Public v Private isn’t the most important question
A post Asking why are we so obsessed with who owns the shares?
Last week, I marked the passage of the Act to renationalise rail services with a light-hearted imaginary history of British Rail, had privatisation never happened.
But, of course, it did happen. Indeed, for pretty much my entire life, the dominant question on public services has been whether they should be privatised or nationalised.
As I turned up for my first day in Play School, the 1985 Transport Act, which deregulated (and largely privatised) bus services, was going through Parliament. By the time I reached secondary, John Major was burning much-needed political capital privatising the trains. Since then, it’s a debate that’s never really stopped, and has sucked the energy away from the real problems and actual solutions. In Labour’s policy-lite manifesto in the election just gone, the only substantial transport commitment (and certainly the only one Labour was willing to shout about) was the renationalisation of the railways.
Yet the evidence that the share ownership model is at the core of good quality delivery is pretty limited.
In terms of customer satisfaction, one of the best-performing rail franchises has consistently been the service that, from 1996, was branded as GNER (a private business owned by Sea Containers) and is now called LNER (a public sector company owned by the DfT). In both entities (and via multiple stints alternating public and private sectors in between), the franchise has maintained an entrepreneurial and customer-focused culture (now being enhanced by the outstanding David Horne).
LNER’s red, GNER was blue - but with both of them the journey flew
When I founded Sn-ap (my digital startup), we launched in Nottingham. So I spent a lot of time travelling on buses around that part of the East Midlands. It has some of the best bus services in the UK outside London. Some are run by the publicly-owned Nottingham City Transport, others by the private sector Trent Barton. Both are superb.
The only city to achieve mode shares equivalent to London is Brighton. Its buses are entirely private. London’s are run under contract to the state.
The Isle of Man has a fantastic quality modern, dense bus network, plus an electric railway and a steam railway - all in the public sector. The Isle of Wight has a fantastic quality modern, dense bus network, plus an electric railway and a steam railway - all in the private sector.
The best-performing major railway in Europe is Swiss State Railways, run in the public sector by SBB. Last time I was in Switzerland, I was gobsmacked by the fact that they put on an “Ersatzzug” (replacement train) to ensure we were able to leave Basel on time, as opposed to wait for the planned train which was… horror!… 19 minutes late. It had been delayed on its way in from Germany by Europe’s worst-performing major railway: German State Railways (DB), also in the public sector.
Italian regional trains are slow and unreliable (with a superb side-line in all-over bodywork grafitti). Italian Frecciarossa high-speed trains are incredible - reliable, great quality service, customer-focused. Both Frecciarossa and the regional trains are run by state-owned TrenItalia. Part of the reason Frecciarossa trains are so good is competition from private open-access operator Italo. So is Frecciarossa a triumph for the private sector or the public sector?
In Switzerland, the transport network is a magical thing: fully integrated, incredibly high quality and universal. Fares, ticketing and timetables connect up throughout the whole country. The Swiss, on average, make roughly twice as many rail journeys per years as the Brits. I mean, you would, wouldn’t you? While much of the network in Switzerland is public, 40 railways are private. Rural services are provided by the iconic yellow PostBus: owned by Swiss Post. Is it public or private? It operates as a public company but under a special statutory regime, allowing it to function with significant entrepreneurial freedom. I don’t know. Should I care?
The reality is that public sector companies screw up and private sector companies screw up. Each time, we genuflect towards the other. Don’t like the way the water networks are run? Nationalise them! Like the Post Office. Oh, but Alan Bates is on record as saying that he wishes the Post Office was run by Amazon…
That’s not to say that it’s random - that companies are good or bad arbitrarily, and the quality of service is a tombola. There are common themes and factors. It’s just that share ownership doesn’t feel a particularly important one.
Size Matters
One pretty consistent feature is that small is beautiful.
