Printer Friendly

British Rail's "business-led" organization, 1977-1990: government-industry relations in Britain's public sector.

British Rail's "Business-Led" Organization, 1977-1990: Government-Industry Relations in Britain's Public Sector

In January 1982 a new form of organization was introduced into the railway business of Britain's nationalized enterprise, the British Railways Board. Entitled "sector management," it sought to clarify responsibility and accountability for five independent and profit-accountable "business sectors": Freight, Parcels, and three passenger-traffic groups: InterCity, Provincial, and London & South East (from June 1986 called Network SouthEast). At the same time, and with the active encouragement of successive Conservative governments since 1979, the British Railways Board embarked on a substantial program of privatization involving its non-core--that is, non-rail--businesses. Among the divestitures were British Transport Hotels, most of whose assets were sold in March 1983, the board's shipping arm, Sealink, which was sold in July 1984, and substantial amounts of real estate. This article seeks to analyze both changes, which, it may fairly be claimed, were two of the most decisive moves affecting the railway industry since its nationalization in 1948. In attempting to establish the causes of this "managerial revolution," an effort will be made to distinguish between factors internal and factors external to the corporation, since the economic and political climate associated with Margaret Thatcher's Conservative administrations after 1979 is frequently held to have radically affected not just British Rail, but the whole of the public sector. Put baldly, were the changes introduced by the British Railways Board internal initiatives responding to problems of the business environment, or were they driven by government demands to reduce the size of the subsidy paid to British Rail and hence the government's Public Sector Borrowing Requirement (PSBR)? To what extent were railway managers, like other executives in Britain's public-sector industries, constrained by government directives? To what extent was the closer alignment of the two sides in the 1980s, rather than demonstrating the supremacy of one over the other, the result of a convergence of approaches to industrial problems and, in particular, to the recession of 1979-81 and its attendant fiscal constraints?

The overall context in which the discussion will be set is a familiar one internationally, since in most, if not all, of the developed countries the state has established a close and supportive relationships with its railways, ranging from the very tight control exercised in countries such as France and Sweden to the looser but equally sustaining forms in, for example, West Germany and Japan. Of course, the precise relationship--the strength of direct government involvement and thus the degree of autonomy enjoyed by railway management--and the market position of railways within a regulatory framework for transport naturally vary from country to country. (1)

This article has been stimulated by two elements: first, the United Kingdom's nationalized industries have attracted a considerable amount of attention from scholars, whose work has both reflected and helped to shape the critical atmosphere in which the Conservatives approached the public sector in the 1980s; second, there was a strong belief inside British Rail that the 1980s represented a significant break with the past. It is clear that the origins, development, and subsequent performance of the state-owned sector in the United Kingdom, as elsewhere in the developed world, has engaged the interest of a large number of scholars, whether historians, economists, political scientists, or other social scientists. (2) Although much of the research has focused on political motivations, particularly those of the Labour Party after its success in the General Election of 1945, or on the perceptions of civil servants in Whitehall, in recent years greater attention has been paid to the business history of the individual enterprises. The shift of emphasis was given impetus by the commissioning of a series of weighty business histories, notably Leslie Hannah's two-volume account of the electricity supply industry to 1962, a multivolume history of the coal industry that included Barry Supple's account of the period 1913-46 and William Ashworth's on 1946-82, and my own examination of the railways, very much the dominant element in nationalized transport, covering the years 1948-73. (3)

These books were produced in the critical climate that has characterized British attitudes toward the public sector over the last two decades. Although their commissioning was probably the product of a desire on the part of senior managers in nationalized industry to "set the record straight," the studies' findings often gave detailed support to the more concise attacks on waste and mismanagement in the public sector by academic economists. They were thus part of an interactive process linking academic criticism and political philosophy that greatly influenced events in the 1980s. It was the widespread attack on the alleged poor performance of Britain's nationalized industries that provided valuable ammunition for the government's privatization drive. The findings of the commissioned histories were then given a sharper cutting edge by the determined efforts of the Conservatives to "roll back the public sector." On the other hand, senior railway managers in the United Kingdom firmly believe that the present organization of British Rail represents a radically new departure for the enterprise, with clearer business objectives and a more profit-conscious regime. How much truth is there in this view?

Change is certainly not new, of course. In my account of the first twenty-five years of nationalized railways, I argued that the British Rail of the early 1970s was very different from the British Transport Commission of the late 1940s. Substantial efforts had been made to streamline the rail businesses, to distinguish and attribute costs, to improve labor productivity, and to alter the management framework, with Richard Beeching's attack on the railways' inbred and overblown bureaucracy in the early 1960s and the move to a corporate planning style by 1970. At the same time, there were evident continuities in the disappointing losses sustained by the business and in the instability caused by the pervasiveness and capriciousness of government intervention. Another constant element, which proved very difficult to change, was the strength of railway tradition at all levels of the organization, a "culture of the railroad" erected on a century and a half of the public-service concept, a century of security in several traffics, and the relative stability of the industry's corporate structure after 1850. The culture was more than simple inertia, and it had strengths as well as weaknesses, notably in encouraging staff loyalty. But the outlook not only made railway people suspicious of outsiders (especially of senior executives from the private sector), but it also encouraged railway leaders to be unduly deferential to politicians and civil servants. [4]

Currently, managers stress the importance of change rather than continuity. Thus, in 1986 Sir Robert Reid, chairman of the British Railways Board since 1983, was firm in his belief that the railway management of the mid-1980s represented something quite new in the industry. "Sharp change," he contended, had been made. Relations between the minister of transport and the board had been simplified and government objectives for the railways clarified. This in turn had facilitated improvements in the chain of command in railway management, the "key change" being the appointment of sector directors for the railway businesses. [5] The degree of change involved clearly needs evaluation.

Sector Management

The major organizational changes experienced by British Rail may be outlined quite simply. Prior to 1982 the business was organized in a four-tiered structure of board headquarters, region, division, and area. The linchpin of the basic railway organization was the multifunctional region, led by a regional general manager. There were five of these, determined geographically: London Midland, Eastern, Western, Southern, and Scottish. Below the regional headquarters were further subdivisions into divisions and areas. This complex and rather long hierarchical span was further complicated by changes made at the center from 1970, after the consulting firm McKinsey had recommended the adoption of a non-executive, planning-style board, a chief executive for railways, and the reorganization of the structure below him, with the five regions replaced by eight "territories" in a streamlined, "field" organization.

The outcome, however, was both complex and imprecise. At the bottom, the "field" concept was only partially implemented and was finally abandoned in 1975 after trade union resistance. At the top, corporate planning was injected into a functionally responsible board, and a chief executive (railways), supported by "executive directors," was appointed (chief executives were also appointed to manage each of the subsidiary businesses) (see Figure 1). But this mix of the corporate and the functional approaches was never very satisfactory, as was evident with finance and planning, where the distinction between "corporate" and "railway" responsibilities created tensions and never worked properly.

British Rail was certainly a large and complex business. Even after decades of rationalization, the board had a staff in 1975 of 252,000, an annual turnover of over 1.4 billion pounds, and substantial interests in engineering, containers, real estate, ships and harbors, hotels, and food retailing. But the non-railway activities provided only 24 percent of total turnover and employed only 25 percent of the staff. (6) Consequently, railways dominated the enterprise, and to try to subordinate the "railway" to the "corporate" interest was clearly nonsense, as was recognized by Sir Peter Parker, chairman of British Rail (1976-83), when he reorganized the board in 1977. Furthermore, experience with a chief executive (railways) was far from satisfactory. In particular, there were doubts as to whether he should serve in addition as a board member. The first chief executive, Willie Thorpe, was also deputy chairman, but his successors, Geoffrey Wilson (1971) and David Bowick (1971-76), did not serve on the board, although Bowick joined the board for his last two years in office (1976-78). The issue of combining the posts of chief executive and vice-chairman was also debated. Combinations and then separation occurred several times between 1977 and 1983, as the post passed from Bowick to, first, Ian Campbell and then to Robert Reid. (7) The main difficulty in all these adjustments was how to protect the responsibility of the chief executive for rail performance from encroachment by other functionally responsible senior managers without grossly overburdening him. As was made clear, not least by those who had experience of the job, the responsibility was considerable: "the only place where costs and revenue could be brought together was at the top--at the level of the . . . Chief Executive." (8)

In January 1982 a new organization was introduced. Below the level of the board, five "business sectors" were established, for Freight, Parcels, InterCity, Provincial, and London & South East (from 1986 Network SouthEast). Each of these was led by a sector director, accountable to the chief executive (railways), who was given net revenue or bottom-line responsibility for the set of services in his sector, and who was charged with specifying to regional general managers the standard of service required. Sector directors were also asked to establish levels of affordable expenditure and investment and to conduct strategic planning exercises.

