Rail 386: Heads, the private operators win; tails, the taxpayer loses

Privatisation was supposed to switch the risks of rail operation to the private sector. While the profits have been transferred, however, the real risk of making a loss and going bust has not. Where’s the discipline for private operators, asks CHRISTIAN WOLMAR, if they know the White Knight of the SRA, Sir Alastair Morton, will ultimately ride to their rescue?

There was a fascinating juxtaposition of events in the middle of June which demonstrated how difficult it is for the various rail regulators to get the best out of the private companies which now run the railway.

First, Stagecoach announced it made record profits of £39m out of its South West Trains (SWT) franchise. And that was after a £4m performance payment for late and short-running trains. Given that SWT was paid £52m in subsidy during that year, we are almost back to the days of the late 1980s when Network SouthEast broke even, which is hardly surprising given that passenger numbers are at record levels.

But, because there are no clawback provisions in the franchise agreements – as the Tories knew this would have resulted in more subsidy to the industry – there is nothing anyone can do to rein in Stagecoach’s excessive profit levels.

Then, just two days after Stagecoach’s happy news for its shareholders, we had the astonishing announcement that Prism is effectively handing in the keys to 21/2 of its franchises but will be allowed to hold on to the lucrative LTS routes and to the West Anglia half of WAGN.

The deal had been negotiated during a month of meetings in the smokeless rooms of the Strategic Rail Authority’s (SRA) new headquarters in Victoria Street, Westminster, after struggling Prism had failed to find a buyer and was in danger of disappearing down the Severn Tunnel.

Arriva walked away from a deal in the spring and that left Prism with no alternative but to go cap-inhand to the SRA. The company’s problem was that, apart from its rail franchises, it owns nothing except a couple of small bus operators and therefore did not have the protection of a large company when the going got tough.

But why did the going get tough? Passenger numbers are at record levels, LTS is a refurbished line with improved signalling and new rolling stock and its WAGN franchise includes the lucrative Stansted Express, where annual growth has been around 30%-40%. OK, so Wales & West (W&W) and Cardiff Valleys have not prospered, but then the hefty amounts of subsidies paid to run these services should have been enough to see them through. But Prism’s projections on the cost side, the very basis on which it won the franchises, proved too optimistic. Indeed, local passengers have suffered from Prism’s attempts to make ends meet.

Recent timetable changes in Bristol meant that services were reduced from every 20 minutes in the peak to half-hourly on the route to Bristol from Weston-super-Mare, in line with the minimum set by the passenger service requirement. At first, the company refused to issue loading figures because of ‘commercial confidentiality’ but when it was forced to produce them by an order from the SRA, the statistics showed clearly that there was not enough room for passengers on the trains. And so it proved as commuters were left standing on the platform – a great advertisement for getting people out of their cars and on to trains!

So local rail users will not be sad to see the back of Prism, but they fear the consequences of the next few months as Prism does not actually terminate its contract until the end of the financial year. Staff will obviously be difficult to motivate and will the company bother to do any of those little vital extras like station cleaning?

Well, fortunately – but also outrageously – Prism is keen to stay in business and win the ‘WalesRail’ franchise when it is put out to tender later this year and so has an incentive to behave itself.

One issue which irritated several members of local Rail Passenger Councils (the new and much better name for the old Rail Users’ Consultative Committees) at their annual meeting, held on the day the Prism announcement was made, was the £20.5m investment which the SRA was forcing the company to make on LTS as punishment for failing to fulfil its franchise contracts. (Actually, in the press release it said ‘may invest on the line’ which suggests there is a let-out clause should passenger numbers suddenly drop.) While obviously welcoming the investment, those who represented Welsh and Western areas point out that LTS is a newly refurbished line in good condition serving a lot of prosperous commuting areas, while their franchise areas are crying out for investment in basic provision.

It is a good point. The SRA has also extracted a promise from Prism to put CCTV cameras on its 46 new trains, and yet many Welsh stations do not even boast an information system to say when the next train is due and are served by rattletrap old Pacers. The problem for the SRA is that if it extracted £20m in cash out of Prism to spread about the network, the Treasury would grab it and say ‘thank you very much’, which would be no use to passengers.

Indeed, looked at from the point of view of the SRA faced with a company at risk of defaulting, it all seems like a good deal. The SRA has got back bits of franchises it wants in order to sort out the franchise map, such as Great Northern, which will be linked in with Thameslink to enable a coherent franchise to be let once the Thameslink 2000 work has been completed. It will now also be able to offer a coherent WalesRail franchise (though there are great concerns among passenger groups in the West Country about what will happen to the routes in the rest of the former W&W franchise). And the SRA has avoided the disaster of seeing a franchise go under with all the hassle and uncertainty that would cause.

Yet, from the taxpayers’ point of view, it seems the public private partnerships which are the basis of franchises are a one-sided deal. Essentially, all the ‘good deals’ obtained by OPRAF in the late stage of the franchising process in 1996/97, when companies were desperate to obtain franchises at any price, proved to be duds.

MTL threw in the towel with Merseyrail Electrics and Northern Spirit which were taken over temporarily by Arriva, and Prism has been allowed to walk away from its losses. That only leaves First North Western which, as regular readers of this column will know, has been valued at nothing by its parent company, FirstGroup, and is heavily loss-making.

All these franchises got into trouble for the same reasons – the bidders made far too optimistic assumptions about cost reductions. The unexpected big growth in passenger numbers across the network meant that in those franchise areas where passenger revenue represented by far the major part of income, the train operators have been saved from losses by the rise in income from the farebox. But the franchises which are heavily dependent on subsidy have lost money because even a big boost in passenger numbers has been unable to make up for the failure to make savings on costs.

It is highly likely the SRA will try to do a Prism-style deal with First Group which also has the lucrative Great Western and Great Eastern franchises as well as North Western. The SRA wants to poach local cross-pennine services from North Western (Manchester Victoria-Wakefield and Manchester Piccadilly-Sheffield) to create a new Trans-Pennine franchise and it will probably want to reorganise Great Eastern, West Anglia and Anglia into a larger, more coherent, set of services. The rest of North Western and the remaining Northern Spirit services could then be melded together, with the great attraction to bidders of a whopping subsidy.

Bidders for the heavily subsidised services like the Northern franchise and WalesRail will, though, be a lot more cautious about their ability to make cost reductions. They will also be seeking at least one big change in the form of the contracts. Under the current arrangements, train operating companies are responsible for any losses caused by industrial relations disputes. This has given ASLEF a lot of clout as the drivers know that a day or two of disruption will eat up the whole annual profit of an operator. Handing that risk on to the SRA – effectively the taxpayer – will help attract bids but is likely to lead to more disruption on the railways as the operators will have nothing to lose by taking a firmer line.

The Prism episode, however, begs several questions and demonstrates the difficult job faced by the SRA (and, indeed, the Rail Regulator) which can be summed up as: how do you squeeze the private companies hard enough to make the pips squeak, but not so much that you end up with a lot of juice on the carpet?

Privatisation, we were told, was about transferring risk to the private sector. But time and again that always looks like a one-sided deal. The ‘risk’ of making excellent profits is, indeed, transferred to private companies but the real risk of making a loss and going bust is not. Of course, we do not want to see a company failing overnight and the SRA having to step in to run an emergency service. But where is the discipline for the private companies if they know that, ultimately, Sir Alastair will come to the rescue on his white charger? That question becomes even more pertinent with 20-year franchises.

If bidders get it as badly wrong as MTL, Prism and North West Trains, who will pick up the tab? No prizes for the correct answer.

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