The story of a bad idea: Privatisation of BR could soon bring higher fares and higher state subsidies and reduced services. So whose idea was it, who still supports it, and how on earth did it get this far?

MARGARET Thatcher never travelled by train. John Major thinks British Rail is 'hopeless'. The Treasury has long starved the railways of funds. So BR is being privatised.

And it is turning out to be a privatisation in a class of its own. Few privatisations have had a smooth ride, but this one has had the worst yet. John MacGregor, Secretary of State for Transport, may yet find that the wheels come off his Bill before it reaches the end of the parliamentary line.

Critics warn that the privatisation could lead to higher fares and higher state subsidies and to reduced services. If they are halfway right, the Government may be heading for a political and electoral disaster more damaging than the debacle over coalmine closures.

Public fury reached a new pitch last week with the leak of BR plans to jack up rail prices in the South-east by more than 16 per cent in some cases. These would take effect in December, with further price rises likely the following April. The Government claimed it was only an annual rail price review, which might result in no rises at all. Ministers also point out they would hardly be stupid enough to sanction 16 per cent rises in advance of critical local elections next May. They have nevertheless failed to dispel the impression that such rises will, in the end, be necessary to fatten the BR calf for the private sector.

The opposition to rail privatisation is already remarkably wide-ranging, and extends far beyond the predictable critics in the unions and the opposition parties. Sir Peter Parker, a former BR chairman, describes the plans as 'half- hearted and half-baked'. The Central Transport Consultative Committee (the rail passengers' watchdog) calls privatisation 'a journey to nowhere'. In the Lords, influential former Tory ministers such as Lords Whitelaw and Young are against it. Lord Peyton, a former Conservative Transport minister, steered through a Lords amendment that could yet scupper the Bill altogether. The all-party Commons transport select committee - in a report produced under the chairmanship of a Tory backbencher, the late Robert Adley - has said privatisation could destroy the railways.

TORY doubts are not confined to backbenchers: one loyalist middle-ranking minister, asked about the plan, silently rolled his eyes. One senior cabinet figure admits with enigmatic deadliness: 'Personally I have no views on the subject.' Even some of the ministerial supporters of privatisation doubt the wisdom of proceeding with such a narrow parliamentary majority. John MacGregor is nevertheless soldiering on. How has the Government got itself into such a fix? Why has it not simply given up the idea of privatising the railways?

The answer is that the Tories did once drop the idea - only to find it resurrected by John Major.

Cecil Parkinson, then Secretary of State for Transport, was the first senior minister to moot rail privatisation, in a speech at the Tory party conference in 1988. He mentioned it rather in passing, as an objective to be achieved at some unspecified time in the future.

The announcement caused little stir. Several other utilities had been privatised or were already in the queue - BR was simply an obvious name to add to the list. And for a brief period during the 1980s boom, BR actually went into surplus, raising hopes that private sector investors might not view it as a complete turkey when it came to a sell-off. Recession, at the time of Parkinson's speech, was still a year away.

But finding a way of inviting private sector companies into a system as integrated and complex as the railways was never going to be easy. How, for instance, do you create private sector competition on the same railway lines without also creating total confusion? And how do you sell shares in a heavily loss-making business to the public?

Whichever way they looked at it, Department of Transport civil servants could find no way around the losses. No Western country, after all, has yet found a way of maintaining a full railway system without such losses. So the politicians were forced to accept that BR simply could not be sold as a single going concern the way British Telecom or British Gas - both highly profitable - had been. Instead, they decided, the railways would have to be contracted out - like local council rubbish collection. This could be done by franchising parts of the service to private operators. The man who claimed authorship of the franchising idea was Michael Portillo, then a junior minister at the transport department.

The Tory think-tanks also swung into action. The Centre for Policy Studies, the child of Baroness Thatcher and Lord Joseph, and the one with the closest ties to the senior Conservative leadership, came up with a proposal to split the railway system into a series of independent companies in geographical areas, rather as it had been before nationalisation in 1948. This was clean, simple and familiar. But the problem, from the Government's point of view, was that it would have stifled competition. Since each company would own the track and rolling stock in its own area it could prevent rivals opening competing services.

