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Accounting for Public Money After Railway Privatization Essay

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Updated: Sep 15th, 2021

There were very many problems prior to the railway privatization in 1990. one of the problems that led to the privatization of the railway line in the UK was the misappropriation of taxpayers’ money. The British government decided to put money in the railway line, which was already not performing well. This was because being a government-owned company the appointment of executive officers was due to political influences. Therefore, the company risks over-generalization and performance. Since it was done by the government people had lost confidence in it leading to poor performance and poor productivity. The government-owned company lacked efficiency, innovation, and cost-cutting processes because of the bureaucracies.

The private sector that was also operating in the transport sector provided a competitive environment for the railway company of the UK. The railway corporation did not match with the competition, which was being offered by transport companies, and being bureaucratic customers preferred other means of transport to the railway transport. The government of Margaret Thatcher decided to privatize the company although John Major later came and sub-divided these companies into small units of hundred private companies running the railway line in the UK.

Most people have argued that the British railway went under because it was underfunded but from government quotas, we realized that it always received priorities of funding from the government. This is the reason why the government decided to privatize the company so that they can have long-term funding from the capital market i.e. investment of the public. Although this created a monopoly that was operating in one industry this created a problem that was large and complex which led to the split into hundred units by John Major.

Another problem that led to the privatization of the British railway was its poor performance. Although the railway line was a monopoly in the UK and financial statements always showed healthy performance like British energy it was suffering the same problem. This problem arose because of the political patronage of the executives of the railway lines. They had always to wait for a decision from the government to make some serious and innovative decision which was slow and had a far-reaching effect. In the US the railway line had already been privatized partly and the UK decided to follow suit.

Margaret Thatcher found it very difficult to continue funding an organization that employed huge labor with a strong union but was performing poorly. The union opposed most decisions that led to the privatization. According to Wolmar 2001, he argued that employees represented collectivists as opposed to individualists, which should be there for the success of any business. The railway subsidiaries performed poorly always making to be given subsidies from the government. They were unable to meet the customers’ needs and the institution management was poorly organized with restrictive practices that also prompted the minister of finance to decide it is privatization.

The problems mentioned above are specifically related to the railway line because the government making it has a specific problem owned the railway line. Secondly, the railway line needs a huge chunk of land along the way covering kilometers of areas like the road network meaning that it is very difficult for a single individual to start such kind of business.

The railway line also needs heavy capital investment, which is involved in the construction of the rails, and it is very difficult for the private sector to have such kind of money to start construction the rails, owning the transport, trucks, stations, and other infrastructures. This is why the UK government-owned the railway line. Even all over the world railway government save few cases has always owned lines where they have moved to the hands of the private sector. The labor party, which took power later, was interested in the labor laws of the employees which helped them to make a decision to sell the railway line.

Most people felt that the railway line was performing well and was making good business except the government had identified an operator who will run the railway line and skim off, the lucrative market which is earning good revenue and that will make him very rich. Others felt that the railway line was being sold off to introduce competition, allow free access to the railway line or network to private individuals who will use them in their own businesses without minding the taxpayers’ interests. They suggested reducing competition the government ought to own some percentage in the railway line. The company became a public floatation in 1996 under the government of John Major.

The collapse of the railway franchise was predictable by many members of the public who had actually known that it will not succeed. This was seen at the beginning of bidding for the franchise. When the company was put under sale in 1996 few people bidding for it. This represented the government’s difficulty in selling all the forty thousand franchises, fifty tunnels, 2500 stations, 1500 signal boxes, 9000 level crossing lines, and 90 shops.

This was a complexity that actually was a signal of the like hood of failure. Remember this was the first time it was being tested in the UK and no other arrangements that had this kind of business. Although the government tried to comfort themselves that they were able to overcome the obstacles and complete the same through writing off the heavy debts, that the company had accumulated, eventually it collapsed. The collapse was seen in the year 2001 when the railway was forced into bankruptcy leaving the shareholders with no choice but to swallow the bitter pill like in the British Nuclear Energy company case.

Similar cases have been reported in companies owned by the government. In the US it was the Enron case, WorldCom case where these companies were publicly held but failed to disclose some information that led to the collapse. The railway line in the UK further failed in this franchise because the management remained politically influenced and that was the pains of poor privatization policies implemented by John Major. John Major government looked at the swelling of the national basket with goodies from the sale of the railway but did not take measures to counter the post-privatization effect.

