Introduction

The main feature of the rail industry is that, unlike most other industries that were successfully privatised, it relies on government funding. Few (if any) enhancement projects can be funded on a purely commercial basis without public subsidies. Does this imply that auctions are not suited for rail capacity? What are the characteristics of this network that make auctions a mechanism for which the advantages are very unclear?

‘Competition for the market’ is the only model that has been tried for rail privatisation around the world. Franchises of vertically separated operations were adopted in Britain and concessions for vertically integrated operations was the adopted option in many countries in America and Africa (Thompson, Budin and Estache, 2001). Although many of these contracts were awarded on the basis of competitive tenders, these were typically administrative processes of a Beauty Contest type rather than proper auctions.

The allocation of contracts for rail service operation is an extremely complex and controversial process because of the particular economic characteristics of the industry. Railway infrastructure and rolling stock are long-lived assets. Perhaps more importantly, they are sunk to a large extent since most of the capital equipment is highly specific. The number of alternative uses (or routes for the rolling stock) to which assets could be redeployed may be quite small and in some instances non-existent.