Next stop, privatization.

Photographer: Ben Pruchnie/Getty Images

U.K. and France Should Ditch Eurostar

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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Britain has sold its 40 percent stake in the high-speed Eurostar train service between London, Paris and Brussels for a healthy 757 million pounds ($1.15 billion). Inevitably, that has triggered complaints from commentators and labor unions that the Conservative government is "selling off the family silver."

Rarely has this argument seemed so weak. The better question should be: Why doesn't France's state-owned SNCF sell its 55 percent stake, too?

Eurostar is a good example of the kind of large-scale infrastructure project that only governments can fund, but it hasn't met initial expectations for commercial success. As this BBC story points out, competition from cheap ferries and budget airlines meant the train service never came close to meeting its target of 21.4 million passengers per year by 2004. The actual number of passengers the Eurostar carried that year was 7.3 million, and while things have improved steadily since, last year it still carried just 10.4 million people.

Unlike the U.K. postal service, Royal Mail, which was sold off too cheaply last year and to huge controversy, there's very little emotional or rational cause for the U.K. to keep Eurostar public. It isn't an essential service in which the state ensures that deliveries to remote areas are subsidized by more profitable urban routes. Nor does its sale to the private sector raise the complex challenges presented when the U.K. privatized its domestic rail services. There the government had to manufacture a form of competition to stop -- with little success -- private monopolies from gouging rail commuters.

Eurostar, by contrast, is a convenient alternative for business people and vacationers to use in crossing the English Channel, and it faces fierce natural competition from air and sea. The venture made a 54 million pound profit in 2013, with the U.K. government drawing a dividend of 7.4 million pounds -- not a huge incentive to hold onto a 750 million pound asset.

The U.K. more or less invented privatization as an ideologically driven economic policy under former Prime Minister Margaret Thatcher. So it remains a great divider in British politics, but more like the twitch where a lost limb should be. There is little U.K. "family silver" left to be sold and the government may struggle to reach its target of 20 billion pounds of asset sales to pay down the U.K.'s large public debt.

In France, privatization remains a dirty Anglo-Saxon word. But the business case there is also more complicated. SNCF, unlike the U.K. government, is still very much in the railway business and Eurostar, though no cash cow, is very profitable as high speed rail businesses go -- hence the high price secured by the U.K. So no one is even talking about selling the French stake. But perhaps they should be.

Standard & Poor's, the ratings agency, downgraded SNCF to AA- when it downgraded the French state at the end of 2013. Both were laboring under debt. SNCF, which operates French trains, owed 17.8 billion euros and was struggling to find funds to renew its high speed, domestic rolling stock. The network manager, which ran the track, owed 39 billion euros.

"If you are SNCF, you are a rail company. It probably makes sense to hold onto Eurostar, because it fits quite well in your portfolio," says S&P analyst Aurelie Hariton-Fardad. "You might take a different view, though, if you are in a financially stretched position."

Selling part or its entire Eurostar stake would hardly solve the problems of France's heavily indebted and subsidized state-run rail business, now united under a single holding company. The same holds true even more for Belgium's small 5 percent stake in Eurostar. But it's worth asking if SNCF, or indeed France, couldn't find a better use for about 1.4 billion euros of capital than operating trains to London.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Marc Champion at mchampion7@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net