The move led to a redefinition of roles and responsibilities in other parts of the organization. The board was now intended to concentrate on long-term policy-making, though the functional directors within it were to continue to oversee technical and operational performance and standards. The regional general managers lost their direct responsibility for profitability, which in any case had been rather ill-defined, and they were henceforth to confine their activities to the delivery of a coordinated operating standard as set by the sector directors. (9) The innovation was followed by the abolition of the railway divisions in 1984, leaving the following management tiers: board, sector/region, and area. (10) Later still, in 1986, the sectors were strengthened by the appointment of subsector managers for thirty-two subsectors (see Figure 2). (11)

The changes were justified or explained in a number of ways. First, there was, as we have seen, the stated intention of British Rail to improve its internal management by reducing the burden placed on the chief executive and by giving him control through a more coherent line management of groups of rail services. This was presented as "sharpening up" railway management, making it "business-led" instead of "production-led." The changes rested on the ability of British Rail cost accountants to attribute to sectors not only their revenues but their fixed and variable cost. There was a fair amount of publicity given to the progress made in this direction, which arose from work begun in the early 1970s under the heading PPCCA--Profit Planning and Cost Centre Analysis. By the end of the decade, considerable progress had been made in techniques for attributing avoidable costs to specific sectors of the rail business. (12) Running alongside these initiatives was the clear determination of the government to reduce the size of the subsidy paid to the British Railways Board to support unprofitable but socially necessary rail services. Since the Railways Act of 1974, this had taken the form of a Public Service Obligation, a blanket subsidy paid to support the passenger business as a whole. It was obviously in the government's interest to separate the "commercial' rail services from the "social" services, and to intervene more effectively by seeking specific financial targets for individual rail businesses. (13)

Can a perusal of the evidence permit a ranking of the various forces at work? How important was government pressure for change? Certainly, two long-standing features of the railway industry lead us in the direction of emphasizing the catalytic role of government intervention. First, state regulation has been a persistent theme in British railway history, its importance being first evident in the late 1830s and nearly 1840s. (14) Second, many observers have identified a bureaucratization and conservatism in railway management as the industry matured and its corporate structure stabilized. In the United States, for example, Alfred D. Chandler, Jr., saw this conditional as having emerged by the early twentieth century. (15) In the United Kingdom the challenges posed by the government-led mergers of 1921-23, in which one hundred twenty-three railways were combined into four giant companies, encouraged a mix of organizational responses, ranging from the simple unitary or departmental form (as on the Great Western) to a more decentralized form (employed by the London & North Eastern) or to the innovative but highly centralized administration developed by the London Midland & Scottish under the direction of Josiah Stamp. Nevertheless, the overwhelming impression of these companies is of a traditional stance within a "public servie" mentality, and, as mentioned, a "railroad culture," with its resistance to change, persisted well into the nationalization period. (16)

Furthermore, contemporary critics of government-nationalized industry relations, usually economists, see government policy as a key influence on

internal railway management. Dissatisfaction with the earlier, looser control of all nationalized industries, notwithstanding the successive obligations imposed by government White Papers in 1961, 1967, and 1978, which required the industries to achieve profit targets and satisfactory rates of return on investment, was given greater expression by the election of a right-wing Conservative government in 1979. (17) The outcome was, inter alia, a tighter regulatory regime for railways. (18)

The Railways Act of 1974 had introduced the obligation that "the British Railways Board from 1 January 1975 operate their passenger system so as to provide a public service which is comparable generally with that provided by the Board at present." The first payment (1975) amounted to 320.8 million pounds (including 20.4 million pounds supplied by local authorities and metropolitan Passenger Transport Executives), or 74.8 percent of total passenger revenue of 438.8 million pounds (see Table 1). (19) Of course, such an obligation was affected by subsequent financial constraints imposed by the government, notably the anti-inflationary measures of 1975-76, followed by a combination of investment ceilings and general financial target-setting, based on policy outlined in White Papers on Cash Limits in 1976 and Transport Policy in 1978, and enshrined in the concept of the External Financing Limit, or EFL, introduced in 1976. (20)

Nevertheless, there was a strong body of opinion in Whitehall that regulatory control was still too imprecise. The White Paper on Transport Policy of June 1977, for example, referred only to an expectation that revenue support for passenger services (the Public Service Obligation or PSO) would fall by 20 million pounds by the end of the decade, a figure that was adjusted in November 1979 to 29 million pounds by 1980/81 (see Table 2). At the same time, financial objectives required the board "to contain, and then reduce" the level of support needed and to make the freight and parcels businesses self-supporting (following grants to these services totaling 99 million pounds in 1975-77). Subsequent action certainly led in a sector-based direction. This included the setting of more specific "interim" objectives in March 1980, in which the board was required to make freight (including parcels) cover its direct costs, an agreed contribution to indirect costs, and two-thirds of its current cost depreciation and amortization, by 1982. The InterCity passenger services were to meet all direct costs, depreciation, and amortization, plus an increased contribution to indirect costs of 28 million pounds (in 1979 prices). Later revisions included a target for British Rail's shipping arm, Sealink, and a "commercial" objective for InterCity set in June 1981, to be achieved by 1985. (21) Here, then, was an evident desire to separate the commercial from the social or subsidized elements in the board's activities.

The government's critical approach to the public sector and its eagerness to impose firmer controls were clearly important aspects of the environment confronting railway management. This climate was reflected in a general dissatisfaction with British Rail's corporate plans (and, indeed, with the plans of the other nationalized industries) and in the report of the Serpell Committee, a body established by the minister in May 1982 to review railway finances in the wake of PSO slippage during the recession of 1979-81. The financial situation facing British Rail had certainly become more serious. The central government's portion of the PSO increased by 19 percent in real terms from 1979 to 1981, from 676 pounds to 803 pounds million in 1982 prices (see Table 1), and total PSO, as a percentage of passenger traffic income, rose from 66.3 percent in 1979 to 79.4 percent in 1981 and to 96.0 percent in 1982. At the same time, the board's group (that is, total) net losses, in current prices, increased from 0.4 million pounds in 1979 to 76.5 million pounds in 1980, improved to 37.2 million pounds in 1981, but slumped to 175.0 million pounds in 1982. (2)

The prospect of the board's meeting its target for the PSO was clearly remote at this stage, encouraging the government to reject Peter Parker's appeal for a high-quality, high-investment, "public service" railway system. Parker had argued vigorously that the railways were starved of essential investment, that they had reached the "crumbling edge of quality." But the notion that British Rail had reached the limit of opportunities for loww-reducing economies was firmly rejected by the Serpell Committee. Its report in December 1982 was followed by revised objectives for British Rail set by the government in October 1983, including an acceleration of the achievement of the PSO reduction, amounting to a 25 percent cut in real terms between 1983 and 1986, a current cost operating profit of 5 percent for freight, and a "commercial return" for parcels. (23)

Finally, we should note that the findings of an inquiry by the Monopolies and Mergers Commission in October 1980 also led toward sectorization. Examining passenger services in London and the SouthEast, the commission recommended the creation of a separate management structure for these services, which prompted the British Railways Board to respond initially by creating the post of director (London & South East). (24)

At this stage some skepticism should be expressed, however. First of all, as Chris Nash has pointed out, we should not exaggerate the extent of the change in regulatory control effected by government. Certainly, more precise financial targets were set in the early 1980s, but the directive of the 1974 act remained in place, and no attempt was made to intervene in more sophisticated ways, for example at the level of specific services, or by means of social cost-benefit analysis. (25) Second, it should not be assumed that the change from a blanket PSO subsidy for passenger services to more definite targets for individual sectors was opposed by British Rail. The board was quick to point out the contradiction between the 1974 directive to maintain a fixed level of service and the financial restraints placed on its freedom to borrow and invest. In its annual report for 1976, the board stated in bold type that "the commitment to operate a public passenger service which is comparable generally with that provided in 1974 conflicts increasingly with the commitment to operate within the subsequent financial constraints fixed in 1975/76." This sentiment was repeated in 1977. A blanket payment to maintain a historic level of services was hardly welcome, since it encouraged productivity decline during a period of recession. (26)

A great deal of empirical evidence also supports the proposition that the reorganization of British Rail was as much an internal as an external feature. The notion of dividing up the rail business into sectors was not a post-Thatcher phenomenon. It surface, for example, in the board's annual report for 1976, which stated that the business was "divided for management purposes into six sectors"--InterCity, London & South East Area, Passenger Transport Executives, Other Provincial Services, Trainload and Less-than-Trainload Freight, and Parcels. At the same time the challenge of apportioning joint costs to these sectors was given publicity. In the following year the report announced that British Rail had developed "contribution accounting" via the PPCCA system to the point where estimated results by passenger sector could be offered for 1977 (with forecasts for 1978), revealing data on direct and indirect costs. Similar exercises were carried out and published for the years 1978-82. (27)

