However, franchising is not a free transaction. Evidence from the Transportation Selection Committee shows that the cost per offer was $5 million in 2006 and $10 million in 2012. Previous work has shown that there were 5.4 offers per franchise in the first phase, 4.2 in the second phase and 3.8 in the third phase (Preston, 2017). There is no comparable data for the fourth and fifth phases, but the trade press indicates that two franchise offers have become the norm, although there is now a more arduous pre-qualification phase and it seems that there has been only one serious bidder in some recent competitions and sometimes, as in the South East, not even that. If we assume that the franchisor will cost one bidder per turn, we estimate these transaction costs at $800 million in Phase 1, $234 million in Phase Two, $576 million in Phase 3 and $350 million for phases four and five (until mid-2019). This results in a total cost of $1.96 billion, based on approximately 58 franchise competitions (including a cancellation). Costs related to the management of the four franchise breaks or the 26 direct renegotiations and auctions are not included here. In addition, the installation (and decommissioning) costs of OPRAF, SRA and DfT Rail or the various audits carried out by Franchising are not included. For example, the Public Finance Committee estimated that the cancellation of the west coast franchise resulted in a cost of more than $50 million. These transaction costs are therefore considerable and amount to billions, but these costs are unlikely to completely destroy the benefits of franchising. As a result, the government took greater control of the rail system during the third phase of rail franchising, which ran from about 2005 to 2012. The SRA has been abolished and its functions transferred to a large extent to the Ministry of Transport (DfT).

During this period, 12 TOCs were revived and, in most cases, a cap-and-collar risk-sharing system was put in place to allay concerns that bidders in Hatfield would be overly reluctant to take risks. These agreements, which generally came into effect after four years of franchise, meant that OCDs shared 50% of all transportation fares above 102% of the supply profile with the DfT (the cap). Conversely, DfT would account for 50% of all revenue losses between 96% and 98% of the auction profile and 80% of deficits below 96% (col).