The Adam Smith Institute, the aggressively free-market think-tank, tried to solve this problem with the more radical suggestion of separating the track and the train services. It also wanted each service to be put out to private tender. Rather like airlines competing on Atlantic crossings, but using the same runways and air corridors, competing private rail companies would be given different time slots on the same routes.

The complexity of setting up and running such as system, however, caused headaches at the transport department. None of the think-tank ideas met all the Government's aims and, above all, none seemed practicable. Mrs Thatcher herself was always equivocal. According to one colleague, she 'thought the railways were so bloody awful she wouldn't wish them on the private sector'.

Not even Lord (then Nicholas) Ridley, the man who had pushed through the poll tax and probably the minister most ideologically convinced of the merits of private enterprise, supported rail privatisation. He declared last January, shortly before he died, that it would lead to fewer customers paying higher fares to ride on aged trains with only a stewardess handing out coffee during the long and unexplained delays. Lord Lawson claims in his memoirs to have been an advocate of rail privatisation, but he was one of the few. Then, as now, Lord Young was against it, and so was Lord Whitelaw - whose family were once large shareholders in the old London & North Eastern rail company. And as the Thatcher years drew to a close, her inner circle concluded that railway privatisation was simply not feasible.

But when Thatcher was ousted in 1991, the privatisers were unexpectedly back in business. The new administration needed policies, and selling off the railways seemed like one that could be made to appeal to consumers as well as to the more obstreperous elements of the Tory right.

For Major, the idea also had enormous emotional appeal. In his nostalgic vision of an England in which old ladies cycled to church through the morning mist, there was always a plume of smoke from a steam train somewhere in the background. This mythical train was everything BR was not - it always ran on time, its carriages gleamed and its unfailingly courteous staff were decked out in a livery of cream and gold. And it was privately owned.

The Prime Minister wanted to split BR into geographical areas, along the lines of the pre-nationalisation companies such as the Great Western Railway. It fell to Malcolm Rifkind, as the new Transport Secretary, to steer policy away from this option towards a more complex structure.

By the time of last year's election, the commitment to privatise the railways in some form was part of the Conservative manifesto. MacGregor took over as Secretary of State for Transport after the election, picked up the ball and ran with it as enthusiastically as Rifkind. He was egged on by Portillo - now the Treasury minister responsible for finding ways of reducing government spending - by John Redwood, now Secretary of State for Wales, and by Sarah Hogg, head of the Number 10 Policy Unit.

In July, MacGregor produced the White Paper that now forms the foundation of the privatisation plans. It took nearly everyone by surprise.

'The White Paper was strong on ideology but weak on ideas,' says Lynn Sloman, an assistant director at Transport 2000, the transport pressure group. It triggered six months of intense debate during which critics threw up one objection after another and the Government searched for ways to counter them. 'It seemed as if policy was being formed on the hoof,' says Ms Sloman. The plans incorporated several ideas floated in the late 1980s, but rammed them together in a seemingly incomprehensible structure.

There were three main elements to MacGregor's package. The rail network would be split from the train services and would remain in public ownership for the time being. The train services would be divided into 25 different franchises, such as ScotRail, Network SouthEast, the Gatwick Express and seven different InterCity areas. These would be auctioned off to the private sector - the winners would be those offering the best service in return for the lowest amount of subsidy from the Government. 'Open access', however, would be offered to other private operators who wished to compete with the franchisees on certain routes.

Criticism of the scheme concentrates on two main points. One is that it is far too complex. BR is treated as though it were a monstrously powerful monopoly. In reality, it is a weak competitor in the wider transport market - it has only 7 per cent of the UK passenger market and under 10 per cent of freight. Privatisation will make it weaker still.

