Tony Lodge: Why we need real competition on our railways

CPS Research Fellow Tony Lodge wrote for Conservative Home on rail comeptition, Thursday 18 December 2014. 

To see the original article, visit the Conservative Home website

“Last month, the Government awarded the prestigious East Coast Main Line franchise, the main rail artery between London, Yorkshire and Scotland, to Virgin Trains and Stagecoach.  This long awaited decision, though heralded by the Department for Transport (DfT), raises deeper concerns about competition policy, passenger benefits and wider rail policy, since it means that Virgin and Stagecoach will now control all of the intercity lines travelling north out of London from next March.

Stagecoach already runs the Midland Main Line into and out of St Pancras, while trains on the UK’s biggest rail network, the West Coast Main Line, between Euston and Glasgow, are run by a 51/49 per cent joint venture between Virgin and Stagecoach.  The new East Coast ‘Virgin’ franchise will start in March – when the consortium’s grip on long distance high speed rail travel north of London will be complete.

As well as serving London, these lucrative routes serve a vast patchwork of rural Britain, the provincial cities, traditional market and county towns as well as key London commuter towns such as Peterborough, Milton Keynes, Watford and Stevenage.  Further north, they serve the Government’s much touted ‘Northern Powerhouse’ with the key rail hubs of Manchester, Leeds, York and Newcastle.  Brand new Hitachi built rolling stock will soon serve the East Coast route – which is welcome – but of more importance is the need for this new ‘railopoly’ to face more on-track competition in the interests of passengers, lower fares and new routes.

Virgin Trains has already enjoyed a virtual monopoly on the long distance, high speed rail services between London Euston, the North West and Scotland for over 20 years.  During this period, the company has made healthy profits and enjoyed massive public investment in the railway to deliver more and faster services.  But this franchised service has never faced any long distance high speed railway competition and, perhaps unsurprisingly, Virgin is arguing against any, judging by its recent letters to the Office for Rail Regulation.

Importantly, on the East Coast – the line Virgin will soon be running – there is already some private non-franchised rail competition in place, and their new franchise will face strong competitive forces.  These services are popular with passengers who see lower fares and more routes served as a direct result of this competition.

Since 2007, Yorkshire and the North East has enjoyed such ‘open access’ long distance high speed rail services in competition with the franchise out of London King’s Cross.  Passengers heading north tonight from King’s Cross can reach Yorkshire and the North East using either the franchised service, East Coast (Virgin from next March), or the open access trains run by Grand Central or Hull Trains; they all compete for passengers.

But why has such a competitive model never been encouraged or allowed on the West Coast Main Line connecting London with the Midlands, Manchester and beyond to Glasgow?  Christopher Pincher, Tamworth’s Conservative MP last week tabled a series of parliamentary questions seeking answers to these points.

Open access services have delivered lower fares, more routes, happier passengers, better trains and pose no threat to the viability of the railway.  Importantly, on the East Coast Main Line, Rail’s Second Chance research showed that where the franchise competes directly with the rival, then fares are lower, stations are busier and overall revenue is higher with more routes served.  Alongside this has been a rising premium paid by the franchise (which is facing competition) to the DfT.

A fundamental problem with rail franchising is the franchise model which seems to be trying to do two things it is not ideally structured for; recover maximum premium to Whitehall through the periodic “renting out” of these ‘railopolies’.  But history shows us that monopolies seldom maximize the potential of a market because there is no incentive to do so; they lack innovation or ambition.  Equally, recent franchise history tells us that the “renting out process” has not served us well resulting in cyclical swings from operator super profits to catastrophic operator failure; a situation that has been achieved at huge cost to both government and operators, particularly on both the East Coast and Great Western routes.

Labour’s plans to recreate a division in the DfT where civil servants again bid to win the right to run rail services is both draconian, would be hugely expensive and arguably illegal.  How can it work;  a government owned rail company bidding for a government rail contract – with rail access approved by a government appointed regulator and operating on infrastructure whose management is via the government?  Would this survive a Competition and Markets Authority inquiry?

Open access operations have been confined to destinations previously poorly served by rail; destinations that a natural monopoly operator has neglected both in DfT specifications and by the commercial operator’s plans. Ironically, the new East Coast franchise plans to send new services to locations already served by private open access operators, but this is competition which will be welcomed and will benefit passengers.  How about allowing more open access on to the railways to compete with the franchise on routes that it already serves?

In short, the relative success of the very small open access operation that has established itself is showing what a poor solution the current intercity franchises represent. The DfT and the country would be better served by increased levels of commercial competition delivered through a more transparent form of service provision under an umbrella of suitable consumer regulation; sadly, we may have to wait for this to happen – but it is surely the natural evolution of a more competitive and passenger friendly railway?  This should mean the proper allocation of capacity and timetable planning, restrictions on market dominance and predatory pricing controls thus ensuring a proper operating return to the DfT.

Richard Branson’s Virgin dragged British Airways kicking and screaming into a competitive aviation environment in which BA faced competition and eventually rose to the challenge. It’s now time that the Government, alongside Virgin, accepts the same challenge and encourages and delivers more railway competition in the interests of the passenger, the regions and the railways.

The moral of the British experience is that effective rail competition is possible in many dimensions in the provision of railway services, but that it is pointless for governments to introduce it unless they can deliver on the commitment to allow it to function effectively. Of potential embarrassment to the Government is the emerging EU policy to outlaw the monopoly provision of rail services by Government agencies; but shouldn’t Conservatives be doing this already at a national level?”

To see the original article, visit the Conservative Home website

Date Added: Thursday 18th December 2014