Rail 524: Franchises are complex, opaque and so very expensive

The ‘what is a franchise for?’ debate rages on as CHRISTIAN WOLMAR argues that today’s railway is costing the taxpayer over six times as much as it was when it was nationalised.

In the last issue, Richard Bowker the former head of the Strategic Rail Authority takes me to task over my oft-asked question ‘What is a franchise for?’ Franchising, he says, is simply ‘a contractual right to run a defined “something” for a defined period of time against a defined set of performance criteria’.

This provides the ideal opportunity for a debate on the issue. Bowker says that franchises were an inevitable result of separating the infrastructure from the operations at privatisation and that the government had to ‘sell the rihgts to run the train businesses in return for (reducing) public support’.

Bowker went on to say that the question I really mean to ask is “why create the need for franchises in the first place” and that really my question is an excuse for arguing that ‘railways only work when vertically integrated’. Well, no Richard, that was not my question. My question of ‘what is a franchise for?’ is precisely just that.

There are, in fact, two aspects to the question, both of which are interesting. The first is the general point of what is the purpose of a franchising system on the railway. The second is what is the reason for having the specific franchise arrangements that Bowker himself introduced since he moved the system away from 20 year contracts which his predecessor, Sir Alastair Morton had sought to obtain?

The franchise arrangement was sold to the public as a way of harnessing private sector expertise in running the railways to improve on the ‘dismal’ record of ‘deeply inefficient’ British Rail but, as we all know and without going into detail, the private companies have varied from good to bad, much as BR did.

Travelling to Norwich the other day with the ludicrously named One – one passenger told me she had gone to platform one as a result of the announcement! – was a mundane experience, with little customer focus, a fact noted by the senior National Express executive who was sitting opposite me and who was going to have a word in the ear of the TOC director! GNER has, on the whole been very good while Virgin has only just reinstated evening meals on its service and you still can’t get breakfast if you are a standard class passenger, even one paying nearly £200 return to get to Blackpool as I did the other day.

A second stated reason is that it is a good idea to pass on the revenue risk. The reduction in rail travel as a result of the recent bombings is a case in point. Franchises have taken a hit in the order of tens of millions of pounds which would otherwise have landed on the public sector. However, as has been well documented many franchisees were bailed out in the early days and this may well happen again.

Moreover, the fact that the franchisees get a contract which ensures they are compensated when there are line closures can prove very expensive for the public purse. Go-Ahead – which has been booted off the Thameslink franchise – was given £39m in compensation for the closure of the central London link for 35 weeks. Yet it only lost 1 per cent of passengers – representing around £1.5m in revenue – and some of these may have transferred to Southern, owned by the same group.

The rigidities and complexities caused by the involvement of the private sector in medium term contracts are a perennial problem for the planning of the railway. This is clear with the Crossrail bill. The government has recognised this in its efforts to dodge round the issue by simply allowing Crossrail full access to the slow lines on Great Eastern and Great Western out of London , neutralising the regulator. I am beginning to think that the present structure of franchising makes it almost impossible to deliver a major new section of railway that is affordable. Crossrail may well founder on the rocks of the franchising system.

This complexity creates other problems. Look at the Oyster card in London which, because of opposition from some TOCs who are unwilling to fork out for the necessary hardware, cannot be used for most National Rail journeys within the London area. Contrast this with the relatively smooth introduction of the Travelcard when BR and the GLC negotiated it.

Thus the franchising process is a barrier to integrated transport. Take, too, the Office of Fair Trading’s recent daft referral of National Express’s bid for Thameslink Great Northern to the Competition Commission because it would give the company two out of the three rail routes between Gatwick Airport and London . Who the hell cares if NEG runs both Thameslink and Gatwick Express?

Another reason given for the franchising process in the early days was that the private companies would invest. But this was clearly a nonsense. With contracts as short as five years, there is no incentive – or indeed capability – to invest since obtaining a return on the money would be impossible. TOCs are an asset free zone and cannot invest.

