Rail Privatization: Is Germany Doing it Right?

If Augusto Pinochet’s Chile was the first country in the world

to really embrace the concept of privatization, it was Margaret Thatcher

who shepherded it into a global force, privatizing anything and everything she

could, including British Airways, British Gas, and British Telecom. Even Thatcher,

however, balked at the prospect of privatizing British Rail – something

which eventually happened under her successor, John Major,

and which was more or less an unqualified disaster. So what on earth is Angel

Merkel doing privatizing

Deutsche Bahn, the sleek and efficient German railroad system? Doesn’t she

know that no good can come of this?

Actually, the planned DB IPO could go very well. For one thing the proposed

valuation seems decidedly modest: DB made an operating profit of €2.5 billion

in 2006, and is planning to sell a 25% stake for €3 billion: by my calculations,

that’s a trailing p/e of less than 5.

And a lot of the problems which faced British Rail don’t apply in the case

of DB. For one thing, DB is actually profitable: there’s no need for thousands

of bankers and lawyers to work on highly complex franchising agreements whereby

companies bid to operate rail lines for the lowest government subsidy. And for

another thing, DB is not reliant on notoriously unprofitable passenger services

for its profits. According to Reuters, CEO Hartmut Mehdorn

has expanded

the company very successfully:

His aggressive growth strategy has turned Deutsche Bahn into a transport

and logistics giant with tentacles spread across Europe and into Asia and

the Middle East. Freight transport accounts for 50% of sales, up from 20%

in 2000.

It has 80 subsidiaries – including sea, trucking and air freight operations

– and is proud that only half of its 30 billion euros in turnover now

comes from the rail business.

I don’t know the details of how this privatization is going to work. What constraints

are there on DB’s ability to raise passenger rail ticket prices, or to cut unprofitable

services, or to prioritize freight trains over less-profitable passenger trains?

Is there any attempt to separate ownership of the tracks, or otherwise to create

the conditions for some allowing some kind of competition to DB in the future?

Given DB’s status as a privately-owned monopoly, how can the German public be

reassured that its regulator will have teeth?

There are certainly lots of ways this can go wrong, but it also seems that

this privatization could be vastly more successful than the UK experience. Not

that that would be difficult.

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