Take 'through-ticketing', for example. If you need to change trains halfway through a journey, the same ticket covers you all the way under BR. But under the new system, if you buy a ticket in one franchise area but change trains in another, do you have to buy two tickets? And if you do, will the whole journey turn out to be more expensive? The Government does not know.

The other - and politically far more important - criticism is about cost. The Government argues that efficiencies brought in by the private sector will keep fares down. Yet it does not seem to have made any financial calculations to support its claim. Many of those who have done the sums reckon that we will all be paying more for our railway system, either as consumers faced with higher fares or as taxpayers paying higher rail subsidies.

First of all there are privatisation costs of at least pounds 150m, and BR's loans from the Government of pounds 1.8bn which will almost certainly be written off. These, however, are only one- off charges. The bigger problem is the annual cost of running the new system.

A study for Transport 2000 by the independent consultants Steer Davies Gleave concludes that the total railways bill will rise by 15 per cent - or pounds 500m - over the decade after privatisation. This is to pay for the added administrative burden of 25 franchise operators, three regulatory bodies and a separate track authority. In some stations, travellers are likely to find different ticket windows for each private operator selling tickets for exactly the same routes.

The study says the cost increase could rise to 28 per cent - equivalent to about pounds 1bn - if, as rumoured, the Government demands an 8 per cent return on assets from Railtrack (the company renting track to the franchisees). If the private operators are less successful in increasing efficiency than expected, however, the costs would rise even further.

'Inevitably, these are rough guesses at this stage, but they have never been denied by the Government,' says Stephen Joseph, head of Transport 2000.

The Transport 2000 study says the cost increases imply fare rises of 37 per cent on London commuter services. Although the franchise director is responsible for making sure fares are 'reasonable', the Government does not intend to regulate them heavily. In order to attract private sector operators it will have to allow them to make a fully commercial return - anything up to about 20 per cent - on their train services.

Even if fares rise, however, it may still be hard for private operators to make a decent return - a view apparently shared by such companies as Richard Branson's Virgin Group, GEC, P&O and Sea Containers which, after initially expressing interest in running services, backed away when they saw MacGregor's proposals. So the size of the Government's subsidy - which will then be going to the private operators - would have to rise above the pounds 1bn a year that is currently paid to BR, according to the calculations. The Treasury would not save a bean from privatisation and may find itself considerably out of pocket.

Finally, even with higher fares and subsidies, customers are likely to find fewer services. At present, BR does not measure the profitability of each route, although it is well aware that on some branch lines it would be cheaper to carry each passenger by hired limousine than continue to run the railway. By splitting up BR, the Government hopes to reveal exactly which areas of the railways lose the most money. Inevitably, this will strengthen the argument for closing down the most heavily loss-making lines or services.

Services may deteriorate in other ways. After bus services were privatised, many bus companies could not afford new vehicles so passengers found themselves travelling on increasingly outdated buses. It seems likely that something similar may happen on the railways, particularly because rolling stock is many times more expensive to lease or buy than buses.

BUT none of this has caused the Government to jam on the brakes - yet. The biggest set- back so far has been Lord Peyton's amendment to the Bill which would allow BR to bid for franchises. The Government fears that, with all its expertise, BR would simply win them, making a nonsense of privatisation.

Steven Norris, last week's duty transport minister, argues that BR cannot run the railways effectively because, as a public body, its investment programme will always be constrained by the Treasury. He emphasised that there would nevertheless still be a role for BR after privatisation.

It will continue to run those services for which there is no suitable private sector bid and many of its managers will be running the private sector franchises.

How much ice this will cut with the rebels remains uncertain. While MacGregor wants to overturn the amendment in the Commons, he is not confident of getting enough support from his own backbenchers. If the Bill is to complete its journey to royal assent this October, MacGregor will have to find another way around this obstacle - or retreat by learning to live with the amendment.

But there will be other obstacles, and the public outcry is likely to gather force rather than subside. John Major may wish he had never dreamt of recreating that distant privately run steam train. He may wish that he had left British Rail, with all its faults, alone.