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.
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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.
The Antiplanner wrote:
“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.
I don’t have a problem with the government owning the rails and allowing private-sector companies to use them (in exchange for an appropriate payment). That is essentially how the highway networks of most nations are run. Or alternatively, if elected officials in the UK do not want to sell the railroad network outright, they could arrange for a private concessionaire to maintain the rails for a longer term, maybe 75 or more years, while charging fees of train operators.
I do question the need for franchising, however. Why not use the air transport model, and allow more than one operator to provide as much or as little service as needed to meet demand?
I agree with you, an open market would be very good.
CPZ:
Competition on individual lines requires either duplicative overhead such as maintenance facilities, line and operation managers, and station agents, or some sort of government enforced cooperative use agreement where someone inevitably has the upper hand and tilts the scale. Even in the airline industry, airlines share airports and the government provides neutral air traffic control.
Railroads are integrated transportation systems that generally compete against other modal choices, not against each other. Dis-integration of railroads typically leads to chaos.
Andrew a monopoly isn’t good.
If all rail lines were open access, then any body could run a train.
Though this is part of the big problem that railroads get little protection or funding from government unlike roads.
“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.”
There are a lot of low ball artists out there. I’ve seen it in multiple bid situations before. 4 bids, 3 are relatively close, 1 is 35% lower. Major red flag. More likely than the operator going bankrupt will be going over budget and asking for more money. Going with the low ball artist can leave you up s#!* creek without a paddle.
Surely Francis will chime in and correct my interpretation, but it sure seems like the process is so fiasco-laden that there is no correcting it without taxpayer subsidy.
DS
I don’t have a problem with the government owning the rails and allowing private-sector companies to use them (in exchange for an appropriate payment). That is essentially how the highway networks of most nations are run.
Well, except for the bit about dictating how many times and when we can use the highways.
“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).”
This is in fact wrong. The West Coast Main Line franchise is actually a profitable route. First Group was offering to PAY the government £5.5 billion in order to operate the route for the next 13 years, where as Virgin was only offering £4.5 billion.
The reason for the complicated system, and the seperation of infrastructure from the operators was due the idea of “Open Acess” operators. The idea was that private companies who felt they would be able to operate a route more efficiently, or a route that no one else operated would be able to launch rail service without needing to buy tracks, they could just pay for right of use the same way as the franchise operators. Look at the North East Corridor between New Haven and Hell’s Gate Bridge if you want an example of one company owning the infrastructure and favoring themselves, with MetroNorth preventing Amtrak from running at speed and actually being competative. Similar to competing airlines, the hope was that “Open Access Operators” these would slowly crop up and help drive costs down. While two now exist on the East Coast Main Line, Branson has managed to politcally keep them off the West Coast.
When the system was privitized in 1994, the hope over time all the train lines would move to open access operators. The hope was that private companies would use the profitible routes to subsidize service on the routes where they made a loss. Unfortunately the Department for Transport and the Office of Rail Regulation have been reluctant to actually free up the passenger market enough to allow this to happen, despite the European Union liberalizing the entirety of the rail system in 2010. There are also problems with how ticketing and revenue distribution works, but they are long and rather tedious.
Freight on the other hand has managed to liberalize fairly well. EWS, one of the three freight companies in the UK is now owned by DB Schenker, the German freight railway company, and they run freight from all over the UK to central and eastern europe via the Chunnel. While many of the passenger companies might welcome freight companies to run during their non-busy times, having Network Rail sorting out all the dispatching and maintenance opens the system to slot competition.
Still better than what is going on in America!