The other reason for my question is the issue of whether alloperations should be franchised out. At the moment, South Eastern Trains is being run by a management team on behalf of the SRA whose last boss, Nick Newton, still retains the chairmanship of the train operator until it is franchised out.

Now interestingly, South Eastern is doing something which private operators would not dare because they would fear the revenue loss – taking on the unions. SET is planning to shut some ticket offices and redeploy the staff onto trains or platforms. Together with much improved ticket machines, its retail director, Alex Warner, reckons that this will bring ‘railway retailing into the 21 st century. Overall staff numbers are going up, but this has not deterred Bob Crow and his cronies from threatening industrial action. Contrast this with South West Trains’ craven refusal to push through single operation of trains.

The issue of why the Integrated Kent Franchise (which incorporates SET) is being outsourced when there is great uncertainty about the effect of the high speed line domestic services, making the assignment of revenue risk to the private sector very expensive, appears to me as sheer dogmaticism. A public sector franchise would be a useful cost comparator.

Then there is the cost of the franchising exercise both the hidden one of taking the best railway managers out of operations since winning the next franchise is more important than the day job of keeping services running, as well as the basic expense. In the early days, bids were simple and cost a few tens of thousands. Now with the complexity required by the Department, it takes £2.5m- £3m to put in a bid. And there is the upheaval for staff when a contract changes hands.

The very opaqueness of franchising is another problem. A recent pamphlet on franchising written by the noted accountancy academic Professor Jean Shaoul, for think tank Catalyst – The performance of the privatised train operators – highlights the fact that the ‘SRA does not identify and publish [financial] information in a clear and consistent way on an annual basis’. Overall, according to National Rail Trends, the cost of franchising has gone up from £1.2bn in 2003/4 to £1.7bn last year. Some of that is down to increased access charges, but there were also new, more generous, deals for some franchisees, notably South West Trains. The details are, however, lost in the complexity of the arrangements which means it is impossible to know whether the public is getting value for money – a key requirement of buying in services from the private sector.

Indeed, the Department for Transport has tried to prevent the publication of annual premium payments and the situation over the cost of the Virgin West Coast franchise is so complicated that not even the DfT’s press office could supply a coherent explanation why the subsidy had gone down from £328m in 2003/4 to £113m last year, despite a rise in access charges.

So, to sum up franchises are a complex, opaque and apparently very expensive contractual relationship between government and private companies to run the railway in a way which creates complexity that militates against the creation of an integrated transport system. Moreover, most of the time they offer customers very little that BR didn’t.

My question is not, as Bowker suggests, rooted in dogmatism. It is based on the fact that I genuinely do not know why there is an ideological commitment to franchise out all or bits of the railway. The case for the concept has by no means being proved and therefore we need a debate in which the advantages of the system are put forward by its protagonists, rather than merely hiding behind the notion that ‘this is what we have got, so therefore this is what is right’.

And there are alternatives – the objection that Brussels would not allow vertical integration is not accurate, or else how come we have the London Docklands Railway and the Isle of Wight , and why did the government not use that as an excuse to why it did not proceed with vertical intergration following the rail review last year. TOC managers I have talked to recently suggest various alternatives: an experiment in vertical integration; permanent contracts, to allow investment, with stringent five year reassessments; or simple management contracts with no or very little revenue risk. The case for each of these can be made and may indeed be better than the existing muddled concept which seems to satisfy no one in the industry, and they may provide an answer to my original question.

On the other hand, if Richard Bowker reallly wants to have a debate on his interpretation of my question, he could try to justify why a well working railway costing £1bn per year in subsidy which had the capacity to invest in improvements has been turned in to today’s shambles that cannot afford to fit out the King’s Cross Thameslink box and costs taxpayers £6.5bn this year and which, despite recent improvements, is still less reliable than the vertically integrated BR?

Shares