But how successful will such a policy be in cutting down drunkenness and the associated anti-social behaviour in many towns and cities, especially on Friday and Saturday nights? The following articles discuss the issue and look at some of the evidence on price elasticity of demand.
Virgin’s franchise to run the West Coast Main Line from London to Birmingham, Manchester, Liverpool, Glasgow and Edinburgh was due to expire in December. The Department of Transport thus invited tenders to run a new 13-year franchise, worth around £5 billion, and on 15 August announced that the franchise had been awarded to FirstGroup. It had bid substantially more than Virgin.
Virgin immediately challenged the decision, arguing that FirstGroup’s figures were flawed. According to the second BBC article below:
It argued that FirstGroup’s revenue projections were wildly optimistic – that passenger growth of 6% a year was unlikely given that Virgin had seen growth of 5% a year from a much lower base. This level of passenger growth would have seen FirstGroup’s revenue from the franchise grow by more than 10% a year, which was simply unrealistic, Virgin argued.
And it is not alone. “Everybody in the industry thought that this bid was not sustainable and that the risks had not been taken into account by the Department for Transport,” says rail industry expert Christian Wolmar.
If revenue targets are not met, the franchisee doesn’t have the money to pay the government the promised fee for the contract, which in FirstGroup’s case was back-loaded towards the end of the 13-year term.
After making its decision, the Transport Secretary at the time, Justine Greening, said that the process of assessing the bid was robust and fair and conducted with due diligence. Sir Richard Branson of Virgin strongly and publicly disagreed and Virgin decided to take the Department of Transport to court. The court case was scheduled to begin on 4 October.
However, in preparing its case to put to the court, the Department of Transport uncovered significant errors in the evaluation of the bids. These errors involved the overestimation of passenger numbers, the undervaluation of risk and a failure to take inflation into account. The errors stemmed from inputting the data incorrectly.
The errors were so serious that the new Transport Secretary, Patrick McLoughlin, on the day before the court case was due to begin, announced that he was scrapping the contract to FirstGroup and would invite new bids. All four of the original bidders would have their costs refunded, amounting to some £40 million.
The minister also announced that he was setting up two reviews. One would seek to establish just what went wrong in the assessment of the West Coat Main Line bids and what lessons could be learned. This is due to report at the end of October. The other review would examine the wider rail franchise programme and how bids are appraised. In the meantime, three other franchise competitions had been ‘paused’ pending the results of this second review, due to report in December.
The articles look at the problems of assessing bids and properly taking into account risks associated with both revenue and cost projections. Not surprisingly, they also look at the politics of this amazing and unprecedented U-turn
Webcasts and podcasts
West Coast Main Line rail franchise deal scrapped BBC News, Richard Westcott (3/10/12)
West coast rail franchise deal scrapped Channel 4 News, Krishnan Guru-Murthy (3/10/12)
‘Major problem’ for West Coast Main Line BBC Today Programme, Louise Ellman (3/10/12)
Philip Hammond on West Coast Main Line contract BBC News, Andrew Neil (7/10/12)
Virgin to run West Coast route ‘for at least nine months’ BBC News, Richard Westcott (15/10/12)
Articles
British transport secretary cancels West Coast franchise International Railway Journal, David Briginshaw (3/10/12)
Wrong track: Another humiliation for the government The Economist (5/10/12)
West Coast Main Line: total chaos as government scraps franchise deal The Telegraph, Alistair Osborne (3/10/12)
West Coast Main Line deal scrapped after contract flaws discovered BBC News (3/10/12)
Q&A: West Coast Main Line franchise BBC News (4/10/12)
What derailed the Transport Department BBC News, Robert Peston (3/10/12)
Transport official suspended over rail fiasco is ex-Goldman banker Independent, Oliver Wright and Cahal Milmo (5/10/12)
West Coast Main Line: Civil servant Kate Mingay speaks out BBC News (6/10/12)
Civil servant: I wasn’t to blame over West Coast bid The Telegraph, Louise Armitstead (5/10/12)
West coast rail fiasco: three government officials suspended Guardian, Gwyn Topham (3/10/12)
What does west coast shambles mean for big rail franchises? Guardian, Dan Milmo (3/10/12)
West coast mainline fiasco may claim further victims Guardian, Gwyn Topham and Dan Milmo (4/10/12)
The West Coast mainline, wasted taxes, and a secretive shambles at the heart of the Civil Service Independent, Steve Richards (4/10/12)
Why all the West Coast bids were wrong BBC News, Robert Peston (9/10/12)
Questions
- What were reasons for awarding the contract to FirstGroup back in August?
