The New British Railways Structure A Transaction Cost Economics Analysis

The 1993 reform of rail transport in Great Britain led to an outright break-up of the British Rail vertically integrated monopoly. All railway activities have been isolated and divided among private operators whose relationships are determined by contracts. This paper examines the relevance of a vertical separation between train operations and rolling stock ownership and the stability of this new structure. Transaction cost theory, which mainly concentrates on vertical integration and contractual coordination issues, provides a relevant analytical framework. It is argued that the disintegrated governance structure is not suitable to the features of the relationships between lessors and lessees of rolling stock. Moreover, the coordinative mechanisms of existing leases cannot solve the problems caused by vertical separation. Therefore, operators have adapted the structure and change the characteristics of the rolling stock market transactions.