West Coast Rail Line franchise decision - a fine example of Government failure

Every cloud has a silver lining! News reports out today confirmed that the original decision to award the next 15 year franchise of the West Coast Rail line to FirstGroup instead of the incumbent Virgin Rail has been rescinded and the bidding process re-opened at a potential wasted cost of £40 million (by the way, have they fixed that leaky roof at your school yet?). This may seem like a fiasco to train users and the general public alike but to us Economics teachers it's a super example of government failing to intervene correctly in a market.

I have had call in recent weeks to meet with some staff at the Virgin Academy in Crewe, who deliver training to employees of Virgin Rail, and have been mightily impressed with their facilities. I was also very conscious of the anxiety created by the decision not to renew the company's franchise on the West Coast line and today's decision will at least give the people that I met some encouragement. For me, however, this seems like a very clear example of how the government can falter when attempting to deal with market failure and I would bet the price of Richard Branson's Caribbean holiday island that this case will appear on a data response question in the very near future.

The train line franchises are an attempt by the government to deal with the issues relating to this type of transport. All the major political parties agree that nationalisation of the train service is inefficient but the solution to this problem is not quite so clear cut. You can not run a truly competitive train service - running several railway lines would be costly and environmentally damaging. Given that road transport remains the most popular form of travel, the level of demand is such that a highly competitive rail service may have several loss-making firms. The government has attempted to address this by having 15 year franchises (giving the winning bidders enough time to recoup any capital investment costs) awarded to sole business-providers and maintaining the quality of provision through regulatory bodies such as the Office of Rail Regulation.

The bidding process for the West Coast line appeared to have gone the way of FirstGroup but prompted the biggest public outcry about franchise change since GMTV took over the ITV early morning coverage from TV-am (whatever happened to Mike Morris?). The Labour Party called for the decision to be revoked and investigated whilst Virgin themselves started legal procedures in an attempt to stall the process.

Now it seems, according to current Transport Secretary Patrick McLoughlin, that the bidding process was not properly managed and should be re-started. An investigation into how the process went wrong is also under way.

So what do we say to our students? We might have to wait to find out the details of how this government intervention failed but it could be down to imperfect knowledge on behalf of the bid reviewers, poor management within the Ministry of Transport or something else a little more sinister.

You can catch Richard Branson's response to the decision on his blog at this link.