Lessons to be learnt from government’s rail franchise fiasco

THERE are several lessons to be drawn from the government’s West Coast franchising disaster. For a start, it is hard to see why any government would want to take on Sir Richard Branson and his incumbent operator, Virgin – his PR skills are so superior to anything the government can muster that the final outcome has hardly come as a surprise. Branson remains the superstar of British business, the most famous and most respected of our entrepreneurs. No politician stands a chance against him. Why bother taking him on for no particular reason?

The next problem is in the nature of the franchising process: bidders are faced with a perverse and asymmetric set of incentives. If they bid too high, they will either pull it off and make a fortune, or go bust – but that would merely mean abandoning the franchise and allowing the government to renationalise the line. If they bid too low they are guaranteed to lose everything immediately.

So many will think that it makes more sense to over-bid, on the basis of overly-optimistic passenger growth figures, with the risk of possible failure a few years down the line judged less bad than total failure today. There are partial ways of rectifying this, for example by ensuring that the contracts and incentive structure of the managers in charge punish later failure severely. But being too strict may lead to a lack of ambition and risk averse companies managing decline rather than trying to grow rail traffic. The government needs to be far more aware of these challenges.

Another important issue is that there are double standards in the way private sector and public sector failure is treated. G4S was rightly slammed when it failed to provide enough staff to guard the Olympics. Two senior executives were forced to resign; the firm’s share price was hammered; its reputation damaged; and it may lose other contracts. It has rightly paid the price for its error.

Time and again, failure in the public sector is not punished as severely. Staff are retrained or moved on; too rarely are they fired. The nature of the public sector is that it doesn’t have the same inbuilt disciplining mechanisms as the private sector – there is no threat of bankruptcy, no brand name to protect and public servants are looked upon more indulgently than profit-seeking business folk – and thus far less accountability. Suspending a few officials at the Department of Transport isn’t enough; if there was indeed incompetence, far more people should be sacked, including top officials.

The answer to government failure is not to trust the government even more. If the government can’t even run a simple tender, then it can’t run a railway. Clearly, the current mixed public-private rail system is deeply flawed, with ridiculous levels of incompetence, passenger inconvenience, rocketing fares and huge subsidies – radical reform is needed, but returning to a purely public system is not the answer. It also clear that we shouldn’t trust the government’s equally dodgy sums on the HS2 high speed rail project, that monstrously expensive white elephant that should be scrapped as fast as possible.

But the most important lesson is that the civil service is broken; it is an archaic institution that has become very bad at delivery. We need to move to a more US-style system of government, where thousands of officials are brought in by incoming governments to run things, with strict safeguards. The government is deservedly on the back foot. But it could still turn a crisis into an opportunity by launching a root and branch reform of the civil service.

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