Dr Robert Jupe, Reader In Accounting, Kent Business School, University of Kent comments on the following BBC news item:
‘West Coast Main Line deal scrapped after contract flaws discovered’
The controversial award of the West Coast Main Line franchise to FirstGroup has been cancelled, apparently because of flaws in the evaluation of the franchise bids. The Government is blaming civil servants, three of whom have been suspended by the Department for Transport. While there may have been technical flaws in the evaluation process, this debacle raises much wider issues about the privatised rail industry.
The Conservative Government led by John Major, which introduced rail privatisation, argued that the introduction of competition and private sector management would, in the long run, improve efficiency, reduce costs, eliminate subsidy and provide better services for passengers. In practice, privatisation added over £3 billion to rail costs, and the current rail subsidy of £4 billion is four times the subsidy received by the much-maligned British Rail in the years before privatisation. Privatisation, far from improving efficiency, fragmented an integrated industry into many constituent parts: an infrastructure provider (now Network Rail, which replaced the failed Railtrack); train operating companies which bid for franchises; and rolling stock companies which lease trains to the operating companies.
Franchise bidding was intended to improve services, and reduce subsidy, by attracting new entrants into the rail industry. In practice, there are only a small number of bidders for each franchise, and there have been frequent problems with operators winning franchises on the basis of overoptimistic bids. This happened on the East Coast Main Line franchise, which was awarded to GNER in 2005 after it agreed to a premium payment of £1.3 billion over 10 years. It abandoned the contract, however, when passenger numbers failed to materialise. The replacement operator, National Express, contracted in 2007 to pay a higher premium of £1.4 billion over seven years. It also abandoned the contract, however, and so the franchise is currently run by Directly Operated Railways under public ownership.
A key reason for franchising is the attempt to obtain high premium payments from operators on the most profitable routes. This means passengers are faced with much higher fares in future. An alternative approach would be to bring franchises back into the public sector at no cost as they expire, or as operators run into financial difficulty. The industry could then be gradually reintegrated, and substantial savings made as no dividends would be paid to shareholders. Further, responsibility for rail could be transferred from the Department for Transport to the new, publicly-owned rail body. The ultimate paradox of the flawed privatisation of rail is that it has led, because of all the problems which have arisen, to much more state intervention in rail than when British Rail was responsible for operating the whole railway.