Off the Rails

Virgin’s complaints highlighted the mistakes made by government economists

Complete the following sentence with the words ‘long’ or ‘short’: ‘Look after the _____ run and the ____ run will take care of itself.’ According to the eminent economist Charles Schultze, if you fill the first blank with ‘long’ and the second with ‘short’, you are most likely a mainstream micro economist. Essentially, this is the concept of microeconomics, a decentralised price and incentive-based system that will help to channel resources to their most productive uses in the long term

This was however, not the approach that the Government had in mind in its recent decision to withdraw the awarding of the West Coast Main line franchise to FirstGroup, of which current provider Virgin Trains had been fiercely contesting for. It emerged that there were very serious flaws in the Department of Transport’s (DfT) evaluation of the ‘level of risk in the bids’, in the method where inflation and passenger numbers were accounted for, and also how much money bidders were then asked to guarantee subsequently. This suggests, that if not for Virgin Train’s decision to bring judicial review proceedings against FirstGroup, the flawed procurement process might have potentially not been uncovered. The result? Taxpayers will have to bear the estimated costs of approximately £40 million, for DfT to reimburse the four companies for the cost of their bids.

So, how exactly did DfT go so wrong? Simply speaking, it was long overdue a process of overhauling the rigid franchise agreement system. Ironically, it was recognised by DfT in March 2012, that the contract management of franchises had become ‘overly bureaucratic’; with a study produced by Sir Roy McNulty in May 2011 suggesting that current franchise agreements leave franchisees with a minimal degree of flexibility to deal with emerging market trends and policies. He pointed out that incentives did not adequately reward franchisees for reducing costs, which mirrored Sir Richard Branson’s (Chairman, Virgin Group) outburst, that DfT did not have a system in place to recognise past track records but instead specifically resisted favouring incumbents.

One wonders where the economics is in this approach – or where the government economists are. By specifically resisting hiring the current franchisee, it would appear to be a policy-based decision to allow for a different franchisee to take over instead of a free market approach. Has the role of a government economist thus been changed?

Traditionally offering non-partisan and objective advice within their administrative functions, economists have instead been increasingly moving towards their position and authority as policy advisors and decision-makers. The government economist is no longer impartial, as observed by prominent economic advisor Sir Alex Cairncross, ‘an economic advisor who insists too strongly and persistently on his neutrality may end up being neutered’ – he has to be an advocate. According to academic Coates, the economist-turned-policy adviser will also realise that a majority of the policy-making discussion has ‘little to do with economics at least in the conventionally defined sense’, but with political practicalities, lawmaking strategies and effects on public opinion.

In this milieu, the economic advisor thus needs to tread with caution, especially with issues that prove to be a political hotbed. As Schultze warns, the hazard of the economist trying to act as a political expert is unlikely that he will be a poor one, but that he may justify political findings with that of economic arguments and vice-versa. Therefore, the economic advisor should contribute extensively and robustly to policy debates by providing expert economic guidance, and not wait for reports from independent regulators to highlight urgent areas of reform.

Government economists need to work towards effectively and coherently reforming the franchising system by developing an environment that provides incentives to train operators so that cost-benefits may trickle down to consumers, thus protecting the larger interests of fare payers, taxpayers and wider society, lest another example of a ‘bungled government procurement’ occurs again.

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