I’ve been thinking a lot about infrastructure recently, in particular who owns it. As I wrote recently in a comment on this platform about ( predominantly foreign ) UK airport ownership, the notion of profit-seeking private institutional investors owning public infrastructure and siphoning off huge amounts of capital from the realm of the public has always been abhorrent in the eyes of many.

As a new era of economic protectionism rears its head, that really doesn’t fit the model. But beyond matters of national security and sovereignty, having private owners effectively run monopolies but under-invest in their assets, depriving citizens of reliable essential infrastructure is seen as particularly deplorable.

So, it was a big moment in the UK this past weekend as the first railway re-nationalization since the Passenger Railway Services ( Public Ownership ) Act 2024 was enacted took place. On Sunday May 25th, the government took South Western Railways, a regional train operating company, into public ownership as the company’s franchise came to an end.

In doing so, it wrested control from the operator’s joint venture partners: MTR Corporation, Hong Kong’s majority government-owned listed transport company, and London-listed transport multinational FirstGroup plc. South Western will be run as a subsidiary of government-owned DfT Operator ( DfTO ) until it transfers into Great British Railways ( GBR ) when this state agency is established following the passage of new legislation, expected later this year.

In a written statement to parliament, the UK’s secretary of state for transport Heidi Alexander said the transfer of South Western “marks a watershed moment in the government’s plan to return the railways to the service of passengers and reform our broken railways, ending 30 years of fragmentation … and put passengers firmly at the heart of the railways”. Public ownership, she added, will ensure services are run in the interests of passengers, not shareholders.

The point of the 2024 legislation is to eliminate shareholder-owned private rail franchises that provide UK passenger rail services. GBR will consolidate the train operating companies, DfTO and the already re-nationalized rail infrastructure company Network Rail. The re-nationalization programme excludes the UK’s so-called open-access operators, the private operators that purchase the rights from franchisees – on full commercial risk – to operate certain routes. Passenger rail services in Wales and Scotland have already been nationalized ( in 2021-2022 ) and are under the control of the Welsh and Scottish governments.

Rail nationalization timetable

On July 20th, the UK government will re-nationalise c2c, depriving the Italian government of its ownership ( via state-owned Ferrovie dello Stato Italiane ). On October 12th, Greater Anglia will transfer into public hands. That company is run by Transport UK Group, which acquired the franchise in 2023 after a management buyout from Abellio, a joint venture of Dutch state-owned rail operator Nederlandse Spoorwegen and Japan’s Mitsui & Co.

After the transfer of Greater Anglia, the re-nationalization programme will see the transfer of franchises into state hands as contracts expire. Doing it that way means the government will not have to use taxpayer funds to buy out existing shareholders. The process is expected to be complete by October 2027, although if operators fail to comply with the terms of their franchise contracts, the government can exercise termination rights and re-nationalise earlier.

The re-nationalization programme will see a wide range of foreign governments, pension funds ( predominantly Canadian and Australian ), domestic and international private equity companies and infrastructure asset owners and asset managers pushed out of the UK passenger rail market. Before the 2024 legislation was passed, the government had taken control of four passenger rail companies in distressed situations where operators had experienced financial and other difficulties ( LNER, TransPennine Trains, Northern Trains and London & South Eastern Railway ).

Poor service since privatization

The privatization of the railways between 1994 and 1997 after 50 years of state control was seen as highly controversial and was deeply unpopular among many. At the time, passengers were promised a much more efficient system that would thrive on competition. But that never materialized.

Instead, users were given one of the most expensive rail services in Europe via a complicated mesh of regional operators with little competition, poor ( if any ) inter-operability and bad service characterized by delays, cancellations, overcrowding and long-running trade union disputes. Fat executive bonuses paid for what many considered to have been failure, and the flow of large sums of capital to private investors just added insult to injury. Hence re-nationalization has been hailed as a victory by many more.

At privatization, the rail network was split into several regional companies that operate routes under franchise, a rail infrastructure company that owns the track and major stations, and three rolling stock companies ( Roscos ) that own the trains and lease them to the regional operators. The infrastructure company ( Railtrack ) went bust in 2001, not long after privatization, and moved back under government control ( renamed Network Rail ).

As far as I understand it, there are no plans to bring the Roscos under state control, although the government is reportedly in discussions with Eurofima, the European Company for the Financing of Railroad Rolling Stock, with a view to moving to the agency’s cheaper financing model. Headquartered in Basel, Switzerland, Eurofima is owned by European rail operators in 26 European countries. It finances its operations in the bond market.

If that happens, it will create significant strain on the three UK Roscos that have the bulk of UK rail leasing contracts and their shareholders. Angel Trains is 62.6% owned by the Public Sector Pension Investment Board, a Canadian pension fund, with minority stakes held by Arjun Infrastructure Partners and Amber Infrastructure.

Porterbrook is owned by the Alberta Investment Management Corp, another Canadian pension fund; German insurer and asset manager Allianz; infrastructure asset managers Dalmore Capital and Generation Capital; and EDF Invest, the investment arm of French government-owned power company EDF. Eversholt Rail, meanwhile, is owned by Li Ka-Shing’s Hong Kong-based CK Infrastructure Holdings and related companies, although it is up for sale – JP Morgan Asset Management’s Beacon Rail is in pole position to acquire the company, according to reports.

With the remainder of passenger rail companies passing into state control, whatever government is in control will remain under significant public scrutiny. In her written statement to Parliament, Transport secretary Heidi Alexander acknowledged that public ownership alone is not a silver bullet and will not fix the structural problems hindering the railways. That, she cautioned, will take time.

But not just time. Providing better service at affordable cost will require smart public investment at a time when government budgets are constrained, a hell of a lot of management endeavour, constructive engagement with all stakeholders, altered operating habits and behaviours, and a whole new way of thinking about delivery models. Phew! Let’s see.