Making Markets Work: Rail Franchising

Making Markets Work: Rail Franchising

According to some polls, 60% of people think that the rail network should be nationalised, whilst only 25% believe it should remain in private hands. With the chaos affecting the Thameslink and Great Northern networks, annual above-inflation price-rises and a number of well-publicised failures in franchising such as the 2012 West Coast Mainline debacle, it’s easy to see the appeal. But at the same time, it’s not that simple.

The number of rail journeys being made has more than doubled since privatisation in the late ’90s. Regardless of other factors, that’s an impressive increase in performance. And, recent circumstances excepted, the trains do generally run on time these days, whereas British Rail had been a byword for inefficiency and delay. Yet excessively high salaries of rail executives rightly offend, and a combination of government subsidies to Network Rail and rail franchisee’s payments to the  Exchequer can make it difficult to tell how much the taxpayer is genuinely spending or receiving. Nationalisation may offer the siren-song of simplicity, but it is hard to tell whether or not it would genuinely make our rail services better or cheaper.

Rather than renationalisation, a better solution would be to pledge to allow a state-owned rail company to tender for other franchises on a level playing field with other companies. The state-owned company would have the advantage that it wouldn’t need to make a profit (and any profits made would simply be returned to the Treasury); the private companies might have the often-cited advantages of greater efficiency: instead of needing to speculate, the government could simply award each franchise to whichever offered the better deal. There is even a precedent: a number of the companies currently running our rail franchises are state-owned, such as the German state-owned Deutschebahn, which controls Arriva.

This is not a new idea, but with the recent timetabling fiasco and with the East Coast Mainline recently returned to state hands, there has never been a better time to do it. Last time the East Coast Mainline was in public ownership it had high levels of profitability and satisfaction, paying over £1bn to government over the course of the franchise, making it well-placed to bid for other franchises as the tenders become available. And of course, if the public company failed to deliver, it could be stripped of a franchise, just as a private company could.

The beauty of this system is that it allows future decisions on the ownership of our railways to be taken on the basis of evidence, not ideology. A pledge allow a state-owned company to tender would defang the seductive nature of Corbyn’s promises on nationalisation: the public would know that, if the state-owned company genuinely offered better value, it would win the franchises.

The system preserves the best elements of both the private and the public sector: by forcing it to compete for contracts, the state-owned company will be kept efficient whilst, if it wins, the taxpayer will benefit from retained profits. Transition between public and private occurs in a managed, sustainable fashion and, either way, passengers and the taxpayer benefit from the best possible value for money.

 

Marking Markets Work is a series exploring how the free market can operate more effectively to deliver benefits to ordinary working people. It affirms that the free market has been the best and most successful mechanism for generating prosperity and lifting people out of poverty, but recognises that in recent years a number of departures from the theoretical ideals of a competitive market have resulted in some discrepancies between headline economic figures and the welfare and wellbeing of ordinary citizens. The series considers how small interventions could address these distortions to improve both economic and social returns from the economy.

3 thoughts on “Making Markets Work: Rail Franchising

  1. Hi, interesting post as one currently sitting on the floor of a Great Northern service and grateful for this much of a seat! My concern is firstly that your proposal wouldn’t address the division between track and operator which is often cited by industry experts as a root cause of the problems. Secondly, it retains a franchising model which I am told by a friend who works on the railways is also questionable insofar as it imcentivises franchise holders to offer sexy incentives which help them win the contract (principally upgraded trains which take the drivers ages to figure out, and which aren’t properly maintained because they are rented), rather than focussing on the core issues of ticket prices, seat numbers, service reliability and communications which are actually customer’s prime concerns. Certainly on my line Great Northern have replaced a reasonably reliable Greater Anglia service which had seats 90% of the time with one that has new trains with fewer seats (I estimate I get one 10% of the time now) and runs later much more often.

  2. This seems like an obviously excellent idea, as long as you can deal with the issues of
    – What the cost of having the company is if it fails the tender
    – Ensuring the decision about which to choose isn’t actually swayed by being pro- or anti- the state provider

    I’m never sure if polls on policy approaches like this reveal much. Presumably a few people feel strongly on principle but most would tick a ‘whichever provided better service, investment and value for taxpayer money’ box if one was available?

    As a side note, I think there’s sometimes a slight blurring of what being public would mean. It gets presented as ‘like now but without the money being taken in profits’, but then you hear people saying ‘if it was in public ownership we could require them to… [make it more disabled-friendly, pay senior staff less, pay junior staff more, whatever].

    So there’s a question about if for some explicitly or implicity nationalisation is actually about making nationalised industries serve a broader public interest (or put more cynically, political demands) than we are actually requiring through the franchise. Of course this could also be a reason to oppose nationalisation and think publicly run things would be less efficient (would Tesco or Amazon be able to provide the same service for the same price if they were under the scrutiny and expectations that exist for public sector bodies?)

  3. Douglas, you raise a fair point over whether the costs (and alignment) of the tender process itself outweighs the benefits from competition. I don’t think it does – but I accept it’s an argument to be made.

    Lafayette, the East Coast mainline made a clear profit. As long as the public operator is functioning like that, it may be worth keeping open a ‘reservation franchise’ for the public service for an initial period (5-10 years) to see if it is competitive. Obviously, if it lost every franchise for a long period we could then conclude the argument for public ownership had been lost.

    I agree public ownership would likely carry with it differences in behaviour which could be seen as positive or negative. Assuming (where we agree) that most people just want the one that’s cheapest and most efficient on rail, this system would account for these: if the publicly owned operator can win with lower CEO salaries, more holiday, etc. then great; equally, the private sector gets put to the test on whether their practices are genuinely necessary to increase efficiency and performance.

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