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The Government’s rail bailout

July 2nd, 2009 Posted in UK Politics by

Quite a lot of nonsense has been written about the recent announcement that the Government has stripped National Express of its franchise to run the East Coast mainline. Something which is going to cost us a lot of money. 

So lets be clear .

THIS IS THE GOVERNMENT’s FAULT. plain and simple.

1. GREED- the Government wanted to raise some cash (for the next potty plan up its sleeve no doubt) and cut its own cash input into the railways.  So it set up a sealed bidding process that blindly awarded rail contracts to the highest bidder. There was no account taken of how feasible/affordable that bid was. We all know that the highest bid is not always the best bid – which one would have hoped would have weighed with the governement- unless of course, it did not give a toss.

2. INCOMPETENCE : They were either stupid or lazy (or most likely, both) to allow the Franchisee (National Express) to create an entirely separate company to operate the franchise – thereby allowing the bidder to cap potential losses in event of problems. National Express did what any sensible company would do to protect its shareholders/investors money. Dont blame them if the rules they were told to play by had holes the size of channel tunnel in them.  

It still is unclear where the Government is even capable legally of stripping National Express of the other two franchises it operates. Incompetence piled on more incompetence .

But I dont know why we should expect anything else from this government. More fiasco’s will follow as this sorry mess unravels.

11 Responses to “The Government’s rail bailout”

  1. Paul Lockett Says:

    I couldn’t agree more. The major problem I can see is that the Government made no allowance for a possible economic downturn impacting on profitability. If you tell people that you’ve put an end to boom and bust, you can’t complain if a potential franchisee bids on that basis.

  2. Angela Harbutt Says:

    good point.

  3. Joe Otten Says:

    But greed is good, right?

    Better for it to be greedy when selling stuff than to raise the difference in extra taxes!

  4. Angela Harbutt Says:

    Hmmm, I dont agree “greed is good” but….
    would prefer for government to keep its interfering nose out of our businesses and spend less on just about everything. Then it would not need to run around like a clutch of headless chickens constantly looking for ways to feed the beast. (think i mixed metaphors there apols)

    And if you get greedy selling stuff – without sufficient care about the consequences – this type of fiasco will inevitably happen.

  5. Joe Otten Says:

    Well it’s not the spending as such that I have a problem with, but the taxation to pay for it. And so if the government ever sells anything for less that the maximum it can get, this is corporate welfare, and means more taxes for the rest of us in the long run.

    Actually I would like lower bids with better services to be accepted sometimes, if only I thought companies could reliably be held to higher service standards. That they can’t is just another reason why the franchise system is broken.

    I’m not so sure about the incompetence argument either. If the government had insisted that the whole price be guaranteed, banned the SPV, etc, then that would have depressed the bids. Without the benefit of hindsight, the risk of franchise failure seems quite a reasonable one. It’s not as if the trains will stop after all. In fact, what exactly is the problem?

  6. Angela Harbutt Says:

    Joe, This is not the first time a rail franchise holder has got into trouble. It was only back in 2006 that GNER was relieved of the very same South East mainline contract because it couldnt make it pay. Why? In GNER’s own words its “bullish bid”. The risk of franchise failure was HUGE.

    So I have to disagree that we need hindsight to spot that the super high bid price by Natex was going to be a problem. And even I can tell you that Stagecoach down in the West is in trouble – and doubtless there are others (note to self to drop a line to Lord Adonis in case he hasnt spotted that one either).

    The problem as i see it is the enormous gamble the government took with the transport infrastructure of this country. And the other downside, erm the bailout money.

    Awarding the contract to a more sensible bid would have had many benefits including of course additional tax revenues from a profitable franchise holder, a more secure stream of income to the government from the contract, and minimising of the likelihood of the need for a bailout two or three years down the line.

    Looks like incompetence. Feels like incompetence. Yep! its incompetence.

  7. Joe Otten Says:

    Angela, what is the disaster? The trains are still running. The franchise will get sold again. All that is lost is the high price for the franchise that you would have turned down to begin with.

    What competence does the government have to second-guess the price a private-sector franchisee wishes to pay?

  8. tim leunig Says:

    Angela: When trains are franshised the govt does not always accept the highest bid – and did not in this case. (see Roger Ford: There was a higher bid that govt felt was too risky.

    Furthermore, to mitigate risk, the govt has a risk sharing deal with the franchisee from year 5, so the private firm only has to look ahead 5 years. That is surely not too much to ask?

    You will always have to allow companies to create special vehicles to bid for contracts – otherwise no major company would bid. Companies do this all the time.

    Saying that govt was reckless here is like saying that someone who leased a shop to Woolworths was reckless. Companies go bust from time to time having misjudged things. It is part of a dynamic economy. As Joe says, the trains are still running, the tickets will be honoured (unlike if most other companies go bust).

    The NE CEO is out, that is as it should be: he has paid a personal price for overpaying, and his company may well get taken over.

    Andrew Adonis has played a weak hand well, and tax payers should applaud him. He has let other franchisees (including Stagecoach/SWT) know that he will not renegotiate, and that if they walk away (as they have the legal right to do), then he will attempt to take back all their franchises, and that they will not be looked on favourably for other bids.

  9. Niklas Smith Says:

    @Tim: Andrew Adonis…has let other franchisees (including Stagecoach/SWT) know that he will not renegotiate, and that if they walk away (as they have the legal right to do), then he will attempt to take back all their franchises, and that they will not be looked on favourably for other bids. [My bold.]

    So the government penalises people for exercising their legal rights? I suppose we should be used to that by now, but I still find it illiberal.

    I think the problem with the franchising system is not so much that the government is accepting bad bids but that they want franchisees (and thus passengers) to pay for the rail infrastructure through the fee (and thus fares). Because of this (and because a franchise is a monopoly and so worth bidding a lot for) the rail companies pay through the nose for the right to run trains. As Paul Lockett wrote above, this works only as long as the economy keeps booming – when we hit recession farepayers no longer cover the costs of the franchise fee.

    I feel there are two linked solutions to this problem. Firstly, abolish the franchise system and let operators bid for timetable slots (like take-off and landing slots at airports, except with a proper market) to run a train on a particular stretch of track at a particular time. This is how the Swedish railways will operate once they are deregulated (by 1 October this year). Franchises produce monopolies that often result in a poor deal for passengers – I would rather that train operators could compete on the same routes to drive down our ridiculously high fares.

    Secondly, the government should fund rail infrastructure through taxation. Then train operators only have to pay their own costs, rather than Network Rail’s as well. At the moment cars, coaches and lorries have an unfair advantage over trains because they get to use the roads for free. Until road charging is introduced it is distorting competition for train operators to be made to pay for the track. (And before you mention petrol taxes, those are needed for environmental reasons and are not a form of road tax. Electric cars pay no petrol tax or road tax. ASAIK the diesel used by trains is also taxed.)

  10. Niklas Smith Says:

    Correction: the Swedish state train operator (SJ) will lose its monopoly completely in October 2010. It has already lost its monopoly on Friday evening and weekend traffic (from 1 July this year) and on subsidised trains that are put out to tender. The county public transport operators can now also run services across county borders.

  11. Ziggy Encaoua Says:

    Weirdly I found myself agreeing with Peter Hitchens when this question came up on last week’s edition of Question Time.

    The point he made was generally people have no problem when it comes to subsidising the roads but when it comes to rail they do, why can’t they judge rail & roads as the same & that provide a decent both need subsidies etc.