This is one of the really important rail routes in the UK (London - Edinburgh and London - South Wales being the others).
When rail was privatised the network was split up into franchises (most of the others being smaller and messier geographically) and whoever wanted the lowest subsidy, or would pay the most was allowed to run them.
The whole process was a mess. Too many franchises, franchise periods that were too short to allow investment or too long to promote competition. There were frequent changes and government interference. Nobody came out of the process with any credit.
Now there are medium term franchises (around 13 years) and the 'bid process' is well established. The aim is to maximise revenue to the government and provide better rail services while ensuring investment. The aims are not necessarily complimentary!
The latest route to be competed for is the West Coast Mainline, which the Virgin Group has run since it was first privatised. They have invested in new trains and improved service frequency and quality. They have also received quite staggering favouritism from government (see Private Eye ad infinitum).
But Virgin lost the franchise to First Group, already a major rail operator. Virgin offered less money and less comprehensive service improvements and after 18 months of the process their bid was judged inferior.
Virgin feel hard done by and are using their considerable PR clout to call foul and demand intervention by MP's. It's very sad and I think really embarrassing.
They have, however, one valid point. The way franchises are awarded may not work.
The theory of franchising is this:
1. Competition promotes efficiency.
2. Efficient allocation of resources is better for consumers - lower prices, and society - more efficient use of scarce resources.
3. Rail is a natural monopoly and so it is inefficient to have multiple train providers on single routes.
4. Therefore competition should be provided in the process of bidding to run the routes. Regulation and regular 're-franchising' will keep franchise holders honest and prevent monopoly profits.
5. The government can make money selling the franchises!
But the process can go wrong when a bidder for a franchise offers too much. If they make losses and walk away this can cause massive disruption and reduce investment in the network. And it has happened before. National Express offered too much for the East Coast mainline and had to be replaced at great cost. In another industry Harlech Television paid too much for the ITV franchise for 'Wales and the West' and went bankrupt.
I hope Virgin is wrong. They have been given preferential treatment throughout their time as a rail operator and this just stinks of sour grapes. However the issues are real and not just for Transport Economics.
I feel that Virgin do not deserve to maintain their hold on the 'West Coast Mainline' as they offered less money and less comprehensive service improvements compared with their other competitors, in this case being First Group. As this writer has said, They have been given preferential treatment throughout their time as a rail operator and as Rail is a natural monopoly Virgin have managed too gather vast sums of money out of it. They should accept that their competitor has put forward a better and more profitable offer to the government, and quite rightly the government have taken it. Virgin should accept defeat and stop being so stubborn about it.
ReplyDeletePersonally I am not convinced that FirstGroup's bid is totally practical, and judging on their share price the day it was announced that their bid had been successful neither do their shareholders.
ReplyDeleteOn the day that FirstGroup were announced as winners of the West Coast Mainline Franchise FirstGroup's shares fell by 16 points. How does this reflect on shareholder's confidence in the company.
FirstGroup at present is holds a large stake of the UK rail market, also being in control of multiple other services around the country such as the Great Western franchise. And for a number of years First Great Western has been voted as the worst Train operating company in Britain. How does that reflect when they are looking to take on other services?
As well as this, surely it would be inapropriate for one single company to be in control of so many franchises in Britain, if they carry on bidding and winning more franchises surely the competition commission will have to step in?
Virgin have not been running the West coast franchise on their own for all of these years, it is a key item to note that Beardy Branson onlt has a 51% stake in Virgin Trains and that the other 49% is owned by the Stagecoach Group. Thus, this group running the franchise takes transport experience and expertise from Stagecoach and mixes it with investment and branding power from Virgin. This alliance then results in a leading service from Virgin Trains and much more potential in the coming years.
But yes, we can accept that FirstGroup's bid did offer better value for money for the passenger, the taxpayer and the government but that is only if FirstGroup can deliver on what they are comitting to. Previously the National Express Group failed to deliver on what they had agreed to on their rival East Coast mainline franchise and they then had to pass control for the services back to the government. An embarassement for the government and as a result that franchise is still in public ownership without private investment. Virgin offered a bid which they know they can deliver on, however it is unclear if FirstGroup's bid is too much and whether or not they will be able to deliver on that. FirstGroup already has large debt which is a hinderence on the Company and hopefully they will realise that they have financial limitations.
Also, it is much easier not to change who is running a franchise in the sense that all the branding must be changed and trains must be repainted, staff must sign new contracts etc. Virgin is well established on the West coast, they know it inside out. They know what will most likely happen on it and they know what's possible. FirstGroup have come in from the outside with no experience on the West Coast assuming that they can achieve what they have bid. There would be a reason that Virgin bid less and that reason would most likely be that they are bidding with what can actually be achieved rather than living in dreamland with crazy ideas about passenger number increases and changing costs of running the line.
Virgin have already vastly improved the standards of the journeys that people take on the West Coast mainline with new trains, extra services and faster services since they receieved operation of the franchis in 1997.
Beardy Branson was looking to expand the length of the franchise to around 20 years so that Virgin could give the West Coast mainline some proper investment and vastly improve services as well as giving time for the company to gain some return from that. That was a main reason in the decision to privatise our railways, so that the services would increase in quality whilst companies gain from doing a good service.
If the government do decide to carry on with FirstGroup's bid it will be a massive gamble because the government may well have to pick up the peices at the end whereas with Virgin, the franchis would be relatively safe with them and they can be trusted to provide a service that will last until the end of their franchise.
The fact that Branson is 'bitterly disappointed' is completely understandable and even though Virgin offered less money, they had invested in new trains and improved service frequency and quality. The government also seemed to have given their approbation on this by 'favoring' them. 'First Group' on the other hand, have a reputation of extortionate ticket prices and for providing an inadequate service to customers in some cases. I do not agree with this decision as i don't think The West Coast Mainline should just be rented out to the highest bidder, but to whom provides the most efficient and satisfying service and gives customers the best value for their money.
ReplyDeleteI similarly agree with master Speed. He is correct in saying that when there is high competitivity, the company or producer with the best offer deserves to gain what is the product. This happens in every day life, varying from who will pay the most for a packet of skittles to what would be offered for a second-hand rolls-royce. Virgin are seemingly trying to make the gvt. feel guilty simply because of who they are and what power they attain. Thankfully, the government have made the correct decision and in doing so managed to do something which isn't absurdly wrong as per.
ReplyDeleteBranson is too rich. He is starting a monopoly, eventually he will own all transport and prices will rise as they wont need to be competetive. Demand will eventually go down and as people wont want to pay as much and then we may finally have a decent price train ticket. Southern Rail are too expensive and have the student body of people by the balls as we have to pay so much if we want to go to horsham.
ReplyDeleteAppalling decision which has nothing to do with service. Virgin has revolutionised the West Coast despite the frustrations of Network Rail failing to deliver track improvements. Virgin provides a good service to customers whereas First Group does not. First will inherit the best rolling stock and infrastructure with no commitment to further improvements.
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