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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