United Kingdom’s Department for Transportation is in trouble over a plan to transfer the franchise to run passenger trains over the London-Glasgow West Coast route from Virgin Trains (which is 49 percent owned by Stagecoach) to rival First Group. After fifteen years, Virgin Trains’ franchise is set to expire in December, and when the government put a new franchise up for bid, First Group had the low bid (meaning it asked for the least subsidies).
A Virgin Train. Photo by Andrew Butcher.
Virgin argued that having the low bid should not be the only factor in selecting a winner, and hired Europa Partners to evaluate the bidding process. The consultant’s report (a full version of which doesn’t seem to be available on line) argued that selecting the low bidder carried a high risk that the operator would go bankrupt, thus disrupting rail service.
The government awarded the contract to First Group anyway, leading Virgin to sue. Thanks in part to a timely appeal from Virgin’s Richard Branson to Prime Minister David Cameron, the government withdrew its award the night before it was supposed to defend it in court, saying that it had found irregularities in the bidding process, just as Europa had indicated. Now the government may be on the hook for millions of pounds to First Group, which says the reversal injured it and that its share value fell by 240 million pounds after the government withdrew the contract.
This has led some to call for re-nationalizing British railroads. But the real problem is that the rail privatization that was undertaken in the mid-1990s was only half-hearted. Instead of selling the rail lines outright, the government has continued to rely on central planning and control, which ended up costing taxpayers billions of pounds.
The government’s strategy was to divide responsibility for the trains in two: one part would manage the infrastructure and the other would operate the trains. Infrastructure was initially handled by a single national company, Railtrack, created for the purpose. Train operations were handled by some two dozen train operating companies, which were franchised to handle various routes.
The government set the routes and frequencies of service and asked operating companies to bid on each route. Most if not all of the bids were negative, meaning the companies would receive subsidies. The companies in turn were to pay Railtrack to use the infrastructure, which was supposed to make Railtrack self-sufficient.
Two flaws in the system soon became apparent. First, rather than saving money, the subsidies trains quickly grew to much more than they had been when the government ran the trains. Second, three serious accidents, killing a total of more than forty people, led many to question Railtrack’s ability to keep trains safe. Soon it was learned that Railtrack knew about the cracks in the rail that caused the third accident, and had ordered and received replacement rail but never installed it because it didn’t want to give up the revenues that would be lost when it delayed or cancelled trains to put in the new rail.
The government responded by re-nationalizing the infrastructure, which is now run by a government agency called Network Rail, a quasi-governmental non-profit company whose primary goal is supposed to be safety. While no serious accidents have taken place since then, the cost of running the system remains controversial.
By at least one important measure, however, British rail privatization has been an enormous success. Between 1996, which privatization was taking place, and 2010, rail passenger miles grew by 60 percent (see p. 15), far more than any other European country (see page 104) and twice as fast as in western Europe as a whole. Between 1994, when privatization began, and 2010, rail’s share of British surface passenger travel grew from 4.2 to 7.5 percent, again more than any other European country. Rail’s share of British freight traffic also grew more than any other European country.
According to Rupert Darwall, one of the authors of the Europa Partners report, this growth took place because the writers of the original franchise “had flexibility and incentives for innovation [which] enabled Virgin to transform the West Coast into Europe’s most successful long-distance railway by ridership.” Over time, however, the government agency in charge of franchising grew more rigid and failed to consider such incentives now when it is renewing the franchises.
“The real problem is franchising itself,” says Darwall, which is “financially inefficient and destroys taxpayer value.” “Why not just sell the West Coast service outright,” he asks, “and make absolutely certain that the taxpayer receives every penny bid by the winner?” And while they’re at it, they should sell the tracks to the same bidders and let them decide the optimal level of freight and passenger service.