The post-privatization effect that led to the collapse was the poor and dirty overcrowded transport system that was exhibited by the private sector who had taken over. Most operators in the railway line decided to record good investment by putting their money into dividends incentive structures that gave it the impetus to invest but single bad management did not succeed in what they were doing. Another factor that destroyed the railway line was the crossing lines. The members of the public failed to hit instructions at the crossing lines thus causing road accidents, which led to huge insurances that led to the collapse of the franchise.

The best example was in 1999 on 5th October when a drunk man ignored a red light and drove off to the crossing lines where an accident occurred and 39 people died. The blame was apportioned to the railway line and the British government. This led to the payment of the insurances, which made the railway line go down quickly. The reason why the government was blamed was an argument that they should have compelled the railway line to put automatic or automated barriers which will sense when the train is coming and automatically becomes barriers on the main roads.

The private sector is more efficient, more productive, and profit-minded as compared to public institutions. The private sector is owned by individuals who are interested in the profits will not entertain any political interference of their businesses. Take for example the issue of a careless railway driver will be dismissed immediately, but the government with its bureaucracies will tend to negotiate with the driver so that he keeps his job.

Once the management messes up with anything, he will be shown the door. Each year the public will wish to see healthy financial statements with a distribution of dividends. However, the government is offering services, which are non-profit. The issue of maintaining a loss-making institution is not the problem. The problem will be when too much of the public funds will be trailed from the public coffers to fund these organizations.

The assets of the private sector are properly organized and systematic but unfortunately, the public institution does not keep proper records for its assets. This is mentioned in this case of the British railway line where Juliet Jowet, 2003 argued that the railway trunk negligently or deliberately denuded itself from vital assets. Also, there was massive over-speed by the railway lines which infuriated the public over the railway line. Tonny Blair’s wife in 2000 was caught using the railway line without paying although she was charged.

Many lessons are learned from the case a company which public held with political influence cannot be allowed to go under but they are given funds that are from public coffers. This means that the government can intervene in case of failure, as it is easier to intervene in its management. This makes the management to be not very serious in managing the firm. Political decisions always are taking seriously whether viable or not.

For example after a promise from the chairman that the company in a sound financial position a few weeks later the company nearly collapsed but still, the man remained in the company meaning that strict regulation rules are not followed. In the case, the strictly private company the chairperson was to be shown the door. This is because the private members are more interested in the profits and good service than the government.

Therefore, the investors should have monitored the activities of the company. This shows investors should not rely solely on the regulatory bodies to take care of their investment, they also are part of the monitoring team through appointment and dismissal.

We can compare this company with the British petroleum that was once public but its privatization changed them drastically. Currently, they boast of over 500 subsidiaries worldwide and records revenue of over $ 250 billion annually, and currently tops as the company with the highest record of sales in terms of petroleum products and exploration income. The subsidiaries are in over 70 countries of all the continents that is Europe, Asia, North and South America, Africa, and Australia. Being a global energy company, they specialize in providing fuel, energy, petrochemical products, and retail services worldwide. This clearly shows that without a government hand in the appointment of management in the company it will succeed.

After privatization, in the year 1996, 2007 objectives of privatization have not been obtained fully although partly. This can be seen from the profitability that is being made by these companies. The problem of this financial over-dependency on the government ceased and currently, it is performing very well in the market. Economists have argued that privatization of the railway lines was the best thing that was done since most companies formed out of the railway line are now making profits which were not being experienced in the year 1996 and below when the railway was being privatized. The members of the public are having confidence in this railway system and now one can which to be associated with it.

Looking at the financial statements of the railway lines currently one can admire the type of funding that is appearing in the capital structure and carrying out ratio analysis of the company, one can realize that the private sector is doing very well.

Ratio analysis is as follows.

