Rail 391: Two-nil to the incumbents, but the game has just started

The new Midland Mainline and Chiltern franchise deals are replete with welcome promises of badlyneeded investment that will have sent shockwaves through Britain’s rail industry boardrooms. But the details of the deals remain undisclosed and CHRISTIAN WOLMAR believes the jury is still out on the long-term benefits of privatisation and the operatorinfrastructure split.

The National Union of Columnists imposes a blanket ban on its members writing entirely positive pieces. We are not allowed to say things are wonderful without a few judicious words of caution or criticism. This is to allay suspicions that we have been bribed or have written columns to please prominent advertisers.

So, just as when I was writing about the ten-year transport plan and Comprehensive Spending Review (RAIL 389), it is incumbent on me to pick a few holes in the first two franchises awards made by the Strategic Rail Authority to the incumbents of Midland Mainline (MML) and Chiltern. And despite the good news, there are genuine concerns which need addressing.

First, though, the good news. The deals which Sir Alastair Morton has thrashed out with the two operators are indeed full of goodies and are an excellent benchmark for future negotiations. The MML deal in particular, involving a two-year extension of the original ten-year contract to April 2008, looks good and demonstrates that, at least for the time being, the Treasury is on board with the plans to boost rail usage. By forgoing a mere £33m in premium payments between now and 2006, plus around £20m of notional premium payments for the following two years, the travelling public is getting some £238m in investment from National Express, the franchise incumbent. The most important aspect of the deal is that the £53m represents real public expenditure in terms of the way the Treasury does its sums, and is the first conclusive proof that we have moved away from the OPRAF-era of only ever going for the cheapest deal.

The benefits of the MML deal show, too, the kind of improvements that can be made on a line which, currently, is underused. There will be increased frequencies, with more services to Leeds which will provide direct competition with GNER on London services, in much the same way that Chiltern competes with Virgin on London-Birmingham; and the much complained-about new Class 170 twocoach DMUs are to be moved to other NEG franchises and replaced by new five-coach 125mph tilting trains. Indeed, being prepared to shift new rolling stock in that way around the system demonstrates a real long-term commitment to the railways. There will also be a new East Midland parkway station, though subject to planning permission, and even some spending on customer service and training.

Chiltern is equally replete with exciting pledges. The company is promising £370m worth of investment and claims that over 20 years this could even become £1bn, all for one of the smallest franchises on the network. Capacity will be improved with the doubling of nine miles of track and the quadrupling at Beaconsfield and Ruislip and two new platforms at Marylebone. There will be new rolling stock, a new control centre and even a driver simulator. And, of course, most exciting, there will be a great increase in frequencies with 50% more train miles and plans to reopen three closed routes: Aylesbury-Oxford, giving a new route from London to Oxford; Aylesbury-Milton Keynes; and the line north of Aylesbury, possibly eventually as far as Leicester.

One important aspect of these deals is that many of the improvements come early in the franchises. This is because the Treasury has earmarked money for the early part of the ten-year plan and the SRA, together with the rail companies, must ensure it is spent, otherwise the Treasury will claw it back.

Both deals also introduce the concept of profitsharing which was trailed some time ago by Sir Alastair. No figures are available so we do not know the rate of return that will trigger what effectively are premium payments to the SRA but, even as a token gesture, this innovation is welcome.

Stagecoach superprofits on South West Trains are a constant reminder of how OPRAF was forced to sell off the railway quickly in order to get the privatisation process under way, which has led to money being leeched out of the system for no discernible benefit for passengers. Again, the Treasury must allow the money to be recycled into the rail system to ensure it can be invested elsewhere.

Profit-sharing was portrayed in a leader in the Financial Times as unnecessary interference by government but an insider in one of the successful bidders told me: “We are totally relaxed about it. If we get up to a certain rate of return, we are quite happy for the extra money to be reinvested in order to benefit other parts of the industry. After all, there is a lot of taxpayers’ cash going into the railways.” Indeed.

