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Introducing Privatisation and Competition in Public Services: Italian and British Experiences in Railway Companies Summary
In Italy, the railway sector has been managed for nearly a century by the Azienda Autonoma Ferrovie dello Stato (an historical public entity), which was founded in 1905 after the nationalisation of railway companies. The Azienda Autonoma Ferrovie dello Stato changed its legal form in 1985, when it was transformed in Ente Pubblico Ferrovie dello Stato (a more modern form of public entity, still directly under State control). Since then, other major changes occurred: the Ente Pubblico became a Società per Azioni (a limited company, formally private with all its shares totally under the State’s control) and the Infrastructure Manager was formally separated from transport activities. Passenger transport services are now managed by Trenitalia, while the Infrastructure Manager is Rete Ferroviaria Italiana (RFI).
Such changes belong to two main streams. In part, they were a consequence of European Union’s reforms towards the harmonisation of European railways. They also belonged to a wider privatisation process that Italy promoted in the nineties (Borgonovi, 2004). It was formed both of privatisation dynamics (sale of companies) and “corporatizations”: introducing private management principles into public organisations (Anselmi, 2014). In the meanwhile, some kind of competition was also introduced in the Italian railway sector, which gave a chance for private companies to run against the incumbent.
Overall, the practice of introducing privatisation, corporatisation and competition belongs to the New Public Management (Hood, 1991) theory, which promotes the use of private management tools and organisational structures into public organisations. The United Kingdom is usually considered a crucial case in applying New Public Management (NPM), in particular relating to privatisation process in the railway sector (Dunleavy et al., 2006), while Italy belongs to that set of countries where NPM was more lightly applied (Ongaro, 2009).
Following such premises, this research analyses the potentials and critical issues connected to applying NPM principles to the British railways privatisation, making a comparison with the Italian railways. The research is aimed both at understanding the wider picture about privatisation of British and Italian railway companies, both at analysing the specific characteristics of passenger railway companies in the two countries.
Right now, Italy is moving towards new approaches in dealing with an historically vertical integrated monopoly model. In this perspective, it is important to know how the present organisation has changed through time and what opportunities and weaknesses may arise from a privatised model – taking the British one as an example. The research develops adopting a business-oriented perspective, also contributing to provide different insights from the typical macroeconomic perspective in railways research.
This research adopts a comparative perspective. However, given the peculiarities of the railways sectors, it is not possible to gain universally valid conclusions. In fact, railways are strongly influenced by geographical, social and economical factors of the places which they relate.
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From a methodological perspective, the case study (Yin, 2013) could well explain the “why” and “how” of complex social issues. In this research, it is associated to triangulation methods, using various methodological approaches to study the same phenomenon (Denzin, 1978; Jick,1979). The research is based on primary and secondary data, belonging to oral sources and written documents. The research also included an historical part, in order to understand how past events influenced the present time (Budd, 2008).
The research shows how NPM principles have been deeply embedded in British railway reforms, from the first aims to most of practical developments. NPM ideas were already embedded in British policies before the rail privatisation: Beeching’s reforms in the 60s were aimed at removing everything that didn’t add value to British Railways (Jones and Thompson, 1997). In fact, Beeching’s cuts removed nearly a third of railway lines. Introducing competitive tendering procedures is a key aspect of NPM (Hood, 1991; Hood, 1995, Christensen & Laegredid, 2011), as well as introducing performance measurement and control practices, also considering multi-dimensional performances (Jones & Thompson, 1997). Such tools became an incentive to increase quality and reduce costs of railway services. Competitive tendering practices recall other theoretical issues, about the right mix between profitable and loss-making services (Borgonovi et al, 2013). In fact, the British system calculates subsidies or premiums for franchises based on the expectations of the overall economic equilibrium of the railway lines. The research also highlights a key consequence of the privatisation: the ability of attracting large international companies. This means that privatisation was successful at increasing the number and dimensions of transport companies, at attracting foreign capital and at transforming State-owned companies in public companies (Anselmi, 2014). It also became a chance to build a strong know how in bidding processes. Empirical research showed the main factors attracting railway groups to the British market: low risks, a low amount of capital needed and potential good economic results. Privatisation showed some negative outcomes and aspects that could be improved. First, privatising the infrastructure showed critical effects and should be a reminder that a railway infrastructure needs strong investments and maintenance funds. Second, future reforms could improve the incentives between the States and the railway companies, which presently do not encourage investments in the later years of franchises. Interestingly, Italian XIX century railway companies had similar tendencies.
Even though Italy never adopted as strong privatisation reforms as the British one, it shows some NPM trends. In fact, competition was introduced on High Speed Rail (HSR) lines, which let a private competitor (Nuovo Trasporto Viaggiatori, NTV) enter the market. Moreover, Trenitalia has gone through some corporatisation processes, and it will be partially privatised in the near future.
The research also shows common features and key differences between State roles and competition effects, both form a historical and present point of view. British railway companies and railway lines were formed and constructed from private capital only – today, the Government aims at attracting private companies to invest and compete for the market. In XIX century Italy, most railway lines and transport activities had some financial support from the State – today, most railway companies belong to the public sector, as their shares are held by the State or local authorities: it seems that the public sector’s role has been relevant throughout
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all Italian railway history. Overall, while in Britain the State usually acted as a Regulator, in Italy it has mostly been an Entrepreneur. Among communalities, trends in increasing and decreasing the State’s role appear in the same periods: at the beginning of the XX century and during the world wars, the State’s role in the ownership and management of railway companies usually increased, while it progressively decreased in the last decades of the century, with the privatisation processes. However, the two railway companies went through different privatisation processes: the British one was totally privatised, while the Italian one was only formally privatised.
Presently, both cases show what the critical success factors are in the railway sector, consistently with Antonelli (2000): they generally are innovation, on board services and prices. However, pressure on critical success factors can vary according to the different contexts and competition levels. The tendency to lower prices was found in both types of competition, for the market and in the market – in the latter case, it happened both in Open Access tracks and in those tracks where franchises overlapped.
Even though services are differently organised, the railways are considered a social public service in both countries, that has to respect precise standards and requirements, while obtaining public subsidies. Such belief is further confirmed in the British case, as only two open access operators are presently allowed to run services: they only provide railway services on market niches, without interfering the economic equilibrium of companies operating in franchises.
Findings could have implications at the academic level, in connection with the current discussions on the role of the State, on the validity of NPM practices (De Vries e Nemec, 2013; Lapsley e Square, 2010) and on the different effects competition has in the railways (Nash, 2010). At the practitioner level, the comparison brings some insights which might be useful for the future privatisation process of Ferrovie dello Stato Italiane (as stated in Documento di Economia e Finanza 2015 and confirmed in 2016) and for the future compulsory introduction of competitive tendering for regional railways services (European Commission, Fourth Railway Package).
