Microeconomic Concepts - Effects of Privatization of the London Underground.

Sam Tilston – BA MHM1

Business Economics – Microeconomic Concepts

Effects of Privatization of the London Underground

This essay aims to identify the business objectives of The London Underground, a public sector transport group that provides transportation services to the public within London, the potential changes to the business objectives if it were to be privatized.

The London Underground, otherwise know as the Tube, is a public sector organization that is a publicly-owned part of the British mixed economy. The Tube is owned and controlled by the government and is a monopoly which takes advantage of economies of scale by being the sole provider of underground rail services to the public. This is supported by London Underground’s stated mission;

“…to open London’s rich potential to all by delivering a dynamic public service that puts customers first.” (http://tube.tfl.gov.uk)

Being a public sector company the London Underground is subsidized by the government, which is funded by taxation. The organization is not accountable to shareholders or investors but to the government and public and therefore, in theory, should place the customers first as stated in the above mission statement.

As a public sector company the London Underground and its customers enjoy many benefits such as government subsidies on ticket prices, government investment, service guarantees and public accountability. Set against this are some negative affects of being publicly owned such as heavy tax burden on the public, inefficiencies due to the nature of less monetary accountability and not being profits driven, no private investment and in some cases, poor management. If the London Underground were to be privatized there would be many changes. Privatization occurs when

“… resources and economic activity are transferred from the public to ...

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“… resources and economic activity are transferred from the public to the private sector as a result of government policy.” (Livesley, 1998, p.98)

In 1998 there was an agreement between the London Underground and a consortium of private companies to commit to a Public Private Partnership (PPP) (http://tube.tfl.gov.uk). This is arguably a partial privatization, although the management of the Tube remains in public hands.

As the London Underground becomes partially privatized many new opportunities for investment and improvements in the service may arise. This is due to items such as competition, lower levels of government interference and more efficient organization. Although the London Underground will remain a monopoly as the only underground transport provider, the PPP is a consortium of private companies who each have a share and so, in theory and the government hopes, there will be competition amongst these companies to gain a bigger share by competing for things such as efficiencies or providing a better service. This may result in a greater choice for the public on pricing structures and ticket prices as well as better levels of service.

Governments are notorious for red tape and interference, with privatization there will be less of this and so management will be able to act in a way which furthers the interests of the company. In a full privatization situation, losses that would normally be incurred by the government would be borne by the private company, its investors and shareholders. Although in this instance, because it is a share partnership and not fully privatized, under the London Underground PPP scheme most of the loss risk is still borne by the government and taxpayers. This is supported by Christian Wolmars’ comments in the Guardian.

“…the contractors, Metronet, will be able to make large profits with very little risk” (http://politics.guardian.co.uk)

Due to the privatization, London Underground has been able to attract many billions of pounds in private investment that would not have been possible if it stayed in the public sector. The consortium of private investors have stated in the Guardian that;

“…consortium said it will be investing £17bn into the London Underground” (http://politics.guardian.co.uk)

Under the Public Private Partnership scheme the track, signaling, bridges, tunnels, trains and others will all be under the control of the consortium as stated by the London Underground;

“Under the Public Private Partnership scheme, which the government announced in 1998, the core of the Underground - the track, signalling, bridges, tunnels, lifts, escalators, stations and trains will be transferred to three private companies.” (http://tube.tfl.gov.uk)

This investment and transfer of control, if properly managed, will improve the quality of the trains, underground stations and other services to consumers. There may be a down side to this of increased ticket prices as the private companies will want to recoup their investments.

Privatization of an integral public service such as the London Underground could have repercussions for the users. Public sector monopolies operated by the government are there for the benefit of the consumers, private sector companies will run the services for a profit, although his has its benefits it is important to ensure that the consumer is not taken advantage of. Particularly in the case of the PPP part privatization of the London Underground where the government is still footing the majority of the bill. For these reasons it would be necessary to establish appropriate consumer watchdogs to ensure good services are provided and service targets are met.

References:

Guardian Unlimited, (2003) , Special Report : Tube PPP deal complete. – access 14/02/2004

Livesay, F. Milward, B., Applied Economics., 1998, Macmillan Press, England.

The London Underground, (2004), About London Underground. access - 12/03/2004