Encouraging Overbidding Is The Point Of The Train Franchising System


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.