Passenger Rail Franchising – British Experience

Abstract

Given that virtually all British passenger train services were franchised out over the period 1995-7, and many have now been franchised for a second time, Britain should provide an excellent opportunity to study the impact of franchising passenger rail services. Moreover, since several different franchising models have been tried, there should also be some useful evidence on how best to go about franchising. In practice, however, the turbulent history of the British rail industry over this period makes drawing firm conclusions difficult. At the start, it appeared that franchising was very successful with strong competition for franchises, rapidly rising traffic, rising productivity and falling subsidies. Whilst most of the increase in traffic was due to external factors, the growth appears somewhat faster than would be explained by these factors alone. Despite this, a number of train operating companies got into financial difficulties, particularly in the Regional sector, where franchisees were relying on reduced costs rather than increased revenues to achieve subsidy reductions, and in the short term franchises were renegotiated or replaced with cost-plus contracts pending refranchising. After the bankruptcy of Railtrack not only have the costs and performance of the infrastructure manager severely deteriorated, but there has also been a large rise in the costs of train operating companies. Without a better understanding of the causes of this rise it is hard to form firm conclusions on the success of franchising. One argument is that one of the reasons franchisees found it difficult to achieve the anticipated cost reductions was the degree to which costs had already been driven down in the 1980s. However costs did start to rise again in the early 1990s and in the early years of franchising substantial savings in costs per train kilometre were achieved, with cost increases only following later. A second suggested explanation for the cost increase is the temporary placing of many Train Operating Companies on management contracts or renegotiation of franchises around 2001. We have found some support for this hypothesis, with our analysis showing that the affected TOCs experienced higher cost growth than other TOCs. A third argument is that the increase in costs in the last few years may have been driven by factors unrelated to the franchising process, and in particular, other aspects of policy such as health and safety legislation, disability discrimination legislation and a general requirement for higher standards. It is hard to be definitive on which of these three effects dominates, but we do have evidence which suggests that the way in which problem franchises were managed may have contributed substantially to the rise in costs after 1999/00. Our overall conclusion then is that passenger rail franchising in Britain may be regarded as a moderate success on the demand side, but that it has failed to achieve its objectives on the cost side. However, it should be noted that the rise in train operating costs in recent years has occurred at a time of considerable disruption, during which many other factors unrelated to franchising policy were changing at the same time. It remains to be seen what the re-franchising process will achieve in terms of cost reduction in a more stable environment. * We have greatly benefited from comments on an earlier draft by a number of people including, Mary Bonar, Richard Davies, Jeremy Drew, Peter Kain, John Glover, Lou Thompson and Steve Perkins. Responsibility for the final version is however solely our own.