Rail 445: The ‘Oliver Twist’ TOCs must put away their begging bowls

Train operators want to have their franchise cake and eat it, pocketing the profits when successful and yet scurrying to the Government for help when times are hard. CHRISTIAN WOLMAR urges SRA Chairman Richard Bowker to use the same response as Bumble the Beadle gave Oliver in Dickens’s novel.

The moment when Railtrack went on to the critical list in the intensive care ward was not, as many commentators have argued, when Stephen Byers pulled the plug, forcing the company into administration. Nor was it when, a couple of months earlier, the hapless John Robinson walked into Byers’s office and asked for more money.

No, the day when Railtrack signed its own death warrant was in May 2001 when its board decided that despite the somewhat trivial loss of £534m during the past financial year (compared with a profit of £360m the year before), the company would still pay out more than £100m in dividends to its shareholders.

I happened to bump into Steve Marshall, the then chief executive, that day, and suggested to him that he had been a bit naïve by making that payment as ministers might not be entirely pleased at seeing taxpayers’ money handed over to the shareholders of this supposedly brave, risk-taking company. Where was the risk, I asked at the time, if shareholders always got their dividends even when the company’s performance had been so appalling?

I would be lying if I suggested that I knew at the time just how prescient that warning would turn out to be. For his part, Marshall merely replied that it was important to keep his shareholders sweet. Yet, in the same results statement, Railtrack had said it would need £2bn subsidy that year to keep on going. Clearly Marshall, an accountant with little political savvy, had failed to realise that ultimately Government ministers were more important than the great mass of unwashed shareholders.

I retell this story not to gloat – though it is deeply tempting – but to send a little warning to the likes of Michael Davies, chairman of National Express, who, on 17 September, issued a plea for more cash as part of an announcement on his company’s rather poor figures.

National Express, you will recall, already did its Oliver Twist number on the SRA back in March over its two loss-making franchises, ScotRail and Central. Under the renegotiated deal, to “put these two franchises on a stable financial footing”, as the press release at the time said, “the SRA has agreed to provide £115m additional subsidy” to achieve a break-even position between January 1 2002 and the end of the franchises in 2004.

At the time, it seemed like a general invitation to franchisees to come to Uncle Richard to get more dosh. And so it has proved. National Express now says this is not enough. According to Davies, after the March deal “we retained revenue and cost risk. Subsequently, industrial action at ScotRail has cost £7m to date in lost revenue and increased costs.” He then goes on to cite a series of other problems, including “current industrial action across the rail network”, “the continuing decline in leisure traffic” and “on-going infrastructure maintenance issues” which “have combined to put these two franchises back into losses.” Therefore, he reveals, “as a result we have recommenced negotiations with the SRA about the future of these franchises.”

Now, I’m sorry if I am intruding into private grief, Mr Davies, but there seems to be a trifling inconsistency in your summary of the situation. On the one hand, you say that you are retaining “revenue and cost risk” but on the other you are arguing, effectively, that since National Express is making losses, then it has to have more money from the SRA.

This raises a fundamental issue about franchising: if the SRA is always going to cough up more money whenever a franchisee asks for it, then that is effectively carte blanche for doling out taxpayers’ cash on demand. The SRA is, though, terrified of a franchisee coming along and saying: “Sorry, we really can’t be bothered to run this lot of trains any more, over to you.” That would certainly scare the horses in the Treasury who would see it as a reversion to state control, putting the railways firmly back on the Government’s books.

But surely, this is the moment when the SRA has to show that it can withstand these sorts of demands. Just as Railtrack tried it on once too often by paying a dividend, National Express is straining the credibility of the whole system by asking for more, a mere six months after renegotiating its deal.

Of course, taking back a franchise would be a hassle but it must remain a possibility if the system is to work. Last time, National Express threatened that it would cut back on services which were not specified in the Passenger Service Requirement. But reducing frequencies on profitable services, such as Glasgow- Edinburgh, would just be cutting off its nose to spite its face. Other services are contracted by Strathclyde Passenger Transport Executive and, surely, the whole edifice of franchising was designed to ensure that services would be protected in such an eventuality. Moreover, if National Express was perceived to be behaving vindictively by the SRA, that could have implications for its other, more profitable franchises. It is time for the SRA to say to the franchisees, as the Rail Regulator rightly told Railtrack at the time: “Put away the begging bowl.”