Internal records also indicate that there was considerable dissatisfaction on the part of senior railway management with the existing nature of control. Three steps were taken in 1977-78, which may be associated with the stimulus given by Peter Parker, a businessman with an enthusiasm for the public-sector concept, who was appointed chairman of the board in September 1976. (28) First, in January 1977, the board was reorganized in an attempt to establish a better grip on the rail businesses. Here, a strong executive team was appointed. The chief executive, Bowick, took on in addition the role of vice-chairman, and functional appointments were made in marketing (Reid), personnel (Clifford Rose), engineering and research (Ian Campbell), and railway operations and productivity (James Urquhart). The effectiveness of this reorganization was undermined, however, by the illness of Bowick in 1978 and by the existence of personality clashes within the executive team. (29)

A second initiative dealt with the subsidiary activities, including shipping, property, and hotels. Parker expressed the view that the British Railways Board was essentially a group of businesses and that the subsidiaries should be managed as separate entities under a holding company. Action was then taken to give this effect. Finally, the board sought to improve its long-term planning by setting up, in 1978, a Strategy Unit under the direction of a Strategy Steering Group. It was the steeing group, headed first by Bowick, then by Geoffrey Myers, and assisted by John Heath from the London Business School as consultant, that developed the ideas pointing in the direction of management by sector. (30)

The preliminary work on the concept had been completed by November 1979, only six months into the Conservatives' period of office. Of course, the government wanted firmer control and a clearer understanding of separable elements within the railways' overall activities. It was concerned by British Rail's poor freight results in the late 1970s and by the unprofitability of the long-distance InterCity passenger services. But given that pressure, it was left to railway managers to determine what to do and how exactly to impose more effective control. If the separation of the "commercial" and the "social" parts of the business had dictated a bottom-line responsibility for regional general managers, it would probably have been acceptable to the Department of Transport. When the sectorization change was made in 1982, it was not subject to prior government approval as a major organizational change under the terms of the Transport Act of 1962. This represented a sharp contrast with earlier organizational upheavals in the industry--in 1947, 1955, 1963, and 1970--which were very much led by government. (31) Thus, the sector-management concept itself was largely an internal initiative, though one clearly in tune with the direction of government thinking.

Finally, the importance of the pressure exerted by Robert Reid for the implementation of sector management must be noted. Whereas Peter Parker was a great motivator of people and prepared to take on the government in intellectual debate rather than to confront opponents within the rail business, Reid was intent on getting on with the job within the guidelines established by government. It is quite clear that he was an enthusiastic supporter of the sector concept, and equally clear that his drive and determination while chief executive helped to carry the idea past the substantial opposition of skeptics on the board and of critics in regional management. The power and prestige inherent in the office of regional general manager, derived from the key posts in the "Big Four" companies of 1923-47, should not be underestimated, even after thirty-five years of nationalization and a series of reorganizations. Reid's willingness to take on the old guard, the traditional "railway culture," and his view of himself as an outsider crusading against entrenched opposition were crucial personal factors in the process. His task-oriented approach, an emphasis on getting the job done rather than a concern for managers' sensitivities, kept the issue alive during the the formative stages, and its subsequent development over the period 1982-84 owed much to his firm handling of critics. One by one, opponents in regional general management were removed from office or asked to retire early. (32)

There was more subtlety to the process of sectorization than the above rendering implies, however. The internal records indicate that the idea was carefully nurtured and thoroughly debated (albeit within a fairly narrow group) over a two-year period before being presented for more general consumption at a seminar in July 1981. A key body here was the small Sector Management Steering Group set up by Reid, which included Heath and supporters inside the railways, such as Philip Sellers and Bill Bradshaw. {33} The concept developed gradually, as one would expect given the size and complexity of the business, and there was significant change over time, so that sectorization in 1986 looked very different than it had in 1982. The process suggests that we have here an example of Charles Lindblom's "strategy of disjointed incrementalism," where a series of policy steps is taken to reach a radical position that would have been extremely difficult to attain in one move. (34)

At first, the introduction of sector directors did not appear to threaten the position of the regionally based management or existing lines of communication. The directors were seen as part of the chief executive's support team; they were not intended to develop large staffs of their own, but were to work through the regional general managers, who would instruct managers of subsectors falling within their geographical boundaries. As sector management developed, practice in the individual businesses diverged. The sector director wielded greater authority in Freight and in London & South East than in Inter-City or in Provincial, for instance.

A reevaluation of the organization, assisted by consultants from Price Waterhouse (who produced a lengthy document on "Roles and Responsibilities of Sector Directors, Regional General Managers and Functional Directors" in August 1983), which took into account the views of the Serpell Committee, resulted in the decision to give the sector directors full bottom-line responsibility for sectors and subsectors at the end of 1985. Notwithstanding references to a "matrix" organization, in which neither sectors nor regions nor functions would enjoy pre-eminence, the role of the regional general managers was correspondingly diminished. (35) Further changes were also made at the center. At committee level, the Railway Executive Group and the Railway Directing Group were replaced by a revamped "Railway Executive," embracing sector directors, regional general managers, and staff (that is, functional) officers at headquarters. At board level, most members lost their executive responsibilities. Reid, the chief executive, took on the additional role of vice-chairman, and two deputy chief executives were appointed to support him: Rose (Resources) and Myers (Sectors and Marketing). These changes were made in 1982-83. After Reid's appointment as chairman, the two posts were retitlled "Joint Managing Directors (Railways)," taking effect in April 1984. (36) When, in December 1985, the function of chief executive was passed to Myers, by this time a vice-chairman, the organization was a shown in Figure 3. (37)

Can the recasting of the organization be presented as a demonstration of Alfred Chandler's "strategy-structure" formulation? Although it may appear that the clarification of government objectives for the railways (strategy) was followed by the necessary structural alterations to the organization (structure), the answer is no. (38) The first structural changes were made before there was any real discussion of new strategic objectives. Then, both strategic and structural modifications proceeded in tandem. The government and raillway managers were agreed on basic strategy--to reduce costs and maintain service levels--and on the desirability of establishing more specific business objectives, but it was the managers who pressed for an organizational model to suit their needs. Once sector management was in place, however, it became easier for the government to set revised objectives for British Rail's individual businesses.

The Impact of Sectorization

What has sector management achieved to date? Perspective is naturally rather narrow at the time of writing (early 1990) but some achievements, and also some weaknesses, may be identified. Some of the gains claims by top railwaya management for the new organization can be readily confirmed. There does appear to have been a "sharpening of minds" among senior British Rail managers, resulting in a marked improvement in cost consciousness and investment appraisal and in a firmer control of resource utilization--one example being the transfer of High Speed Trains from the Western Region to the London Midland Region, where revenue potential was greater. (39) Service-setting has to some extent been taken out of the hands of production and engineering managers and become more closely related to a knowledge of revenues and costs. In the process, the authority of the old regional hierarchy has been dented. The benefits of this change have been evident in the greater encouragement given to technical development and in advances in British Rail's corporate planning, where the managers responsible for formulating plans are now expected to achieve the forecasted results. The plans themselves have improved since 1982, with the emphasis shifted from rather vague, over-optimistic public relations documents, designed to encourage the government to maintain its financial support, to more precise plans intended to serve as a framework for internal management action. (40)

There has also been an observable improvement in British Rail's operating and financial results (Table 3 and 4). The sector results, shown in Table 3, indicate distinct improvement. The three passenger sectors, InterCity, Network SouthEast, and Provincial, all showed a healthy growth in real income from 1982 to 1988/89, and the aggregate increase for the five sectors was 36 percent. The operating results were also much better, with an aggregate improvement of 63 percent over the same period. Nowhere was this more evident than with InterCity, which had been given a break-even objective for 1988/89. In the previous year, a loss of 86 million pounds (68 million pounds in 1982 prices) had been declared. Twelve months later, a surplus of 57 million pounds (42 million pounds in 1982 prices) was recorded, an improvement in real terms over 1982 of no less than 121 percent.

Broader indicators, shown in Table 4, confirm the hypothesis of enhanced performance. By 1988/89, passenger traffic volume, 21.3 billion passenger-miles, was up 16 percent from 1983 and the highest recorded figure since 1960; passenger income had increased by 23 percent in real terms since 1983; the operating surplus on Freight, 69.4 million pounds (51.5 million pounds in 1982 prices) was the highest for over a decade; the railway labor force had been cut by 17 percent since 1983; and labor productivity, measured here as train-miles run per staff member, improved by 26 percent. At the same time there were healthy increases in both the "railway" and the "group" financial performance.

