GNER debacle marks the end of an era

It is, as Rail magazine put it wittily, the end of a GNera. The widely expected demise of the GNER franchise marks the end of a brief attempt by the Department for Transport to use the franchise process to maximise revenue from the rail companies at the expense of a reduced standard of service for passengers and sharp increases in fares.

GNER’s troubles also suggest there is no coherent answer to the question I have been asking for some years, ‘what is a franchise for?’, which is currently the subject of an investigation by the redoubtable Gwyneth Dunwoody and her Commons Transport Committee. The policy on franchising has turned full circle. In the early heady days of privatisation, it was seen as a way of reducing subsidies over time. Franchisees were given a couple of good years and then were expected to cough up huge savings in such a way that overall subsidy to the railway was to be cut, broadly, from £2bn to £1bn.

As several franchisees threw the towel in, unable to meet the rigorous financial targets to which they had committed themselves, the Strategic Rail Authority under Richard Bowker changed tack. Instead, it tried to secure deals that were deliverable and offered more than simply the least subsidy, though the SRA remained under constant pressure from the Treasury.

Once Bowker had left, however, the policy changed back and the GNER deal, the last it signed before abolition, was solely aimed at screwing the maximum out of a train operator expected to pay £1.3bn over the ten year length of the franchise. The desperation by the operator to squeeze the last pips out of the franchise was demonstrated by the recent decision to double car parking charges.

The numbers never stacked up. But the coup de grace was administered when the Regulator decided to allow open access operator Grand Central to run three trains delay between London and Sunderland. Crucially, by allowing the train to stop at York, the new company can claim a proportion of existing fare revenue on that route, even if it does not carry any passengers itself.

Now that GNER has lost its court challenge, its parent company, Sea Containers, in a gloomy statement to investors, says that they cannot expect any dividends in the near future. The recent chaos at airports may give GNER a short-term boost but clearly the long-term franchise premium payments scheme is simply not viable.

In truth, GNER has been exaggerating the importance of Grand Central’s intervention as GNER was already in trouble itself, gaining only an extra 3.3% in revenue in the first 14 months a third of its target. GNER oddly claims that it will lose over £10m per year, yet Grand Central expects a revenue of only £7-8m annually and surely some of that will be newly generated business.

Whatever the precise figures and reasons, GNER is up the proverbial creek with little prospect of finding a paddle. The implications of the parlous state of GNER extend across the rail network.

If the franchise has to be renegotiated (the Department’s adamant statement that there will be no renegotiation is merely the starting point of negotiations!) or passed on, the Department will not get the expected revenue and there will be a shortfall that has to be made up from other parts of the rail budget.

Other suicidal deals, such as First’s latest two franchises, are also likely to prove unrealistic, putting further pressure on the budget. Moreover, bidders for new franchises will never commit themselves to such onerous deals and therefore the whole issue begs the question, again, as to the purpose of the franchising arrangements.

Are they a sensible way of running the railway given the uncertainties and instabilities they cause in an industry which, above all, needs a stable climate to stimulate investment?

Hopefully, Mrs Dunwoody will come up with her usual trenchant report and Douglas Alexander will show a greater readiness to consider a fresh look at the way franchising is working than his predecessor.

Shares