This raises the issue of what to do about revenue risk. Risk is only risk if there is any possibility of the unwanted action actually happening. If there is no chance of a franchisee ever losing money, except in the short period between going into deficit and the SRA handing over wads of fivers, then there is no point. After all, the large profits that Stagecoach makes – boosted, incidentally by that extra franchise payment of £29m to introduce trains that seemed to have been already promised – and Virgin used to make out of their franchises would, in the past, have been used as cross-subsidy for the rest of the industry. No longer. This money is now lost to the railways and scrapping revenue risk would ensure that this was reversed.

If franchise arrangements are so fragile that whenever there is a minor mishap – let alone a major recession or another Hatfield-type disaster – the operators come back begging for more, what is the point of transferring the revenue risk. As I mentioned in my previous column (RAIL 444), this issue is up for grabs. There are voices within the SRA who would like to see revenue risk taken back in-house, given that it has proved to be a one-way ticket for franchisees, since the profitable ones pocket the money while the others come back for more, but others are wary because they recognise that this would be a big step towards renationalisation, the word that is banned within a mile of Whitehall (which takes in the SRA offices at 55 Victoria Street).

The repeated demands by National Express for more may be the turning point over a key issue facing the SRA.

Collecting fares: Why bother?

Of course, the big problem of taking back revenue risk is whether the rail companies would bother collecting the fares. I am always surprised at how little concern is paid by train operators to their revenue.

A week ago, I travelled to Nottingham from St Pancras on the 0755, which meant I paid a cool £85 return and yet, apart from a barrier check, there were no ticket checks which meant anyone getting on the train en route could have had a free ride.

I hear a lot of similar anecdotal evidence. A chap I know who commutes on the West London Line said that several of his colleagues travel in from various unstaffed stations in South London, change at Clapham Junction to go to Kensington Olympia and never bother paying fares because there is no-one to collect them at either end. “I pay because I start at Clapham Junction where there are barriers,” he said with disarming honesty, “otherwise I wouldn’t bother.”

Reader Paul Tetlaw reports that for the past three months he has been commuting several days a week from Edinburgh to Rosyth. Overcrowding on the trains from Fife to Edinburgh, he says, “is legendary and ScotRail now carries out spot-checks on tickets for passengers arriving at Waverley and Haymarket”. However, he travels in the other direction, catching the 0813 from Waverley to Rosyth: “Typically this train carries 200 passengers in a two-coach Sprinter – most of whom travel to South Gyle and Dalmeny, and fare collection is either minimal (say 10%) or non-existent, so most passengers enjoy a free ride every day. Those who are asked to pay often do so by credit card (they appear to have no cash) and they all book single tickets.” Mr Tetlaw insists: “I am mug enough to pay every day because I believe in public transport.”

He reckons ScotRail loses £1,000-£1,500 a week in business on this train alone. And he asks the questions which have troubled me for some time over this issue, because revenue collection was one of the areas where I thought private companies would be much better than BR, but this has not proved to be the case: “Why would a private company do this? Is it pure incompetence or is there a more sinister motive?”

Mr Tetlaw suggests that ScotRail might be embarrassed about the level of overcrowding and therefore does not want figures on the numbers it is carrying to be revealed. I think it is partly that companies suffer from the same phenomenon as BR – a reluctance to have people on the payroll, as employing staff is a hassle. This failure has important implications for the railway and for transport policy generally as it underestimates rail usage and therefore the case for more rail investment.

The good news is that Govia, which has taken over the Connex South Central franchise, has calculated that the revenue gained from putting on staff is three times the cost. Overall, however, the inability of the TOCs to collect the money may well strengthen the SRA’s case for taking back the revenue risk if it can find a way of incentivising the operators to collect the money through the right sort of bonus scheme.

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