Finally, the objective set by government of reducing the PSO by 25 percent was comfortably attained. British Rail had been asked to reduce the subsidy from 856 million pounds in 1983 to 635 million pounds in 1986/87 (in 1983 prices). The amount required from the central government was 720 million pounds, 621 million pounds in 1983 prices, a reduction on 1983 of 27.5 percent. Furthermore, PSO payment in 1988/89 fell even further, to only 531 million pounds (416 million pounds in 1983 prices), only 34 percent of total passenger incomes (including InterCity), compared with 82 percent in 1983, and 51 percent lower than in 1983. (41) British Rail remains the least-subsidized railway system in Europe, and the gap has widened. (42)

Sector management is not without its blemishes, of course, and some of the achievements recounted might have been the result of economic recovery, exploited by a determined management, rather than the product of a particular organizational structure. Some continuing elements of weakness must be recognized. British Rail's corporate planning, though much improved, continued to attract criticism. Its plan of 1984, for example, can be singled out for its optimistic, marketing flavor. (43) In any case, the whole business of planning remains adversely affected by the government's insistence on annual adjustments to financial limits. It is also too early to say that sector management has achieved a sustained financial improvement. InterCity's initial progress toward its break-even objective was slow, a profit being made for the first time in 1988/89, the first year in which the government was set to withdraw its subsidy to the sector. InterCity's improved results owed something at least to the transfer of services between sectors and to the application of more sophisticated formulas for allocating infrastructure costs. (44)

Disappointments occurred in other "commercial" areas as well. The Parcels sector recorded an operating loss before interest of 6.8 million pounds in 1987/88 and 12.4 million pounds in 1988/89, whereas Freightliners lost 6.2 million pounds in 1987/88 (at current prices). (45) Moreover, the overall performance of British Rail improved against a background of strong economic recovery--Gross Domestic Product increased by 18.5 percent in real terms from 1983 to 1988--and with considerable income from sales of assets; the more extravagant claims made for the "sector revolution" must therefore be dismissed. (46)

The sector-management concept may also be criticized on organizational grounds. First, the attack on the old railway structure met with not inconsiderable resistance; although it was not strong as that which undermined the "field" organization of the early 1970s--the earlier attempt to effect change at the regional level--tensions between sector managers and regional and functional managers persisted. Sectorization, though an appropriate response to British Rail's environment, was antithetical to the railways, "culture." Complaints that sector directors had become the dominant force below board level necessitated a firm directive from the center in the shape of a management brief entitled "Sectors and Regions: Where They Stand" in October 1987. This sought to reassure regional managers that they were of equal rank in a team-based organization. Furthermore, the emphasis on the "sector" appears to have encouraged suboptimal decision making in the context of the railway network as a whole. Sector directors competed with one another, for example, to avoid responsibility for costs in order to maximize productive investment. The overall strategic interests of the railways can be sacrificed when managers pursue narrower objectives, and it seems that some recent battles for investment resources have resembled the random "garbage can" model of managerial behavior familiar to organization theorists. (47)

How real the organizational improvement has been throughout British Rail remains unclear. To effect change in a strong vertical organization with weak horizontal linkages was a difficult task. Despite all the appeals for "teamwork," British Rail remains in essence a unitary or U-form organization. Although the new structure has delivered substantial benefits in the short term, it retains all the advantages and disadvantages that a centralized, segmented structure implies. (48)


The privatization of the British Railways Board's subsidiary businesses presents a picture at once more controversial and more complicated, and the untangling of internal and external elements in the decision-making process is a challenging task. First, the chronology of divestiture must be outlined.

Put simply, the British Rail's privatization "program," which began in 1979-80 with the aim of finding capital for its ancillary businesses on a partnership basis, soon became a strategy of disposal by outright sale. In November 1980 British Rail Investments, Ltd. (BRIL) was incorporated as a wholly owned subsidiary of the board. The new company, though formally subject to ministerial direction under the Transport Act of 1981, which gave it legal standing, was nevertheless intended to function as a free-standing holding company. (49) The assets of British Transport Hotels, Ltd., Sealink UK, Ltd., British Rail Hovercraft, Ltd., and British Rail's nonoperational properties, hitherto managed by the British Rail Property Board, were all transferred to BRIL. The initial intention was clearly to "privatize" by attracting private capital into these investment-starved businesses in the form of joint ventures, with the board retaining a stake in the reconstructed companies. To that end three Scottish hotels, including the famous establishment at Gleneagles, were sold to a new company, Gleneagles Hotels Plc, in June 1981, and in the following October the ailing hovercraft business, trading as Seaspeed, was merged with Hoverlloyd, owned by the Swedish company Brostroms Rederi A.B. to form Hoverspeed UK, Ltd. In both cases a substantial shareholding was retained in the public sector. (50)

The atmosphere changed rapidly, however, and BRIL came to be regarded merely as a vehicle for selling off assets to the private sector without retaining a participatory stake. Steps of this kind were taken with two minor activities within the British Transport Hotels company: three laundries, which were sold in March 1982, and a wine business, the Malmaison Wine Club, where the stocks were reduced by 2 million pounds in 1980-82 and the business eventually disposed of in September 1983. (51) But the principal decisions taken were the sale by public tender of most of the remaining hotels in March 1983 and the disposal by a similar mechanism of Sealink UK, whihc was bought by British Ferries, Ltd., a subsidiary of Sea Containers, Ltd., in July 1984. In both cases efforts to organize a management buyout (MBO) were unsuccessful. (52) Parallel moves included an acceleration of property sales in general and, in particular, the transfer of several imporant properties in the "operational" portfolio to BRIL in order that they could be sold. British Rail's stake in the Hoverspeed enterprise also disappeared. The merger failed to turn the operation around in the short run, and in March 1984 the whole business was sold to a management consortium for a nominal sum. (53)

Subsequent activity has seen the emphasis shift to British Rail's large engineering capacity, which since 1970 had been managed by the subsidiary British Rail Engineering, Ltd. (BREL). Privatization began with the policy of competitive bidding for the railway's rolling stock requirements, initiated in 1983. By 1987/88 the private sector had won 53 percent of the orders for the 720 million pounds spent on locomotives and coaches, and 45 percent of the 100 million pounds investment in wagons (freight cars) since then. Another precedent was set by Foster Yeomans, a major freight customer, which with British Rail's encouragement purchased its own American diesel locomotives from General Motors for its aggregates trains in 1986. (54) The private ownership of wagons, which had always been a feature of freight operations in Britain, also intensified. By 1987/88 31 percent of the wagon fleet was privately owned; a year later it was reported to be close to 50 percent. (55)

The breakup of BREL itself was a natural sequel. In April 1987 the works at Doncaster, Eastleigh, Glasgow, and Wolverton were hived off to a rail maintenance subsidiary, British Rail Maintenance, Ltd. Sales of other assets then followed. In September 1987 Doncaster Wagon Works was sold to RFS Industries, Ltd., a company created by local management staff. In August 1988 Horwich Foundry was bought by a castings firm, Parkfield Group Plc, and in March 1989 the rest of BREL--the works at Crewe, Derby, and York--was bought by a consortium in which the managers and employees hold a 20 percent stake. (56)

There has also been a greater private-sector presence in property development, notably in the redevelopment of the Broad Street and Liverpool Street stations in London by Stanhope and Rosehaugh, and in station trading, advertising, and catering. Both British Transport Advertising, Ltd., and the station catering company, Travellers-Fare, were sold in management buyouts, the former in August 1987 and the latter in December 1988 (following the earlier separation of train and station catering and the putting out to tender of one-third of the sites). (57)

Privatization thereby produced a substantial part of the reduction in British Rail's staffing between 1978 and 1989--54,000 out of a total of 108,000 (see Table 5). Sales of parts of the railway network itself have also been under consideration, although the only actual step taken to date has been the disposal in October 1988 of the narrow-gauge Vale of Rheidol Railway in Wales. (58)

These moves, of course, may appear rather marginal to the main thrust of the British government's privatization program, which since 1981 has seen the transfer to the private sector of large "visible hand" utilities such as British Telecom and British Gas, and of sizable companies in more competitive industries, such as British Aerospace, British Airports Authority, British Airways, British National Oil Corporation, and the government's 31.5 percent stake in British Petroleum. (59) On the other hand, some of British Rail's subsidiaries, although marginal in relation to total railway turnover, were nevertheless among the largest in their industries. This was certainly true of the hotels, shipping, engineering, and property interests. In any case, the British Rail story is certainly important as an example of government-industry relations during the formative stages of a major change in political strategy. The bulk of Conservative privatizations took place after the sale of Sealink UK in July 1984, and the government's experience of handling railway assets was undoubtedly important in helping to shape its actions elsewhere in the economy.

