Rail 462: Private sector investment proves to be a mirage

While superficially the new franchise deal for SouthCentral looks as if a lot of private money has been attracted into the industry, Christian Wolmar argues that most of it is illusory. At the end of the day, it is the taxpayers who are footing the bill.

At last a franchise contract has been signed. The deal between the Strategic Rail Authority and Govia for the SouthCentral contract was announced on 12 May after a gestation period rather longer than an elephant’s.

This is not, however, a new style franchise which will come into force next year. Instead, it is still modelled on the passenger service requirement model and will run for six years although it can be terminated by the SRA during the final year to ensure a smooth handover. So essentially it is a five year arrangement from the starting date of 25 May.

A lot of blood sweat and tears have gone into the negotiations of this contract. At the press conference, Keith Luderman, the chief executive of Govia, gave a long list of thank yous and testified to the difficulties of establishing the deal, but at the end of the day it is pretty thin gruel that has been served up. Older readers will remember that originally SouthCentral was supposed to be one of the 20 year deals accompanied by a cascade of investment delivered by a Special Purpose Vehicle for the upgrading of the Brighton line. That was Alastair Morton’s vision but all that optimism disappeared with the collective nervous breakdown suffered by the railways in the aftermath of the Hatfield train crash.

Sure, the press release promises £1bn worth of investment but that is hardly anything to get excited about. Not only was this less than the £1.5bn that had been promised originally, but the bulk of the money is for new trains, the replacement of Mark I rolling stock which was a requirement of the franchise since it is all supposed to be replaced by the end of next year, a target, of course, which cannot be met because of the power problems in Southern Region.

Moreover, the new trains are being paid for largely by increases in subsidy. Currently, the SouthCentral franchises receives around £50m in public support and this will more than double to over £100m for years two, three and four and then fall back to £84m by 2009. At the press conference, Richard Bowker said that around 80-90 per cent of this extra money will go towards the cost of the new trains. That’s around £45m per year extra but also the new trains should attract extra revenue and cost less to maintain, which is an added benefit to Govia. This is in sharp contrast to the old system of pricing rolling stock created at privatisation when the cost to the train operator of old and new rolling stock was deliberately set at a similar level in order to encourage investment in new trains.

The payments to Roscos exposes the fundamental fact about private sector investment in the railways which is often forgotten – that it has to be funded from the public purse. In terms of the national economy, what is the difference between investment that is funded by a rolling stock company and paid back out of increased subsidy and that funded by the government and paid out of subsidy? Well, the big difference, of course, is that the government could do it cheaper since it can obtain funding at a much lower cost, but that is not the way things are done these days. It is, of course, not Govia which is buying the trains but Porterbrook, the rolling stock company, which oddly received little of the credit in the press release put out by the SRA.

The other ‘exciting’ part of the deal is that there is to be a new depot for the new trains negotiated as a special purpose vehicle and costing £115m. So, the new trains will have a depot. Wow.

Now a little rant. The subsidy figures were not contained in the press release which is a stupid attempt at spin doctoring by a public body whose leadership and communications department ought to know better made even dafter by the fact that an SRA press officer at the press conference had the figures for the subsidy on a piece of paper, part of which he showed to a Reuters journalist who was pressing for the information. Come on boys, grow up: at every franchise announcement, my colleagues and I will ask always about the subsidy line and therefore you may as well put it on the release in black and white. Trying to hide what the taxpayers are contributing to rail investment in an attempt to persuade us that it is all, by magic, coming from the wonderful private sector is just childish.

On being asked, Richard Bowker gave the figure for the subsidy over five years as £520m. Yet totting up the numbers provided belatedly by the SRA, the amount comes to £670m. Is that an error? No. Bowker, being an accountant has given a net present value figure. In other words the amounts in future years are discounted back at 6 per cent per year to give a consistent 2003/4 figure. i.e. £100m this year, is worth the same as £106m next year and £112.36m the following year and so on. Therefore, rolling them into a figure at today’s prices makes the total appear rather less than just adding up the raw numbers. However, this methodology tends to result in an understatement of the true figure. It uses the Treasury discount rate of 6 per cent when we all know that inflation will be much less than that, at least in the early years – say 3 per cent – and therefore the real payments will probably be somewhere in the middle of the two figures.

Another omission from the press release was the key issue of targets for reliability and punctuality. On questioning, the target was revealed as 87 per cent punctuality, rather than the current level of 84 per cent, a modest improvement and a complete retreat from Sir Alastair’s 15 out of 16 (93.75 per cent) target.

The misguided attempt to restrict information in the press release meant that even a bit of good news was omitted. There was no mention of the capping arrangement for Govia’s profit. This will come into play if the company begins to make more than £20m per year which, incidentally does not mean that level of profit is guaranteed. Above that, the SRA will claw back between 50 per cent and 80 per cent, preventing the type of massive profit making enjoyed currently by franchises such as Great Eastern which currently makes a 20 per cent profit margin. (By way of comparison, that would give SouthCentral a £60m profit.)

There is no protection for downside but as we all know, when things go pear shaped, Govia will put out the begging bowl and on past performance the SRA will cough up, though I am told this has not pleased ministers who are quite keen to see what happens if the extra dosh were not forthcoming.

None of this really answers the fundamental question I keep asking in these columns – what is the franchising process for? Certainly the transfer of risk is minimal. Clearly, as one wag put it, the only risk to Govia really is if their uniforms go out of fashion and they have to buy a new set (remember the horrible Connex yellow). Moreover, five years is awfully short for a company to make a difference. No sooner is the franchise signed than there will be concerns about renewal. And all the costs of the bidding process have to be gone through over again – it is not a sensible way to run a railroad but everyone knows that.

In reality, the only reason we have franchises is because ministers don’t want to have to reorganise the railway or, what they would see as even worse, have a BR type organisation running it.

However, here’s a little prediction in the Mystic Wolmar mould. If the franchise bids start getting too expensive, the SRA may be forced into a position of running chunks of the railway itself. After all, that is what has happened with Network Rail and the engineering companies. Such an arrangement would make a lot of sense, giving the SRA a benchmark on the costs of running a railway. Ultimately, it would be sensible to have one of each type of franchise – Regional, InterCity and NetworkSoutheast, to use the old BR terms in order to give the SRA the information it needs. Of course, the next logical step would be to merge the SRA and Network Rail and then begin to create an integrated railway. But that would be far too sensible.

Railway madness 4…

A signaller in an old mechanical box in the Midlands reports that he was recently visited by a contractor who was putting in a voice ‘Where will you put it?’ the signaller asked. ‘Oh, I’m only doing the wiring mate’, was the reply. ‘Another company will be installing the actual recorder’. So for a simple job, two companies requiring two employees and two journeys, are involved. And what’s the betting that the second contractor declares that the wiring has been put in the wrong place and two journeys becomes four?

…but a victory for common sense

Last year, I highlighted the confusion which FirstGroup caused on its trains by insisting that all the anti-macassars bore the legend First, which led to confused occasional travellers wandering up the whole train in search of the standard class seats. The company has now relented and the anti-macassars in the cheap seats now bear the legend standard class in big letters, above a small company logo which says First. Still a tad confusing but a victory for common sense nevertheless.