Rail 541: MPs set to answer £1bn question: what are franchises for?

For the best part of a decade, CHRISTIAN WOLMAR has been repeatedly asking ‘what is the purpose of franchising?’ Now, thanks to the indomitable Gwyneth Dunwoody MP, he may be about to receive an answer.

The Wolmar Question, ‘what is a franchise for?’, may be about to get an answer. For several years, I have asked why the Department for Transport thinks it is a good idea to franchise out the railway and, more specifi cally, why the particular model of franchising is used. There has never been a satisfactory answer, with ministers parroting the notion that the privatisation of the railways was botched but never explaining what that meant nor the role franchising played in the ‘botching’.

Now Gwyneth Dunwoody, the redoubtable chairman of the Commons Transport Committee, is unleashing the full force of her troops to look at the issue of franchising and, refreshingly, the fi rst question posed in the call for contributions is “what is the purpose of franchising?”. Richard Bowker, when he was at the Strategic Rail Authority, used to give the disingenuous answer that franchising was a contract between government and the private sector for the provision of a specifi ed number of services for a given sum of money (which, of course, these days is more often a negative amount given the Treasury’s anxiety to reduce the amount of subsidy going into the railways). It will be interesting to see if the great man’s view changes now in his new role as chief executive of National Express, provided the company has any franchises left when he gets there.

Bowker’s answer does not address the policy of franchising. What is so great about it? Even that perennial optimist, George Muir of the Association of Train Operating Companies, does not sound entirely convinced. In a recent pamphlet, The Railway in Britain: on the right lines, he wrote: “The original franchises allowed train operators considerable freedom… now the new agreements specify in more detail what train operators will deliver… This greater specifi cation will work so long as it allows train operators enough management freedom to make the efficiency savings which government wants to see…’

Not exactly a ringing endorsement. So let’s wrack our brains to consider all the possible purposes of franchising. They are: value for money, risk transfer, private investment, management expertise, competition, diversity, innovation, getting government out of the railways, industrial relations and getting pictures of Richard Branson leaning against the front of shiny new trains. We can dispense with some straight away. Virgin Trains continues to claim in its press releases that the company has invested more than £1 billion in the provision of new trains. That is simply not true and I am surprised that the rolling stock companies do not get more exercised about it as it is they, not Virgin, who invest in new trains. This will be made apparent should Virgin lose the CrossCountry franchise when the new Voyagers will simply transfer over to the new operator.

Sure, on the margins the train operating companies do invest in, say, refurbishing rolling stock or tarting up the odd station, but these are outputs that are factored into the price of a franchise at the time of the bidding process and are simply bought by the government. If they were not specifi ed, the operator would simply pay more premium or receive less subsidy. The train operators are asset-free organisations and have nothing to invest in.

OK, then what about innovation? Well, if you had 20-year investment-led franchises as Alistair Morton attempted to introduce when he was head of the SRA, there would be plenty of scope for innovation. But operators tell me that today’s highly prescriptive franchises leave very little room for the train companies to introduce new ways of doing things. Indeed, one recently told me that “the Department for Transport is far more involved in running the railway than it ever was in the days of BR”.

Value for money is a much more complex issue. The problem here is the opacity of the fi nances of the franchising regime particularly in the way that it has changed over the years. There is, as Professor Jean Shaoul of Manchester Business School found when researching her excellent recent paper, The cost of operating Britain’s privatised railways, no simple time series of support for franchises in the decade that they have now existed. We know that support for the train operating companies rose, broadly, from £1 billion to £2bn in the aftermath of prValue for money is a much more complex issue. The problem here is the opacity of the fi nances of the franchising regime particularly in the way that it has changed over the years. There is, as Professor Jean Shaoul of Manchester Business School found when researching her excellent recent paper, The cost of operating Britain’s privatised railways, no simple time series of support for franchises in the decade that they have now existed. We know that support for the train operating companies rose, broadly, from £1 billion to £2bn in the aftermath of prValue for money is a much more complex issue. The problem here is the opacity of the fi nances of the franchising regime particularly in the way that it has changed over the years. There is, as Professor Jean Shaoul of Manchester Business School found when researching her excellent recent paper, The cost of operating Britain’s privatised railways, no simple time series of support for franchises in the decade that they have now existed. We know that support for the train operating companies rose, broadly, from £1 billion to £2bn in the aftermath of prvatisation, and that last year they received £1.16bn, according to Chris Cheek of TAS. There is no simple relation between these two fi gures, however, as direct subsidies are now paid to Network Rail and track access charges have changed. Moreover, as Shaoul points out, it is impossible to track down the precise amounts of compensation payments made to TOCs or penalties they have had to pay through poor performance. Indeed, it is almost as if (shock, horror) the DfT in its various incarnations has deliberately obfuscated the fi nances of the industry.

Moreover, if the government was really intent on fi nding out whether TOCs offered value for money, it should have ensured that some remained in-house, taking advantage, for example, of the fact that South Eastern fell into the public sector by default and keeping it there to use as a benchmark.

Risk transfer, on the face of it, seems clear-cut. The private sector takes revenue risk, except that several times in the past decade, taxpayers have had to pick up the bill when things have gone wrong. The department has issued guidance saying this will not happen again, but how can the civil servants ensure it will not? And the risk has been partly transferred back to the state anyway. After four years, the new franchises have a cap-and-collar arrangement that means losses for the franchisees will be minimal and the take-up of the fi nal three years of the new ten-year franchises is basically optional.

If the politicians hope they can absolve themselves of responsibility for the railways through the franchising system, they are sadly mistaken. I think, at root, this is the main reason ministers are so keen on the system. They feel that responsibility for the railways is perceived to be in private hands and therefore they can be cleared of blame when things go wrong. But as the bumpy ride of the past ten years shows, when the proverbial hits the fan, ministers get the blame anyway. As for diversity, well, we could perhaps do without some of it, if millions are spent on creating ridiculous names like First Capital Connect to confuse passengers.

The model of franchising we have is particularly limited in ambition and scope – designed, it seems, simply to maximise premiums from the franchisees. Indeed, franchising has gone full circle. We started with minimal franchises where the winning bidder simply offered to take the least subsidy or pay the highest premium. Then we had Morton’s brief interlude where he tried to develop franchises that would deliver investment (remember Special Purpose Vehicles?). Then we had Bowker who was very prescriptive but, rightly, emphasised deliverability and, he claims, never handed a franchise to the lowest bidder. And now we are back to the fi rst model with the DfT expecting to receive ridiculously high premium payments from the operators.

The issue always boils down to what would a sensible franchise regime be? Arriva and First have both been shortlisted to run trains across the Oresund bridge between Denmark and Sweden, but that is merely a management contract as there is no revenue risk and bidders are simply required to provide a set number of trains. Would that be a better option? The operators say that having the revenue risk gives them an incentive to provide a good service, but shouldn’t they do that anyway?

In the other direction, you could provide long-term franchises (though the EU now limits this to 15 years) with the proviso that the operators invest. But again, that begs a big question: would the operators not get complacent and simply work to the contract, knowing that they had it permanently?

Let’s hope the Transport Committee comes up with the answer to the Wolmar Question, but perhaps the truth is that ministers really are addicted to seeing pictures of Richard Branson with dolly-birds and dry ice in front of red trains.

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