In interpreting that policy, one might easily be tempted to tell a story of successive divestments, with the government slowly but inexorably turning the screw on a reluctant British Railways Board. There was much more uncertainty on the part of government about privatization than such a hypothesis implies, however, and to accept it would be to underrate the undoubted enthusiasm for some form of private-sector involvement among railway managers, particularly those who felt constrained by the rules of working within the public sector. Initially, government policy was all about ends rather than means. This is clear from the debate in the House of Commons on the Queen's Speech in May 1979. The speech merely referred to the intention of "restricting the claims of the public sector on the nation's resources," and Margaret Thatcher, in commenting on it, spoke in very general terms. Pleding herself to secure a larger "healthy free enterprise sector," she promised to reduce the size of the public sector. How this was to be done, and in which industries, were not spelled out. (60) Indeed, in 1979 British Rail seemed to be taking the lead. Hoping to capitalize on the change of government, the board wanted privatization to involve the attraction of capital without loss of control. Unlike other enterprises, which were shedding assets to concentrate on "core" activities, British Rail did not talk of dismemberment. After all, the policy owed its origins to Peter Parker's "Group of Groups" concept in 1977. Making a case for joint venture capital, he had asserted that his subsidiaries should be allowed to "operate with the same degree of flexibility and opportunity ... as their private sector counterparts." (61)

The policy had borned early fruit in the reorganization of the hotels business and in the reconstitution of the shipping services. In 1978 the hotels company was separated into a hotels division and a catering division (Travellers-Fare), a group managing director was appointed (Peter Land), and the twenty-nine hotels were divided into three sectors for management purposes: "city," "leisure," and "investment." The shipping division was then given corporate status as Sealink UK, Ltd., effective on 1 January 1979. (62) After the election in May, the board engaged the services of the merchant bankers Morgan Grenfell, seeking advice on the best way to bring capital into the subsidiaries. In October it took the initiative in sending a report to the minister of transport, Norman Fowler, which examined the prospects for seven businesses (see Table 6).

In late 1979, then, the railways were clearly leading the way in policy-making. Their aim was to examine the scope for development and the opportunities for outside finance. The emphasis was on expansion in collaboration with the private sector. Rejecting the idea of floating a new conglomerate, the railways' preferred policy was to develop special strategies for each business. The criteria to be employed included the long-term increase in net asset value and an improvement in group profitability. The board did not think it appropriate to sell off assets with potential unless the move could be seen to benefit the business in the long run. Synergy was the watchword: the synergy of private and public investment and management. The injection of capital was to be varied to suit the needs of each business.

The board also managed to have its own way with the mechanism for organizing privatization. Initially, the minister had demanded that the rail subsidiaries be transferred to a holding company under his control. However, the board was able to persuade him to accept the idea of a wholly owned British Rail subsidiary--BRIL. At this stage government intentions, as revealed by Fowler in a Commons statement on 14 July 1980, were at one with the board's. Private-sector "involvement," and not a simple sell-off, was favored. (63)

In the ensuing months the government asserted itself. First, the mandate for BRIL was progressively redefined. In the course of 1980-81 it moved from: 1) encourage the subsidiaries concerned to seek private capital where appropriate (September 1980); to 2) ensure that the subsidiaries, where appropriate, seek external sources of capital through the sale of assets or the sale of equity, endeavoring to retain as far as is reasonbly practicable a shareholding (December 1980-February 1981); and finally to 3) ensure that the businesses pass as soon as is practicable--and certainly within the life of this Parliament--into majority private-sector ownership and into effective private-sector control (May 1981).

The Department of Transport's firmer hold on BRIL was associated with the Treasury's insistence that "escape from the public sector" should mean precisely that. It was soon made clear to the board that a reduction in its shareholding in a subsidiary from 100 percent to 49 or even 30 percent would not do. (64) By the summer of 1981, when the Transport Act was on th statute books, the board accepted, albeit reluctantly, that the government would use the legislation to insist on the way in which privatization was to be pursued. And given the problems with British Rail's cash flow during the recession, it was also accepted that government pressure would be exerted to establish when privatizations were to be carried out.

The expectations held for BRIL also changed. At first the board had assumed that the subsidiary company would concern itself purely with privatization procedures, leaving day-to-day control of the business in the hands of the board. It quickly emerged that the government expected BRIL to play a more active role, since the preparation for privatization of activities such as hotels and shipping, which had a poor profits record, clearly implied an interventionist stance.

The events of 1981-84 reveal that the initiative rested largely with government, which can be said to have directed the policy surrounding hotels, shipping, and property. The board's early (1979) stance on the hotels was that commercial opportunities should be developed by merging all or part of the business with a suitable partner in the private sector. Indeed, while the BRIL concept was being developed in 1980, British Transport Hotels had discussions with a major hotel chain, although the idea of a sale and leaseback arrangement did not find favor with the Treasury. [65] The Gleneagles initiative of 1981 was certainly compatible with British Rail thinking, but it was not conceived in a supportive environment. It was planned after the board had been forced by a cash crisis in August 1980 to contemplate immediate disposal of the entire hotel business; and it had to run the gauntlet of criticism, not only from government, where both the Department of Transport and the Treasury were doubtful about whether the scheme really represented an escape from the public sector, but also from merchant bankers, who attacked the substantial discount on market valuation that the sale appeared to represent. (66) In the end, the future of public-sector participation in Gleneagles was prejudiced by the government's insistence that there should be no "symbiosis" between British Transport Hotels and the new company. This was interpreted as prohibiting the former from influencing major strategic decisions affecting investment, borrowing, and so on. When in 1983 the Gleneagles company proposed to fund a move into the London market by a rights issue, British Transport Hotels was prevented from participating in it. Severance became the only logical option, and when a serious takeover bid materialized early in 1984, the publicly held equity was sold for 6 million pounds, double what it had been worth three years earlier. (67)

The influence of government was also evidence in the decision to sell the remainder of the hotel estate in 1983. British Transport Hotels' strategy document of September 1981 had favored the development of the hotel "core," with the aim of placing shares on the market in 1984. This was, however, opposed by BRIL, which advocated the immediate sale of fifteen hotels. (68) For a time, the internal situation was tense, and it was exacerbated by the dual position of Michael Bosworth, the deputy chairman of the British Railways Board, who was chairman of both BRIL and British Transport Hotels. (69) the extent to which BRIL's position was influenced by the government is unclear; certainly, there were many internal references to doubts about the Hotels' strategy as a commercial option, as well as criticisms of the company's track record (operating losses were posted in 1980-83). On the other hand, BRIL was under pressure to achieve a cash flow through sales of 190 million pounds in three years, and the government's banking advisors were in favor of a sale via public tender.

The board was also in an awkward position. The evidence suggests that it tended to support the Hotels company, and it was certainly keener than either BRIL or the government on attempts by Peter Land and his management team to organize a buyout. Indeed, the failure of an MBO evoked considerable disappointment in Peter Parker and his board members. (70) Between June and October 1982, a great deal of effort was put into a management bid of 29 million pounds for eighteen hotels, but this was apparently below the market valuation, and in the course of the hagglingover theprecise value of the bid, David Howell, now secretary of state for transport, made it plain that he could not defend a discounted purchase. (71) By this time the government was sensitive to criticism of some of its earlier privatization schemes, such as British Aerospace (February 1981), Cable & Wireless (also in 1981), and Amersham International (February 1982), where city investors had made substantial profits. (72) The board had no option but to organize the disposal by public tender of twentyone of the twenty-three remaining properties. Even here, the plan misfired; an attempt to favor bids for eight hotels or more, introduced in an effort to enable the Land group to remain a viable suitor, failed. The hotels were sold off in relatively small parcels in 1983-84, and many of them were subsequently resold at much higher prices. (73)

Less controversy surrounded the sale of Sealink in 1984 and the acceleration of property sales. Once again, however, the intervention of ministers and civil servants was a crucial factor in decision making. British Rail's early (1979) strategy for Sealink, as with the hotels, had been to keep the business intact and to move to a public issue of a portion of the equity, in this case by the end of 1981. As 1981 came and went the company's difficulties during the recession--losses after interest amounted to 4 million pounds in 1980 and 11 million pounds in 1981--were such that the issue was not expected to take place until late 1983 or early 1984, when about 70 percent of the capital was to be placed. Here the government wasintially more supportive than it had been with the hotels: it did not dissent from board policy until after the election of June 1983. The Conservatives fully backed Sealink and BRIL in resisting opportunistic takeover bids--the first from European Ferries in December 1980, which was ruled out following a reference to the Monopolies and Mergers Commission, and the second, from Carnival Cruise Lines, Inc., of Miami. (74) They also helped to support the share issue option by authorizing, in the Transport Act of 1981, the transfer for British Rail's harbors to Sealink, providinjg tangible assets for a company that leased many of its ships. (75)

There was a change of emphasis in government circles after the 1983 election, however, reflected by successive secretaries of state for transport, Tom King (June-October 1983) and Nicholas Ridley. (76) Both pressed for an early disposal of Sealink. In November 1983 three options, drawn up and costed by Morgan Grenfell, were considered by BRIL and the British Railways Board: 1) the placing of 60 percent of the equity in early 1984, followed by a subsequent offer for sale; 2) an immediate sale; and 3) an offer for sale in March 1985. The minister made it clear that, notwithstanding the estimated yields from each option, he could support only an immediate sale of the company by competitive bidding. An MBO proposl was considered by Sealink's management but was not pressed. The board duly offered the business to tender in the spring of 1984, and in July it was sold for 65.7 million pounds to the only firm bidder. (77)

British Rail's substantial property portfolio was also affected by the privatization environment of the 1980s. In the context of the British Rail Property Board, the process involved the sale of assets rather British Railways Board, the process involved the sale of assets rather than the sale of a company. A change of managing director in March 1980 (the long-serving Robert Dashwood was succeeded by Gavin Simpson) wasthe prelude to a more determined sales effort, encouraged by the Department of Transport and BRIL. In the railways' property management there had always been the difficult task of setting the earnings from long-run estate management (rentals and so forth) against the immediate benefits of sales. In the climate of cash crisis experienced by the British Rainways Board in the early part of the decade, the balance tipped in favor of sales, and it was inevitably that the Property Board would be asked to deliver more in cash than in rental income (lettings). Plans to accelerate disposals were pressed by government, sometimes, it seems, at the expense of long-term gains, as in 1980 with the "Sale-Speed" initiatives and in 1982.