Sept 2007 Sept 2006 Sept 2005 Sept 2004
Profitability
a) Gross profit
= Gross profit
Sales
69% 1,176,903
1,750,597
= 1:1.49
= 67.2%
973,070
1,482,057
= 1:1.52
= 65.66%
1,268,495
2,154,659
= 1:1.70
= 58.87%
b) Net Profit
= Net Profit
Sales
107,719
1,725,576
= 1:16
= 6.24%
97,226
1,750,597
= 1:18
= 5.55%
40,326
1,482,057
= 1:36.75
= 2.72%
(11,526)
2,154,659
= – 1:190
= – 0.53%
c) Return on Owner’s Equity
(ROI)
= Net Profit
after tax
Equity
107,719
264,998
= 1:2.46
= 40.65%
97,226
312,224
= 1:3.21
= 31.14%
40,326
327550
1:8.12
= 12.31%
(11,526)
314,024
= – 1:27.24
= 3.67%
d) Return on Total Assets
= Net Profit
after Tax
Total Assets
107,719
513,548
= 1:4.77
= 20.96%
97,226
586,654
= 1:6.03
= 16.57%
40,326
536,708
= 1:13.31
= 7.51%
(11,526)
483,494
= – 1:41.95
= – 2.38%
h) Business Activity
Turnover of Inventory
= Cost of Sales
Average Stock
562,154
[36,852+15,300]/2
= 22 times
573,694
[15,300+12,500]/2
= 41 times
508,987
[12,500+11,200] /2
= 43 times
886,164
[11,200+9,300]/2
= 86 times
i) Accounts Receivable Turnover
= Credit Sales
Average Debtors
1,725,576
[10,053+12,748]/2
= 151 times
1,750,597
[1,748+43,600]/2
= 63 times
1,482,057
[43,600+18076] /2
= 48 times
2,154,659
[18076+8,500] /2
= 162 times

On profitability/ performance, it can be noted that the profitability of the company is improving as compared to earlier periods. This is shown by the Gross profit margin, Return on Assets (ROA), Return on Equity (ROE).

The company has grown and committed itself to the development and economical growth of people across different cultural boundaries. Culture is all about the expectations, desires, and lifestyles of the public. The company’s website has a lot of information regarding the different services that are offered by the company. Through the web, customers can also air their views on what new modifications they deem suitable for them. Language is another cultural factor the company has well catered for. Its brochures, magazines, and blueprints are all written in several languages to enhance communication.

In order to achieve better future results, better, the firm needs to cut down its operating expenses. This would considerably improve the profitability ratios. They also have to review their policy on capital management and keep optimal levels of various items of current assets. This would improve the firm’s liquidity position. In order to improve the return on owner’s equity ratio, the management should invest in viable projects that would yield positive net present value. This has the effect of maximizing their wealth. To improve on the financial ratios, the firm would ensure that it has more liquid assets and also resort to internal sources of finance as opposed to external ones.

The company should also adopt the current competitive approach to business. This normally includes Positioning – they should create a niche in offering services in the UK market so that they will be able to compete with other firms who operate in the sector. As most competitors are offering traditional services apart from Rail Promotion – they should increase intensity in the use of the internet, television adverts, promoting social activities, fliers, sponsoring sports and much other promotional activity to advertise their services. Since they are involved in providing services, the company is inclined to product differentiation, which is essential in positioning.

The services should be positioned so it can stand apart from competitive services of lorries and buses. Their unique combinations that differentiate their services from other competitive offerings will enable customers to define the important attributes of the business.

Pricing – the company should make all the charges of their services to match the prices of their competitors that is buses and lorries but will have a hedge because they are unique.

References

Mathieu, Gerard (2003). “The Reform of UK Railways – Privatization and its Results,” Japan railway and Transport Review, 34(1): 16-31.

Murray, Andrew (2001). Off the Rails: Britain’s Great Rail Crisis – Cause, Consequences and Cure. London: Verso.

Scalar, Elliott D. (2000). You Do not Always Get What You Pay For: The Economics of Privatization. Ithaca: Cornell University Press.

Shaw, Jon (2000). Competition, Regulation, and the Privatization Of British Rail. Ashgate.

Smith, Ian (2003). “Britain’s Railways – Five Years After Their Privatization,” Japan Railways and Transport Review, 34(1): 16-31.

Strangleman, Tim (2004). Work Identity at the End of the Line? Privatization and Culture Change in the UK Rail Industry. Houndmills, UK: Palgrave Macmillan.

Wolmar, Christian (2001). Broken Rails: How Privatization Wrecked Britain’s Railways. London: Aurum.

Wragg, David (2004). Signal Failure: Politics and Britain’s Railways. Stroud, UK: Sutton.

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