According to him, the profit-share only works one way. In other words, should the company start making a loss, it will not be able to obtain extra subsidy. However, if you believe that, you are obviously the sort of person who leaves mince pies by the chimney at Christmas. We have seen from the demise of MTL and the cashing of Prism’s two loss-making franchises that the taxpayer will always end up picking up the tab should a franchise go pear-shaped, even if the contract is not expressed that way. Basically, a private company is not going to bear a loss over, say, the remaining ten years of a franchise if suddenly the passenger numbers decline or the figures stop adding up.

There is a great emphasis on performance in these deals, with the SRA having an overall aim of working towards all franchisees running at least 15 out of 16 (93.75%) of trains on time. According to the SRA, that is what passengers want. While it is difficult to dispute that fact, the SRA must remember, too, that there are a whole host of other aspects to a rail journey – frequency, seating capacity, fares, cleanliness, customer service, safety – which are also important and must not be forgotten in the rush to improve reliability and punctuality.

One beneficiary from the deals is Railtrack whose executives are, privately, beaming about them. Both involve Railtrack carrying out the infrastructure improvements rather than one of Sir Alastair Morton’s favoured Special Purpose Vehicles which he wants to see competing for infrastructure improvements. It is difficult to see how Sir Alastair’s laudable but complex concept is ever going to get off the ground.

There is a lack of detail as yet: the contracts are, so far, only ‘heads of agreements’ with the small print yet to be sorted out. For example, we have no idea what the future subsidy profile for Chiltern will be. M40 Trains, the John Laing subsidiary which has the contract, was expected to receive just under £5m in the next financial year. When the final details are known – and the SRA will stick to its predecessor’s policy of publishing subsidy figures – that sum is likely to be somewhat higher and we will find out to what extent it is the taxpayer, rather than the company, who is funding the investment.

There are other vital matters to sort out, including the nature of the breakpoints after five years. Is this a five-year franchise with the promise of an extra 15 years as long as the contract is fulfilled, or is it a 20-year franchise that can only be broken in the most exceptional circumstances. I suspect it will be the latter, which means that once this franchising process is over, the pattern of the railway will be set for the long term.

The other franchisees and bidders will be looking at these deals with some trepidation. Will they be expected to match the amount and scope of investment in order to retain or win franchises? The answer must be yes, and so there will be a lot of angst-ridden discussions in boardrooms around the industry. In particular, managers will be looking at the calculation made by the SRA and MML that some £53m in forgone premiums plus the opportunity to make profits for an extra two years equates to £238m investment.

Of course, MML and Chiltern were easy ones to start with. Both are discrete railways with spare capacity and the operators have a proven track record of expanding services and promoting growth. The next franchises, likely to be announced in October, are set to be East Coast Main Line and SouthCentral which are both much bigger and more complex. Here the calculations are much more difficult and, in particular, the SRA is likely to face a lot of flak on SouthCentral. There, the competition is between Govia – perceived by the press as the company whose subsidiary, Thames, was responsible for the 31 deaths at Ladbroke Grove – and the incumbent, famous for dirty trains and a remote French management. Either way, the SRA is not going to make itself popular. One can easily imagine the tabloid headlines which will follow a decision either way.

So far, then, it is 2-0 to the incumbents and it is difficult to see many of them being displaced given their inherent advantages. My guess is that the score will be about 18-5 by the end of the process. It is tempting to suggest that these deals show that, at last, privatisation is bearing fruit. Indeed, it is difficult to envisage the BR board sanctioning much of this investment. But remember: the name of the game has changed. We have a growing railway to which the Government, had it still owned BR, would have had to respond. Moreover, we have a pro-rail Government which wants to see the railways succeed and is prepared to bat for them in discussions with the Treasury, not an advantage that BR was blessed with very often.

We also have the Private Finance Initiative which would have enabled many schemes to have been developed in partnership with the private sector had BR remained Government-owned. And remember, too, that Chiltern is benefiting from the total route refurbishment undertaken by Network SouthEast under Chris Green. Therefore it is still a matter for debate whether the upheavals caused by privatisation – and, in particular, the split between Railtrack and the operators – have proved worthwhile. I remain on the side of the sceptics.

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