The results were clear from the published accounts. The amount realized by property sales shot up from 14 million pounds in 1979 to 40 million pounds in 1980 and to 71 million pounds in 1983; the gross cash contribution to the board's finances increased similarly, from 39 million pounds to 67 pounds and to 102 million pounds (in current prices). By 1983 the gross value of sales exceeded that of rentals for the first time, and the gap has widened subsequently. In the last two years, 1987/88 and 1988/89, sales amounted to 181 pounds and 264 million, pounds respectively, with rentals only 82 pounds and 101 million pounds. (78) On the other hand, it should not be assumed that the strategy was out of line with management thinking on the Property Board. Here, there was some acceptance that that stimulus provided by cash targets led to more determined action.


The policies developed in relation to the British Rail subsisiaries bear the mark of Lindblom's "incrementalism," although they were not the product of one interest group's determination to succeed by employing "softly, softly" approach. From the start, many public-sector managers welcomed the opportunities offered by the privatization concept, and the board thought, naively perhaps, that it could revitalize neglected businesses and retain a measure of control. The government's initial stance was dogmatic but uncertain; from 1981, and undoubtedly from 1983, it was dogmatic and certain. Privatization was to involve the outright sale of assets whenever possible, particularly when the assets would be located in a competitive industrial environment.

The internal documentation naturally reflects the complexities of negotiations over details. Ministers and civil servants were sensitive to public criticism in the wake of early privatization deals, and the exact positions of the various consultants and financial advisors, some of whom gave advice to both sides, are not always easier to detect. For British Rail managers who concocted more ambitious schemes, this produced feelings of frustration and even anger. The government-industry relationship was not a simple matter of line management. For those public-sector managers who were first encouraged to think positively about privatization but were ultimately disappointed, it must have seemed a veritable spider's web.

The relations between the government and the industry do not fit a simple model of dominance. Railway managers had choices, and they exercised them in relation to both the the type of organization chosen and the initial definition of privatization. On the other hand, government prescriptions for the railway industry intruded into the performance equation at all points, as they did in the rest ofthe public sector in transport. The sale of the National Freight Corporation, the road haulage operator, in 1982, the privatization of Associated British Ports in 1983-84, and of British Airways and the British Airports Authority in 1987, the deregulation of the bus industry following the Transport Acts of 1980 and 1985, and the disposal of the National Bus Company in 1988 indicate a consistent policy by government--although, as we have seen the railways played an important part in the policy-formulation process in 1979-81. At the same time, the economic environment established by the Conservatives in 1979 was important in shaping the parameters of opportunity in British Rail. When Sir Geoffrey Howe, the chancellor of the exchequer, emphasized in his budget speech of 12 June 1979 that, as far as the public sector was concerned, "Finance must determine expenditure, not expenditure finance," it represented a fundamental challenge to most railway managers, who had treated services as an "input" and finance as an "output." It also gave considerable stimulus to those who wished to change this approach. (79) And tighter cash regimes, operated via External Financial Limits and investments ceilings, together with an emphasis on subsidy reduction and asset disposal, fed into British Rail's performance indicators, influencing investment levels, for example.

This influence can be seen in Table 7, where it is shown that privatization has had a considerable impact on the scope for internally generated investment. Inceom from asset disposals, of which property sales were by far the most important element, where equivalent to just over half of the investment in fixed assets over the last decade.

In 1979, a joint British Rail-Leeds University study reported that British Rail was regarded as the most efficient rail system in Western Europe. At the same time, its investment levels were the lowest. (80) Periodic comparisons published since then show that this dichotomy continues. British Rail ranks very high indeed as an efficient, cost-effective railway with a low level of subsidy. British Rail's productivity, for example, measured as train-kilometers run per staff member, was 14 percent higher than that of eight other Western European rail systems in 1979 and 49 percent higher in 1988/89. (81) The strategy may have a downside, however, as Philip Bagwell has emphasized in his book, End of the Line?. (82) Customers' fares cover a much higher proportion (about 80 percent) of real costs in the United Kingdom than elsewhere in Europe, and it remains to be seen whether a more profit-conscious regime can be fully reconciled with adequate investment and with due regard for quality of service and the highest standards of safety. The final verdict on sector management and privatization in these broader terms will emerge only in the 1990s.

(1) British Railways Board and Institute for Transport Studies, University of Leeds, A Comparative Study of European Rail Performance (London, 1979), 111, 134, 139; British Railways Board [hereafter BRB], Annual Report and Accounts, 1984/85 (London, 1985), 9.

(2) Note, for example, the survey material in Yair Aharoni, The Evolution and anagement of State Owned Enterprises (Cambridge, Mass., 1986), and the comparative perspective offered in Vera Zamagni, ed., "Origins and Development of Publicly Owned Enterprises," 9th International Economic History Congress, Bern, 1986, with the papers subsequently published in Annali di Storia dell'Impresa 3 (Milan, 1987): 119-275. For the United Kingdom, there is Sir Norman Chester, The Nationalisation of British Industry 1945-51 (London, 1975), and a host of other works, including Richard Pryke, Public Enterprise in Practice: The British Experience of Nationalization over Two Decades (London, 1971) and his The Nationalised Industries: Policies and Performance since 1968 (Oxford, 1981), and John Redwood, Public Enterprise in Crisis: The Future of the Nationalised Industries (Oxford, 1980).

(3) Leslie Hannah, Electricity before Nationalisation: A Study of the Development of the Electricity Supply Industry in Britain to 1948 (London, 1979) and Engineers, Managers and Politicians: The First Fifteen Years of Nationalised Electricity Supply in Britain (London, 1982); Barry Supple, The History of the British Coal Industry, vol. 4: 1913-46: The Political Economy of Decline (Oxford, 1987) and William Ashworth, vol. 5: 1946-1982: The Nationalised Industry (Oxford 1986); T. R. Gourvish, British Railways 1948-73: A Business History (Cambridge, England, 1986). In addition, there have been official studies of nuclear power and gas, and unofficial but informed works on railways and transport: Margaret Gowing, Britain and Atomic Energy, 1939-1945 (London, 1964) and Independence and Deterrence: Britain and Atomic Energy, 1945-1952, 2 vols. (London, 1974); Trevor I. Williams, A History of the British Gas Industry (Oxford, 1981); Derek H. Aldcroft, British Railways in Transition (London, 1968); Michael R. Bonavia, The Nationalisation of British Transport: The Early History of the British Transport Commission, 1948-53 (London, 1987).

(4) Gourvish, British Railways, 322-43, 374-88, 566-82.

(5) Reid, in ibid. xvi-xvii.

(6) BRB, Annual Report and Accounts, 1975 (London, 1976), 57, 59.

(7) Gourvish, British Railways, 374-79.

(8) Sir Robert Reid, "Managing Change," extracts from a speech made to the Association of Management Institutes of Teeside, 4 Nov. 1985, BRB Management Brief, 18 Nov. 1985.

(9) For a short time regional general managers retained profit accountability for subsectors that fell wholly within their regions.

(10) In addition, a new region, Anglia, was added in April 1988, reflecting economic and population growth in East Anglia. On sectorization see, for example, John Heath, "Planning in Transport," in Strategic Planning in Nationalised Industries, ed. John Grieve Smith (London, 1984), 221-22.

(11) The subsectors were: 1) InterCity: East Coast Main Line, Anglia InterCity, West Coast Main Line, Midland Mainline, Cross Country, Gatwick, Great Western Mainline, Charter Trains; 2) Freight: Aggregates, Automotive, Building Materials, Coal (Distribution), Coal (Electricity), Coal (Others), Distribution Services, Metals, Petroleum, Refuse, Freightliner; 3) Network SouthEast: East [now Anglia], South, North, Central, SouthEast, SouthWest, West [now Thames & Chilterns]; Provincial: Eastern, Midland, Scotrail, Western; and 5) Parcels: Premium Parcels, Newspapers, and Post Office.

