The Welsh Government recently announced the establishment of a not for dividend wholly owned subsidiary company. This company will initially provide advice and technical expertise but  its role could be extended and the prospect of the Wales & Borders franchise (currently operated by  Arriva Trains Wales) being run on a not for dividend basis has been floated.

It will be interesting to see whether the cheers outweigh the groans. Those cheering will point to Directly Operated Railways’ operation of the East Coast  franchise which  they see as a success, arguing that profits earned by rail companies could, in the world of not for dividend operation, be invested in such things as  improved trains and better services. Those groaning will see this as a way  of undermining a system  which has delivered significant growth, safety improvements and improvement to services. They may  also mention that a system which is derided by some in the UK is envied in other parts of the  world.

We all know the arguments and can probably guess with some accuracy which side of the debate  different groups will fall but if the Welsh Government is persuaded by  the arguments in favour,  how would they achieve their aspiration?

The most direct route would be to award the franchise to the newly formed company when the existing  franchise expires, without troubling the market with a competition. This would avoid  un-pleasantries such as bid costs and uncertainty. The alternative route is for the not for profit  company to bid with others in the competition to secure the franchise.

Granting the franchise to a not for profit company without a competition would involve a  significant change in policy, which is of course entirely possible. It would also need to be legal.

Rail franchising is undertaken in the context of both domestic and European legislation and  particularly  in relation to the latter, the Department for Transport and the Welsh Government do not have a free hand. Of particular relevance are the rules on the  competitive procurement of public passenger transport services by rail. Those who see this as meddling from Europe will want to know that the tide is against them as from December 2019 public service rail contracts will be  subject to mandatory tendering and train operators will be entitled to offer “competing commercial  services”. The rail market in Europe is moving closer to rather than away from greater competitive  tendering.

To secure the franchise it seems likely that the not for dividend company would have to bid with  others and so follow the bidding rules imposed on others. This raises issues for the government  (can it run a fair competition when it is also bidding for the franchise?), the not for profit  bidder (is it prepared to lose and incur the wasted bid costs?) and the other bidders (will they  bid if they perceive there to be an uneven playing field?).

Whatever the merits of public over private operation once the franchisee has been selected, if the  road to securing a franchisee is too bumpy the government may be persuaded that public sector bidders are not such a good idea.