Off The Rails

I’m doing this post mainly for the benefit of Kevin, who is very interested in rail policy, but today’s fiasco does have relevance to my day job as well. Lets start with a brief recap.

Many years ago the previous Tory government came up with a mad scheme to make a competitive industry out of passenger rail. I can’t see how this was ever going to work, but we are now stuck with it. Part of the process is that the Train Operating Companies have to bid for franchises to run the various routes. A recent franchise auction awarded the West Coast Mainline route to First Group (who run my local services) ahead of the incumbent, Virgin Rail. Sir Richard Branson and his colleagues were furious, insisting that the Department for Transport (DfT) must have got their sums wrong. They threatened to sue. And in the early hours of this morning the DfT finally admitted that they had made some fairly basic errors, and that the whole process would have to be reviewed, at massive cost to the public.

Exercises of this sort have been a staple part of my day job for many years, although in the field of energy, not transport. The possibility of making this sort of error gives me nightmares. I am keen to know what went wrong here.

Before I get to that, however, a quick comment on the public reaction. My Twitter feed this morning was full of calls for the re-nationalization of the railways. While that would certainly remove the need for any further franchise auctions, I’m a little bemused. This is a regulatory failing. If the policy wonks at the DfT can’t manage to run a simple franchise auction properly, how is putting them in charge of the entire network a smart thing to do?

(And on a related note, the Department of Energy Climate Change is in the middle of forcing through regulatory changes that would give them the right to micro-manage the UK’s energy industry. This worries me greatly.)

Anyway, back to the question of what went wrong. This afternoon the BBC’s Robert Peston came up with some more information (see here and scroll down). We’ve known from early on that the supposed errors were to do with inflation and passenger numbers, but not the precise nature of the errors. Peston says of the DfT:

First it unfairly discriminated against the incumbent, Virgin, by attaching far too great a probability to the projections by the rival bidder First Group that its revenues in the later years of the contract would be much bigger than Virgin’s.

This mistake was compounded in the department’s own internal forecasting model, which also attached too little risk to the possibility that passenger numbers and inflation would be significantly different from what First Group was projecting after 2021.

As a result, the government demanded too little guaranteed money for taxpayers from First Group.

What I get from this is that these “errors” are not actual technical errors, for example forgetting to include inflation in their calculations, but rather errors in the assumptions fed into the models.

There’s a very important difference here. Getting your equations wrong is a serious error that no one should make. Using the “wrong” assumptions may be a result of a difference of opinion as to what the right assumptions should be. Often this is policy driven. I could tell stories, but I’d better not.

So what has really happened here? One possibility is that the DfT was persuaded to use a particular set of assumptions that benefited First Group and penalized Virgin. If that’s the case, we should be asking how that came to happen, and whether any undue influence was brought to bear. The other possibility is a change of policy. There has been a recent change in the Minister for Transport. This could be because Mr. Cameron got wind of the impending disaster and decided to fire the person responsible. Alternatively the new Minister may have a very different view of the future of Britain’s railways to the previous one.

The reason that I raise this question is that political views regarding the level of passenger growth are often at the heart of rail policy debates. In California it is not unusual for right-wing think tanks to predict disaster for rail projects on the assumption that improvements to services would result in zero increase in passenger numbers (because only poor people ride the rails, and then only when absolutely necessary — I mean, who would want to ride a train when he can be driving a stretch Hummer?)

It seems likely that First Group would have over-egged their predictions of passenger growth, simply because that’s the sort of thing a challenger for the franchise would do. However, whenever I hear a right-wing government talking about optimistic assumptions about passenger growth I always tend to worry that the car-is-god philosophy is working its way back into power. I look forward to seeing what Christian Wolmar has to say. This must seen like mana from heaven to him, given that he’s both the UK’s foremost rail journalist and an aspiring Labour politician.

6 thoughts on “Off The Rails

  1. One note re whether nationalisation is a good idea:

    One thing that goes wrong with events like this is that they are one offs, with no opportunity to build up expertise (like me with excel, I just don’t use it often enough so I constantly have to relearn). If one was to set up a nationalised rail service then one would employ people experienced in the area. So I am not sure the argument holds that one proves the other would be bad (not sure it proves the opposite either, mind).

    1. Well the West Coast Mainline franchise auction was a 15-month project, and it is by no means the only one that the DfT has to run, so you would think that some people are full time on such things.

      Also we have an Office of Rail Regulation that might be expected to undertake such activities, and be staffed by railway industry experts, but the government prefers to conduct franchise auctions inside the DfT where they can be more easily adjusted to match current policy requirements.

      1. If the railways were renationalized the expense of these auctions would be spared, and the tens of millions of pounds spent on them (even when they only have to spent once rather than twice, as in this case) could be spent on rail services.

        Also, I’d like to think that a nationalized railway would not be run by policy wonks at the DfT any more than the NHS is run by policy wonks at the Department of Health, but by rail professionals.

        1. So why aren’t rail professionals running the franchise auctions? Governments interfere. It is what they do.

          Which is not to say that a nationalized rail system would not be better. It’s just desperately naive to think that it would be devoid of meddling.

          1. There would of course be meddling, just as there’s meddling in the NHS – and how!

            But I also think that the skills needed to run an auction are significantly different from the skills needed to run a railway.

          2. A franchise auction is essentially an exercise in long term strategic planning. That’s very important for any industry that is dependent on infrastructure. You need strong regulation here when you have a private monopoly to stop the shareholders bleeding cash, but equally you need to keep ministers from meddling. I’m very concerned that both the DfT and DECC are trying to sideline the official regulators. And with nationalization the process would probably be even less transparent.

            Which again is not to say that nationalization would be bad. It just has risks, and this is one of the biggest ones.

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