(12) R. B. Reid, "All Change for Railway Management--How British Rail is Facing the Challenge of Competition," Address to the Institute of Administrative Management, 23 April 1985, BRB; BRB, Measuring Cost and Profitability in British Rail (London, 1978), 6ff., and see also BRB, Report, 1976, 14-15.

(13) Redwood, Public Enterprise in Crisis, 119-20; Tony Prosser, Nationalised Industry and Public Control: Legal, Constitutional and Political Issues (Oxford, 1986), 120-21; Chris Nash, "British Rail and the Administration of Subsidies," in Reshaping the Nationalised Industries, ed. Christine Whitehead (Hermitage, Berks., 1988), 92-93; and John Redwood, Going for Broke: Gambling with Taxpayers' Money (Oxford, 1984), 113-14.

(14) T. R. Gourvish, "Government, Nationalization and Business Performance: The Nationalized Transport Enterprises in the United Kingdom, 1830-1980," Annali di Storia dell'Impresa, 173-76.

(15) Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 185-87.

(16) T. R. Gourvish, "The Railways and the Development of Managerial Enterprise in Britain, 1850-1939," in Development of Managerial Enterprise, ed. Kesaji Kobaysashi and Hidemasa Morikawa (Tokyo, 1986), 194-96; Geoffrey Channon, "The Great Western Railway under the Railways Act of 1921," Business History Review 55 (Summer 1981): 203ff.

(17) The Financial and Economic Obligations of the Nationalised Industries (April 1961), Cmnd. 1337; Nationalised Industries: A Review of Economic and Financial Objectives (Nov. 1967), Cmnd. 3437; The Nationalised Industries (March 1978), Cmnd. 7131.

(18) See, for example, Gourvish, British Railways, 515-20; I. C. R. Byatt, "The Framework of Government Control," in Grieve Smith, Strategic Planning, 67-86; Richard Molyneux and David Thompson, "Nationalised Industry Performance: Still Third-Rate?" Fiscal Studies 8 (Feb. 1987), 50-52; and Anthony Harrison, "The Framework of Control," in Whitehead, Reshaping, 22-28.

(19) In addition a subsidy of 66.3 million pounds was provided to support freight services, and 3.3 million pounds as an adjustment for previous years. The overall support, with pension and loan arrangements, totaled 506.8 million pounds in 1975. See Secretary of State for Transport, Direction, 19 Dec. 1974, in BRB, Report, 1976, 4, and Report, 1975, 3, 8, 60.

(20) BRB, Reports, 1976-79. The EFL was fixed at 730 million pounds for 1979-80, later adjusted to 715 million pounds, Report, 1979, 12.

(21) BRB, Report, 1981, 5. Sealink was asked to earn a real return before interest and tax of 5 percent on the replacement cost of net assets: Report, 1982, 5.

(22) BRB, Reports, 1979-83. Passenger income was 799.7 million pounds in 1979, 1,022.8 million pounds in 1981, and 924.1 million pounds in 1982. The loss in 1982 appears as 136.8 million pounds in later accounts.

(23) The PSO objective was to accelerate from its planned 700 million pounds in 1986 and 635 million pounds in 1988 (1983 prices) to 635 million pounds by 1986. Since the actual PSO in 1983 was 856 million pounds, this represented a target reduction of 25.8 percent in three years. Nicholas Ridley (Secretary of State for Transport) to R. Reid (Chairman, BRB), 24 Oct. 1983, published in BRB, Report, 1983, 4. It should also be noted that the Serpell review, which was in some ways a response to BRB plans for substantial electrification (see BRB, Rail Policy [March 1981]), had initially been invited by Parker. See BRB, press releases, 8 Dec. 1981, 5 May 1982, and HMSO, Railway Finances: Report of a Committee Chaired by Sir David Serpell KCB CMG OBE, 2 vols. (London, 1983).

(24) BRB, Report, 1980, 25, 1981, 10.

(25) Nash, "British Rail and the Administration of Subsidies," 90-92, 96-105. The present directive, dated 30 March 1988, provides for the maintenance of public services at 1988 levels. BRB, Report, 1988/89, 30.

(26) BRB, Reports, 1976-77, 4; Molyneux and Thompson, "Nationalised Industry Performance," 60.

(27) BRB, Reports, 1976-82. A promise to deliver actual as opposed to estimated results was not kept, nor were non-passenger sectors included. The 1983 accounts showed operating results (but no details of direct and indirect costs) for the five sectors: Report, 1983, 34.

(28) Parker had been appointed as a part-time member of the board in April 1976. He was chairman of the Rockware Group, 1971-76, to which he returned in 1983. See Peter Parker, For Starters: The Business of Life (London, 1989).

(29) Ian Campbell became chief executive in June 1978.

(30) Strategy Steering Group Minutes, 10 July 1978, and Strategy Unit, "Strategic Study of Railway Infrastructure," memo to SSG, Nov. 1978, BRB.

(31) Cf. Gourvish, British Railways, passim.

(32) Note the turnover in regional general managers reported in BRB, Reports, 1980-84/85, and see also Reid, "All Change," 1985. The "task-oriented" approach is contrasted with the "relationship-oriented" approach (Peter Parker?) in Fred Fiedler's work on leadership effectiveness: Fred E. Fiedler, A Theory of Leadership Effectiveness (New York, 1967), 13-14.

(33) Sellers was director of finance, BRB, 1980-84, Bradshaw was director, Policy Unit, 1980-83.

(34) Charles E. Lindblom, The Policy-Making Process (Englewood Cliffs, N. J., 1968), 26-27.

(35) BRB, Reports, 1982, 9, 1986/87, 8, 1987/88, 6; Railway Finances, 1983, 98-99; "A Guide to BRB's New Management Structure," BRB Management Brief, 4 March 1983, "The Evolving Railway Organisation," BRB Management Brief, Dec. 1985, and Sir Robert Reid, speech to Railway Study Association, extracts in "Sectors and Regions: Where They Stand," BRB Management Brief, 8 Oct. 1987, BRB.

(36) Rose's illness (he died in July 1983) forced a modification. Myres took charge of Operations/Engineering, and Jim O'Brien, former regional general manager, London Midland Region, became responsible for Sectors/Marketing. The change of title was made when O'Brien joined the board in April 1984.

(37) David Kirby, sector director, London & South East, became a managing director in Myers's place in Dec. 1985. On Myers's retirement in Nov. 1987, Kirby became vice-chairman, and David Rayner took Kirby's place.

(38) Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of Industrial Enterprise (Cambridge, Mass., 1962), 383ff.

(39) Reid, "All Change," 1985. The units were transferred for maintenance purposes to the Eastern Region, through deployed on the London Midland. John Gough, Britsh Rail at Work: Intercity (London, 1988), 24.

(40) Cf. Heath, "Planning in Transport," 220-21, and Prosser, Public Control, 120-24.

(41) BRB, Report, 1984/85, 8-9, 1986/87, 3, 6, 1988/89, 34, 40. The PSO in 1988-89 was also subject to a reduction of 64.5 pounds million as an exceptional repayment for previous years.

(42) Public support for Railways as a percentage of GDP was: BRB, 1979, 0.4 percent, 1988/89, 0.22 percent, cf. eight European railways (Austria, Belgium, France, Britain, Italy, Holland, Switzerland, W. Germany), 1979, 0.84 percent, 1988/89, 0.67 percent. BRB, Report, 1980, 20, 1988/89, 57.

(43) Note Prosser, Public Control, 123-24.

(44) Some profitable services were transferred to InterCity--for example, Victoria-Gatwick Airport (ex-London & South East)--while some long-distance express services remained in the Provincial Sector. On the changing methods of allocating costs, and specifically "avoidable costs," 1975, "prime user," 1982, and "sole user," 1984, see Gourvish, British Railways, 395.

(45) BRB, Report, 1987/88, 3, 16, 26-27, 1988/89, 9, 18, 20. In 1987/88 the government's directive for the non-supported business was a 2.7 percent return on net assets before interest but after depreciation by 1989/90, estimated to be 54 pounds million in 1987/88 prices. Attributed by BRB as freight 39 pounds million, parcels 5 pounds million, freightliner 1 million pounds, InterCity 14 pounds million (contingencies-5 pounds million), actual 1987/88 results were freight-6 pounds million, parcels-16 pounds million, freightliner-12 pounds million, and InterCity -98 pounds million. In 1988-89 the objective was set at 57 pounds million (freight 42 pounds million, parcels 7 pounds million, InterCity 24 pounds million [contingencies -16 pounds million]), and the results were freight 23 pounds million, parcels -17 pounds million, InterCity -26 pounds million. Freightliners was merged with freight in Oct. 1988.

(46) GDP (expenditure basis) at factor cost increased from 290,010 pounds million in 1983 to 343,669 pounds million in 1988 in constant 1985 prices. CSO, Economic Trends, Annual Supplement, 1990, and CSO, GDP Press Notice, 16 March 1990.