Rail businesses that have innovated and grown have tended to be the smaller ones: LNER, Chiltern Railways, Lumo, Merseyrail. In the bus sector, the owning group that has consistently delivered the highest customer satisfaction and consistent margins has been the one with a policy of local delegation and empowerment: the Go Ahead group. 15 years ago, First Bus was highly centralised and struggling. Today, First has local brands and has made real efforts to empower local managers. But Arriva and Stagecoach are highly centralised and struggling (the former, by the way, under the ownership of German state-owned DB until recently: the latter, private sector).
A Go-Ahead group bus, with a typically local brand
DB struggled with Arriva and has seen performance collapse in Germany partly because it overreached. 324,000 employees is a lot, especially for a hierarchical organisation.
Italo was a startup. It’s still quite small, running 118 daily services in Italy. It started tiny. Its intense focus on customers (and different market segments) helped prompt Trenitalia to adopt the same approach: at least on its high speed services.
Open Access private operator Italo competes with Trenitalia on many key routes
But while there is a pretty consistent pattern that small firms innovate better than large ones, it’s not the whole story.
My subheading is misleading. Size doesn’t matter: what matters is being connected to customers and being empowered to make decisions. It’s just that these things are much easier to achieve in a small organisation. Amazon employs around five times the number of people than DB, but they put huge amounts of effort into decentralisation and enabling teams to innovate. DB is highly centralised.
Similarly, small firms don’t have many customers to connect with and it’s easy - big ones need to really make an effort, otherwise it’s very easy to retreat to head office and lose touch with the people who pay the bills. That effort can be around organisation structure (making sure the business is divided into local units that are individually able to connect with customers) or it can be around how teams can be created and empowered to make decisions.
If you want to do well, test your organisation. Are your people connected to customers? Are they empowered to make decisions? Do they feel incentivised to innovate? Ask them. Those characteristics are easier to create in small organisations but they can occur anywhere. It’s just that the bigger the firm, the more deliberate it needs to be. In small ones, these traits emerge naturally.
3% is only 3%
One of the arguments often made for nationalisation is that it retains the profits. That’s true. And is a genuine benefit. My former employer, TfL, did not have to pay dividends to a shareholder so any surpluses could be reinvested. However, the typical transport profit margin is only around 3% and I suspect that many of the norms of public sector behaviour cost around 3% as well. So I’m not sure it actually ends up making a lot of difference.
3% isn’t a lot of money. Differences in fares policy, attitudes to growth, different approaches to cost control can easily end up making more than 3% of difference. Indeed, if we obsessed about these things more than ownership - they probably would end up making more than 3% of difference.
It doesn't matter whether a cat is black or white, as long as it catches mice
This was said by Deng Xiaoping, the Chinese leader who played a significant role in moving China from pure communism to an economy of mixed private and public sector firms. Seems to have worked out OK for China…
This is not to say that public or private firms are identical. The public sector feels very different to the private sector. The public sector is slower, less pressured, more bureaucratic and less focused. It is also more socially-minded, more concerned about equity and more thoughtful. The private sector is more focused, faster and more ruthless - sometimes rapacious. These are real differences.
My point, though, is that while these things are real and important, they are not the most important determinants of customer quality. Leadership is key, and there are good and bad leaders in both public and private sector. Great leaders will promote customer focus, agility and empower managers to innovate on behalf of the customer.
After leadership, the fundamentals matter most. For buses, this means a lack of congestion. For all markets, it means strong demand and a commercially viable service. For transport, it means a close partnership with the local authorities.
The reality is that a fixation on whether public services should be privatised or nationalised misses the larger, more impactful considerations that truly drive service quality and customer satisfaction. Who owns the shares and where we send the dividends is less important than quality of leadership, decentralisation, customer focus, and agility.
The Bill has become an Act: the railways are being renationalised. Fine. Maybe the recent election can be the last one in which the focus is on the ownership of public services and not on the things that actually impact on whether they meet our needs.
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What do you think? Have I got this right? Or is one ownership model inherently superior? Let me know on LinkedIn by clicking here
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