure of success, open-market economics rely on peaceful coexistence with, preferably, one center of power. The US was that center in the last 30 years or so. Now, however, the situation has changed. The rise of China and the growing struggle for economic independence in Europe brings geopolitical measures to the front of the table, and a protectionism is a primary tool.

Therefore, while the threat of protectionism to global enterprises increased, it is but a symptom of a larger problem. Trade wars, nationalism, power struggles between nations, and the growing inequality of income are what threaten the world economy far more (Jackson & Shepotylo 2018). Returning to UK railroads, the growing demands of the public for nationalization of its primary commodities and assets, such as railroads, electricity, water supplies, and other strategically important segments of the economy in the aftermath of a successful Brexit, which was a push for independence in terms of both external policy and the economy (Switzer & Hannah 2017).

In the case of British Railroads, protectionist policies will not change much, if anything. As it was already proven by the company’s performance in the past 20 years, there is very little difference between nationalized or privatized BR. If the former suffered from ineffective management and lack of competition, the latter has the same symptoms plus the necessity to deliver the majority of profits to its major shareholders.

Conclusion

To conclude, the ongoing campaign for the nationalization of the British Railway is motivated by a plethora of economic and socio-political factors. The current privatization model does not take the interests of many stakeholders into account. It prioritizes shareholders over everyone else. Since the existing legal and economic structure did not yield results, it is necessary to find a better option.

Reference List

Banister, D & Button, K (eds) 1991, Transport in a free market economy, Macmillan, London.

Bošković, B & Bugarinović, M 2015, ‘Why and how to manage the process of liberalization of a regional railway market: South-Eastern European case study’, Transport Policy, vol. 41, pp. 50-59.

Bowie, NE (ed.) 2017, The Blackwell guide to business ethics, Blackwell Publishing, New York, NY.

Brake, J & Nelson, JD 2007, ‘A case study of flexible solutions to transport demand in a deregulated environment, Journal of Transport Geography, vol. 15, no. 4, pp. 262-273.

Chang, HJ 2002, Kicking away the ladder: development strategy in historical perspective, Anthem Press, New York, NY.

Charlton, C, Gibb, R & Shaw, J 1997, ‘Regulation and continuing monopoly on Britain’s railways’, Journal of Transport Geography, vol. 5, no. 2, pp. 147-153.

Dahan, NM, Doh, JP & Raelin, JD 2015, ‘Pivoting the role of government in the business and society interface: a stakeholder perspective’, Journal of Business Ethics, vol. 131, no. 3, pp. 665-680.

Danielson, MG, Heck, JL & Shaffer, D 2008, ‘Shareholder theory – how opponents and proponents both get it wrong’, Journal of Applied Finance, vol. 18, no. 2, p. 62.

Davenport, M 2017, Trade policy, protectionism, and the third world, Routledge, London.

Fike, R & Gwartney, J 2015, ‘Public choice, market failure, and government failure in principles textbooks’, The Journal of Economic Education, vol. 46, no. 2, pp. 207-218.

Ford, J 2018, ‘Nationalisation will not fix UK’s wasteful investment’, Financial Times. Web.

Ford, J & Plimmer, G 2018, ‘Returning the UK’s privatised services to the public’, Financial Times. Web.

Freeman, A & Aldcroft, D 2018, Routledge revivals: the atlas of British railway history (1985), Routledge, London.

Freris, A 1984, The Soviet industrial enterprise: theory and practice, Routledge, London.

Friedman, M 2009, Capitalism and freedom, University of Chicago Press, Chicago, IL.

Hodge, G 1999, Privatization: an international review of performance, Routledge, New York, NY.

Jackson, K & Shepotylo, O 2018, Trade wars: are good and easy to win? Web.

Renninger, KA & Hidi, S 2017, The power of interest for motivation and engagement, Taylor & Francis, New York, NY.

Rose, AK & Wieladek, T 2014, ‘Financial protectionism? First evidence’, The Journal of Finance, vol. 69, no. 5, pp. 2127-2149.

Shen, L 2015, ‘The country that imposes the most restrictions on trade might surprise you’, Business Insider. Web.

Stiglitz, JE & Rosengard JK 2015, Economics of the public sector, 4th edn, Norton, New York, NY.

Strether, L 2014, ‘UK rail shows pitfalls of natural monopoly privatization’, Naked Capitalism. Web.

Switzer, T & Hannah, D 2017, ‘Life after Brexit: Global Britain, free trade, and the new protectionism’, Policy: A Journal of Public Policy and Ideas, vol. 33, no. 1, pp. 26-32.

Topham, G 2017, ‘British rail is nationalized all over again – by foreign states’, The Observer. Web.

UK railroad industry – FAQs n.d. Web.

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