Nationalisation isn't he answer to government failure - Credit, public domain via Wikicommons

We’ve that interesting little example of the manner in which Members of Parliament – perhaps our rulers in general – don’t really get the point of markets. The entire point of having a bidding system, of running an auction, is to squeeze the maximum amount of money possible out of the potential buyers. This is true of simpler assets, like spectrum, as it also is of more complex matters like train franchises.

We want to have multiple bidders because that encourages people to bid the price up. In a perfect auction our taxpayer owned assets are let out to the operator who then makes the normal return upon capital employed. And definitely no more. And if they all get caught up in the excitement, like billionaires bidding for a Warhol, then tant pis. We taxpayers get to count the loot as they mourn their losses over time.

An influential parliamentary committee has delivered a withering assessment of collapse of the East Coast rail line earlier this year, accusing the Government of “encouraging” operator Stagecoach to overbid for the franchise.

While the Transport Committee found Stagecoach, the majority owner of Virgin Trains East Coast, should take “prime” responsibility for falling into default on the franchise, the Department for Transport (DfT) failed to “temper over-optimistic bidding”.

Financial stress-testing by the DfT was “not robust enough” and “inconsistent” with the high-profile recommendations by the National Audit Office in the wake of previous failures on the same franchise, MPs said.

The actual mistake made was to believe Network Rail when they said that the line would be upgraded to a certain standard by a particular date. You know, the Network Rail that is state owned?

But even setting that aside. What is it we want from letting out state or taxpayer owned assets? The maximum amount of money we can get. What does this for us? An auction process. People overbid? That’s the point of the process.

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Spike
Member

Of course the Crown and the taxpayer want the maximum franchise fee to be paid. And of course the only real problem was that the government did not keep its promise to upgrade the railway. Now, was it the duty of government to ensure that Virgin made decisions in its own best interest? The only way for this to happen was for Virgin and the other bidders not to believe government in the first place. Presto, no auction.

BniC
Member
BniC

In fairness they do call out the financial stress testing process as part of the problem, as while you want the best price you still want the winner to stand some chance of completing the transaction/contract etc. So that is a reasonable objection

MrYan
Member
MrYan

Assuming you can believe the governments (I know, it’s actually Parliament) own assessment of what happened (from https://publications.parliament.uk/pa/cm201719/cmselect/cmtrans/891/89103.htm): Network Rail do not bear any responsibility for the early termination of this franchise. To date, Network Rail have provided all the infrastructure upgrades that it had formally committed to when this franchise was let. A series of other upgrades were assumed to occur by the DfT and VTEC to deliver an enhanced timetable from 2019 onward; though there was no formal funding commitment to these upgrades when the franchise was let. The delivery of these enhancements will now occur but later… Read more »

Spike
Member

There are no “studies” in government but only sales pitches! This seems to be saying that Network Rail commited no default that would have affected anything up to the end of this year. Are you buying it? If so: What happened?

MrYan
Member
MrYan

The inference is that they overbid and couldn’t afford the payments to the government. You could argue the £200M in costs they incurred is small compared to their liabilities. You might also argue that (like Crapita and the like) we should bar companies that screw over the public purse from getting anymore government contracts.