Evaluating Alternative Policy Responses to Franchise Failure: Evidence from the Passenger Rail Sector in Britain

One potential problem with franchising (competitive tendering) is how to deal with situations where the franchisee is unwilling to continue operating the franchise within the contract period. This paper studies the effects of the franchising authority's response to franchise failure in passenger rail in Britain, which saw the affected operators placed onto management or short-term renegotiated contracts for an extended period. We find that operators on management contracts saw a sharp deterioration in efficiency. Further, the contract inefficiency persisted, though was eliminated by competitive refranchising. In contrast, costs for renegotiated franchises were no higher (statistically) than industry best practice. © 2012 LSE and the University of Bath