- How is discounting used to assess the value of projected future revenue and costs? How does the choice of the rate of discount impact on these calculations?
- In what way should risk be taken into account?
- Why was the FirstGroup bid particularly sensitive to the calculation of risk?
- If both costs and revenues go up with inflation, how is inflation relevant to the calculation of the profitability of a bid?
- What are the arguments for and against making franchises longer?
- Is it only at the bidding stage that there is any competition for train operators? Explain.
- Should full social costs and benefits be taken into account when assessing bids for a rail franchise? Explain.
EU environmental legislation is beginning to cause problems in the UK. As it prohibits coal-fired power plants from generating power, they will be forced to close. This means that the UK will be forced to rely more on imported energy, which could lead to price rises, as energy shortages emerge.
Ofgem, the energy regulator has said that the risk of a gas shortage is likely to be at its highest in about 3 years time, as the amount of spare capacity is expected to fall from its current 14% to just 4%. Energy shortages have been a concern for some time, but the report from Ofgem indicates that the predicted time frame for these energy shortages will now be sooner than expected. Ofgem has said that the probability of a black-out has increased from 1 in 3,300 years now to 1 in 12 years by 2015.
The government, however, has said that its Energy Bill soon to be published will set out plans that will secure power supply for the UK. Part of this will be through investment, leading to new methods of generating energy. The Chief Executive of Ofgem, Alistair Buchanan said:
‘The unprecedented challenges in facing Britain’s energy industry … to attract the investment to deliver secure, sustainable and affordable energy supplies for consumers, still remain.’
One particular area that will see growth is wind-farms: a controversial method of power supply, due to the eye-sore they present (to some eyes, at least) and the noise pollution they generate. But with spare capacity predicted to fall to 4%, they will be a much needed investment.
Perhaps of more concern for the everyday household will be the impact on energy prices. As we know, when anything is scarce, the price begins to rise. As energy shortages become more of a concern, the market mechanism will begin to push up prices. With other bills already at record highs and incomes remaining low, the average household is likely to feel the squeeze. The following articles and the Ofgem report considers this issue.
Report
Electricity Capacity Assessment Ofgem Report to Government, Ofgem (5/12/12)
Articles
Power shortage risks by 2015, Ofgem warns BBC News (5/10/12)
Britain faces risk of blackout The Telegraph (5/10/12)
Ofgem estimates tightening margins for electricity generation Reuters (5/10/12)
Electricity shortages are ‘risk’ by 2015 Sky News (5/10/12)
Future energy bills could give customers a nasty shock ITV News, Chris Choi (5/10/12)
Questions
- What is the role of Ofgem in the UK?
- Explain the way in which prices adjust as resources become more or less scarce. Use a demand and supply diagram to illustrate your answer.
- To what extent do you think the UK should be forced to close down its coal-fired plants, as a part of EU environmental legislation?
- Are there any market failures associated with the use of wind farms? Where possible, use a diagram to illustrate your answer.
- Explain why an energy shortage will lead to an increase in imports and how this in turn will affect energy prices.
- What are the government’s plans to secure energy provision in the UK? Do you think they are likely to be effective?
From early January to late February 2013, the average pump price of petrol in the UK rose by over 6p per litre – a rise of 4.7% in just seven weeks. There have also been substantial rises in the price of diesel.
The higher price of road fuel, plus the general squeeze on living standards from the recession, with prices rising faster than wages, has caused a reduction in the consumption of road fuel. Petrol sales have fallen to their lowest level for 23 years. Sales in January 2013 were 99m litres down on the previous month’s sales of 1564m litres (a fall of 6.3%).
