Rail 553: Gwyneth lights touchpaper for franchise fireworks

I am furious with Gwyneth Dunwoody, the fiercesome chair of the Commons Transport Committee. She has threatened my job by writing a report on passenger rail franchising that is far better than anything I could have written*. In fact, I could just fill this column with extracts from the report, which set out to answer my oft asked question, ‘what is franchising for?’, because I can hardly improve on what her committee has written.

In particular, there is a section that is such a brilliant and concise analysis of what is wrong with the franchising system and the way the government uses it that I will only ruin it by attempting to paraphrase it. Instead, I will repeat it here and then attempt to offer solutions to the questions it implies:

1. The Government has embraced the notion that private enterprise is best at delivering high-quality, innovative services such as the passenger railways, and yet it does not trust companies to deliver these services without highly detailed and specific contractual requirements which reduce the scope for innovation.
2. It supports competition, and yet appears to see open access operators as a threat to stability.
3. It wants risk to be transferred from the public to the private sector, and yet risk cannot be transferred in anything other than name because, as everyone knows, no Government could afford to let the railways go bust.
4. The Government hails the growth in passenger numbers, and yet it does not provide the long-term strategy and investment to increase capacity on the network. It wants coordination and yet continues to operate a system of fragmentation.
5. Finally, the Government wants the private sector to invest, take risks and innovate, and yet it prioritises price above all of these.
Let’s look at these individually as I think that, intellectually, these issues are irresolvable. The first could be called the GNER conundrum but actually it gets to the heart of the problem of franchising. GNER used to run a jolly good train service but was probably getting too much in subsidy, therefore earning profits for its parent company, Sea Containers, that were a bit too generous. So when the new franchise was signed nearly two years ago, the subsidies were transformed into huge premium payments (though as Network Rail receives direct grants, the premium does not reflect the true economics of the line) but GNER suffered a couple of mishaps and is now cutting back on the things which made it an elite service and is threatening to throw in the towel. Its innovations now seem to be confined to doubling car park charges.
To a large extent the private companies merely took advantage of the more generous franchise subsidies available under the previous regime to line their pockets. Therefore it is quite right that the government should be quite prescriptive in its contractual requirements. However, as GNER’s evidence to the committee put it, the franchising system ‘provides the best value operator for the Government’s specification of a particular route, although this is not necessarily the same as providing the best value for the passenger or the railway which passengers and local communities would necessarily desire.’ It is an issue of trust, really, and in a way there is no reason to think that the private sector will do anything than profit maximise which, after all, is its raison d’être legally.

The second point is topical, too. The fundamental point is that franchising and open access are not compatible. Yet, the whole system of franchising and separating infrastructure from operations was created in order to allow open access operators. The 2005 legislation specifically retained the notion of open access and ministers cannot complain that the Office of Rail Regulation then sanctioned the Grand Central trains. However, even when Grand Central starts running trains, there will be fewer than 20 open access services daily (ignoring freight which is a different issue) out of 19,000. While Hull Trains is a good service that has added value to the railways, the right to operate these open access services has caused a huge amount of bureaucratic hassle as well as cost to the taxpayers which suggests they are not really worthwhile. The problem, again, is with franchising which, as Roger Ford, the rail journalist, told the committee ‘preserves the existing timetable in aspic’. It would be far better for existing franchisees to be able to experiment with services, just as BR did in the past without having to obtain a specific budget, pay extra access charges, get legal agreements, negotiate paths and so on. However, because it is so tightly regulated and is so prescriptive, the franchising regime prevents the natural development of the timetable in response to market pressures. Ironic isn’t it?

The third point also raises an unanswerable issue. Time and time again the risk transfer has been shown to be illusory. Everyone knows the trains can’t stop and that the bonds which the companies put up are not significant amounts in relation to potential losses. Already the government’s hard line on GNER seems to be weakening with talk of possible negotiation. There is no real transfer of risk and therefore this should not be included as a justification of franchising.

On the fourth point, franchising has little to do with the rise passenger numbers. It has coincided with a continuous growth period of the economy which has always led to increases in traffic. Of course some of the recent investment in the railways, of which little in reality is down to risk taking private enterprise, has boosted numbers but look at what has happened in publicly owned and run Northern Ireland where long overdue investment has resulted in massive increases in passenger numbers, sometimes as much as a 30 per cent rise in a year such as on the Belfast – Bangor and Belfast Portasdown lines. As the committee report puts it, ‘several of our witnesses were sceptical about passenger growth being used as an indication of system performance’.

Finally, the fifth point appears irrefutable, too. The franchising system has been through several incarnations but the current version is more directed towards saving money and reducing overall subsidies than at any other time. In a way that makes sense. The government should not be throwing public money around. But, as the first point suggests, that means there is little scope for the companies to innovate. In fact, as the report suggests, they do very little anyway. The committee only found one example of real innovation, a rejigging of the timetable by an operator but the MPs were pretty dismissive of suggestions that greater revenue protection or installing wi-fi were very innovative (actually, I think that was a bit ungenerous – while wi-fi may not be innovative, making sure passengers have access to it and, indeed, the mobile phone network is just the sort of action operators ought to be taking).

In conclusion, while the government told the committee that the purpose of franchising is ‘to improve passenger services; and to harness private sector commercial judgment and innovation to reduce the net cost and increase the value for money achieved from the Government’s overall support for passenger rail services,’ there is precious little evidence for this.

It is apt that the report was published on November 5 as it is truly explosive. There has, so far, been little response within the industry unlike the vituperative attack that Brian Souter, the head of Stagecoach, launched against Dunwoody’s report on reregulating the bus industry. He called her a dinosaur and questioned her findings, which somewhat suggests that he was actually scared that bus reregulation would endanger his profits. The lack of response on franchising suggests there are no such fears as the industry reckons the government is too timid to make real changes to the system.

George Muir of the Association of Train Operating Companies even managed to turn the report round to suggest it supported the existing system. Muir, whose glasses must be a far deeper shade of pink than merely rose, said: ‘A careful reading of the report shows that the committee endorses franchising as the way forward – but simply argues that it can be done better.’ They were not the lines I was reading between! The committee, which remember is an all party group that has delivered a unanimous report, says that ‘we do not believe the current system of franchising can achieve these aims [improving services and maximising value for money] in the long term’. As the analysis above suggests and, as does a careful reading of the report, in whatever way the franchising system is tinkered with, its fundamental contradictions cannot be resolved.

The report makes clear that there is no rational basis for the franchising of passenger services. It is only inertia and the fear of looking that sustains the system, Franchising is a fashion, just as state ownership was in the 1940s, and eventually a better balance between the role of the private and public sectors in the railway industry will be found. In the meantime, as the report points out, the railways are costing more than ever before in taxpayers’ money. Please tell me George, is that a coincidence?

*House of Commons Transport Committee, Passenger Rail Franchising, 14th report of session 2005/6, HC1534, published November 5 2006.