(47) See M. D. Cohen, J. G. March, and J. P. Olsen, "A Garbage Can Model of Organizational Choice," Administrative Science Quarterly 17 (March 1972): 1-25. The model sees organizations as garbage cans, into which problems, solutions, participants, and opportunities are pitched. Decisions are the result of a somewhat irrational admixture of these streams. A possible example involved the Newcastle Resignalling Scheme. None of the sector directors was initially prepared to bear the costs of maintaining a small section of track that would have helped to maximize operating efficiency at Newcastle station. However, it should be noted that mechanisms are available to resolve intersectoral conflicts. A Business Review Group meets monthly to review financial progress, sector conflicts, etc., and it is the responsibility of the joint managing directors (railways) to resolve conflicts under the leadership of the vice-chairman (railways).

(48) Cf. Paul Bate, "Organisation Development in British Rail," March 1987, part of a study of British Rail Culture, BRB.

(49) BRB press release, 25 Nov. 1980; Transport Act, 1981, c.56, Part 1, S.1-3. Section 1 allowed British Railways Board to sell shares in or dispose of part of its undertaking subject to the secretary of state's consent, while Section 3 gave the secretary of state power to give directions to the board, and specifically to require the board to exercise its powers under Section 1 in a specified manner and in relation to a specified subsidiary.

(50) British Transport Hotels held one-third of Gleneagles shares and the board held half of Hoverspeed. BRB, Railnews, July 1981, 2-3, BRB, Report, 1981, 31, 33.

(51) The laundries, at Willesden (London), Slateford (Edinburgh), and Heworth (York), were sold to St. George's Group Plc of Cardiff for 1.1 pounds million. The purchasers then contracted to supply laundry services to British Rail. The wine business was bought by Laytons Wine Merchants, who had operated it on an agency basis since June 1982. See British Transport Hotels, Directors' Reports, 1983-84.

(52) BRB press releases, 19 Nov. 1982, 7 and 23 March 1983; Catering Time, 11 March 1983; Modern Railways, Sept. 1984, 454. On the growing popularity of management buyout in the United Kingdom from the late 1970s, see David Clutterback and Marion Devine, Management Buyouts: Success and Failure Away From the Corporate Apron Strings (London, 1987), 1-9.

(53) BRB, Report, 1983, 6; 1987/88, 6.

(54) Roger Ford, "Moving Mountains by Rail," Modern Railway, Jan. 1988, 37-44.

(55) BRB, Report, 1987/88, 7l 1988/89, 5.

(56) BRB, Report, 1988/89, 4; Modern Railways, May 1987, 233, Dec. 1987, 614; BRB press releases, 24 Nov. 1987, 16 Aug. 1988, 13 Jan. 1989. The BREL consortium included Trafalgar House Plc and Asea Brown Boveri of Switzerland.

(57) British Transport Advertising was bought by Ironlook, Ltd.: BRB press release, 23 July 1987. On Travellers-Fare see ibid., 3 June, 12 Sept., and 20 Dec. 1988. An earlier MBO had been the purchase by Dunn Miller Associates of British Transport Hotels' "Superbreak" holiday business in Feb. 1983: ibid., 9 Feb. 1983.

(58) The line was bought by Brecon Mountain Railway, Ltd.; ibid., 6 June and 10 Oct. 1988.

(59) See John Vickers and George Yarrow, Privatization: An Economic Analysis (Cambridge, Mass., 1988), 155-56, 160-69.

(60) Parl. Deb. (Commons), 5th ser. (Session 1979-80), vol.967, 15 May 1979, c.48, 79. Cf. also Kenneth O. Morgan, "Nationalisation and Privatisation: History Since 1937," Contemporary Record 2 (Winter 1988): 34.

(61) BRB, Report, 1977, 8.

(62) BRB press releases, 21 April and 17 July 1978, BRB, Report, 1978, 34.

(63) BRB press release, 14 July 1980.

(64) Merchant banking advice was also important here in pointing out the difficulty of attracting private capital if British Rail retained control.

(65) Discussions with the De Vere Group involved the sale of BTH hotels for a shareholding and their leaseback. This was rejected by the Treasury on the grounds that it involved a government guarantee of hotel rents. The idea of borrowing on the security of hotel assets was rejected for the same reason.

(66) The discount was held to be 19.5 percent on open market valuation, which, given the provision for deferred cash payments, amounted to 23.4 percent in real terms. It should also be observed that the equity holding was reduced from 40 percent to 33 percent after government disquiet.

(67) The Gleneagles company was purchased by the whiskey firm Arthur Bell for 20.4 pounds million.

(68) The proposed sale of fifteen hotels was in addition to decisions already taken to sell three others--at Derby, Sheffield, and St. Andrews.

(69) Bosworth was a board member from 1968 to 1983. He was chairman of BTH, 1978-83, and also chairman of Shipping/Sealink UK, 1976-83, and of B.R. Hovercraft, 1976-81 (and a director of Hoverspeed, 1981-83). BRB press release, 20 June 1983.

(70) Cf. BRB press release, 11 May 1983.

(71) Parl. Deb. (Commons), 6th ser. (1982-83), vol. 32, Written Answer, 23 Nov. 1982, c. 467. The MBO offer for eighteen hotels implied a discount of 4.5 pounds million or 13 percent on valuation. A revised MBO offer of 20.5 pounds million for twelve hotels in Oct. 1982 suggested a discount of 3.47 pounds million, but this also failed. At the time of abandonment the argument appeared to be over a difference of only 1.47 pounds million, since the government was willing, it seems, to accept a 2 pounds million discount. Peter Land has subsequently claimed that the valuation placed on the hotels was 3 pounds million too high, in that the valuers had assumed that the vendors, not the purchasers, would meet the costs of segregating the properties from BRB and of paying for staff travel facilities. The reduced valuation was not disclosed to the MBO team.

(72) Vickers and Yarrow, Privatization, 160-62, 174. For example, Amersham shares were offered for 142p; tjeor [roce pm 25 Feb. 1982 (the first trading day) was 188p, and on 25 Feb. 1989 537p.

(73) Of the twenty-one hotels offered, ten were sold to four bidders in Feb. 1983, and a further nine were disposed of by private treaty in March. The last two were sold in 1984. The remaining two properties, affected by development proposals, were the subject of short leases taken out by two of Land's executive colleagues, Derek Plant John Tee (Compass Hotels Plc). See Philip S. Bagwell, End of the Line? The Fate of British Railways under Thatcher (London, 1984), 48-49.

(74) Carnival Cruise valued the company at 60 pounds million, but offered only 30 million pounds for 51 percent on deferred payments. Negotiations ceased in May 1982.

(75) Transport Act 1981, S.2.

(76) Cf. John Moore (Financial Secretary, Treasury), "Why Privatise?" speech, 1 Nov. 1983, reproduced in Privatisation and Regulation: The UK Experience, ed. John Kay, Colin Mayer, and David Thompson (Oxford, 1986), 78-93.

(77) Six companies expressed serious interest, though only one, Sea Containers, Ltd., via its subsidiary, British Ferries, Ltd., submitted a formal offer. The price of 65.7 pounds million was lower than the tentative value placed on option 3-80 pounds million--but close to that placed on options 1 and 2.

(78) BRB, Reports, 1979-88/89.

(79) Sir Geoffrey Howe, Parl. Deb. (Commons), 5th ser. (Session 1979-80), vol. 968, 12 June 1979, c. 246. On the importance of environment in shaping organizational structures see Paul R. Lawrence and Jay W. Lorsch, Organization and Environment (Cambridge, Mass., 1967), and F. E. Emery and E. L. Trist, "The Causal Texture of Organizational Environments," in Systems Thinking, ed. F. E. Emery (Harmondsworth, England, 1981), 1: 253-62.

(80) BRB and ITS (Leeds), Comparative Study.

(81) Train-kilometers per staff member, 1979: BRB, 2,503, Europe, 2,191; 1988/89: BRB, 3,127, Europe, 2,233. BRB, Reports, 1980, 20, 1988/89, 57.

(82) Bagwell, End of the Line?.

TERENCE R. GOURVISH is director of the Business History Unit at the London School of Economics and Political Science.

I wish to thank the following for their help in the preparation of this article: members of the Harvard Business School's Business History Seminar; colleagues at the Fifth World Conference on Transport Research, Yokohama; members of the ESRC-supported seminar in Business History, Polytechnic of Central London; and the editor and two anonymous referees of this journal. The British Railways Board provided access to papers and arranged interviews with contemporary or recently retired managers. The opinions expressed here natural remain mine alone.
COPYRIGHT 1990 Business History Review
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Gourvish, Terence R.
Publication:Business History Review
Date:Mar 22, 1990
Previous Article:Contrived competition: airline regulation and deregulation, 1925-1988.
Next Article:News in the Mail: The Press, Post Office, and Public Information, 1700-1860s.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters