22 September 2020

Rail franchising might be over – but that should not spell the end of competition

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Amid the flurry of Covid news, yesterday’s announcement on the future of Britain’s rail network has gone somewhat under the radar.

The announcement from Transport Secretary Grant Shapps is a pretty big deal – a rescue package for that effectively marks the end of the franchising system that has been in place since privatisation in 1994. Given the Covid-induced collapse in demand it was obvious back in March that the Government would eventually have to step in to rescue the rail operators, and with passenger numbers still running at only about 30% of pre-pandemic level the case for intervention was abundantly clear.

The deal means that the government will cover any shortfall for the industry, which at the moment is running at about £500 million per month, until March 2022. Eye-watering though that price tag might be in the short term, it’s the announcement on franchising which is of far greater long-term significance.

The move away from franchising could hardly be described as a bolt from the blue. It’s long been clear that the Government favoured reform and the Williams Review was meant to set out how the rail system needed to change to improve performance for customers and taxpayers, but like so many areas of government business, publication has been held back by the pandemic.

The problems with the existing system have of course been well publicised, from the Southern Rail fiasco to the massive problems in the summer of 2018 when new timetables were introduced. Overbidding for contracts has led several franchises to go bankrupt, and persistent issues with industrial relations have bedeviled the industry. Since 2012 the network’s performance has declined with the percentage of trains arriving on time has fallen from over 91% to under 87% in 2019, although it should be emphasised that less than 20% of delays are down to the train operators – most are due to unforeseeable problems or the incompetence of Network Rail.

So, it’s clear that there’s room for improvement, but with the Williams Review delayed there are still questions about what reforms the Government will implement. Of course, some see the end of franchising as a sign that privatisation has failed and that the state should use this as an opportunity to take the system into public ownership again.

However, as my colleague Conor Walsh showed last year, despite well-documented issues, overall privatisation and the franchise system has been overwhelmingly positive for the network . The single clearest demonstration of this is that many more people now travel by train than when it was run by the state, with the share of all journeys by rail doubling from 5% in 1993 to 10% in 2018. And though it might come as a surprise to some, customer satisfaction is among the highest in Europe, as is safety.

Thankfully the early signals are that the government has no intention of going down the route of public ownership and instead they want a system similar to London Overground, where operators receive a fixed annual fee for running the service. While this takes the risk of fluctuations in passenger numbers and revenue away from operators, it also removes their incentive to maximise passenger numbers and service quality. One solution to that dilemma is to offer direct payments for operators who meet certain performance targets, though that risks the perennial problem with centrally set targets – that they often cease to be a good measure of performance as soon as they become a target.

There are also questions of whether this system will work well across the whole of the country, especially on lines such as the West Coast Main Line, where leisure travel accounts for a higher proportion of passengers. As usual what we really need if we want to improve service and make it more productive is more competition, and luckily there is an established way that to accomplish that via open access.

Unlike under franchising where a train operator gets an effective monopoly on a particular line, open access allows multiple operators to run competing services on the same track. The success of this system on the East Coast Mainline, with more competitive ticket prices, better quality service and the increased demand and revenue that inevitably follows, shows that this is a system which works. That’s no great surprise: after all we’ve seen the enormous benefits that competition brings to air travel, where different carriers compete for slots on different routes, thus raising quality and lowering prices.

Open access is not a silver bullet, of course: we also badly need other changes, such as reform to simplify the often byzantine ticketing system, and delays will continue to blight the system unless Network Rail improves its own performance. But by injecting competition into Britain’s railways it will force train operators to improve the quality of service they offer and provide far better value for money, both to customers and the taxpayer. 

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Jethro Elsden is a Data Analyst at the Centre for Policy Studies.