Franchise policy under fire from all sides

The shortlist for the new Southern franchise, which includes Gatwick Express, has been issued featuring the usual suspects including Stagecoach and Govia,. It will be the shortest ever franchise to be let, just five years and ten months because its ending is timed to coincide with the completion of the First Capital Connect contract, in order to blend in with the new Thameslink.

That means there is absolutely no scope for any investment and clearly the result will be the worst sort of short term contract designed to make money for the winner without offering any improvements for passengers. This is the most extreme version of the Department for Transport’s policy since the abolition of the Strategic Rail Authority, which involves the letting of plain vanilla franchises devoid of any investment that maximise revenue for both the Department and the franchisee which share both extra profits and losses.

The Department has now come under attack from all sides over its franchise policy. First, in August the Competition Commission which had been asked to examine the rolling stock market came to the conclusion, as several commentators like myself had expected, that many of the failings of that market were, in fact, due to the short term nature of the franchising policy. Rather than criticise the rolling stock companies, it was rather amusing to watch the Commission turn on the Department which had instigated the inquiry in the first place.

The Commission argued that short franchises meant that new operators had little option but to accept existing rolling stock and therefore there was little scope for a proper market to develop. The Commission suggested that longer franchises of up to 20 years ‘may attract new entrants to the rolling stock leasing market, encourage train operators to consider new rolling stock or encourage a more innovative approach to rolling stock deployment’.

That is actually a no-brainer. Short franchises offer no opportunity to invest but the Department, in its response to the Commission, has argued strongly that they provide a better deal for the passenger and the taxpayer because the longer term franchises inherited from the Tories, they say, allowed the train operators to make excess profits.

The Department however would have none of it. Its response rejected all criticism of the franchising policy and argued: ‘Long franchises have often failed to deliver the anticipated outcomes and in a number of high profile cases have had severe adverse consequences for government.’ This goes against all logic. Sure, there was the case of Connex South Eastern where the operator was sacked by the Strategic Rail Authority, but that showed there were remedies for failing long term franchises. And passengers got the new trains in any case. Longer franchises have allowed the operator to share the cost of introducing new stock but the Department seems uninterested in anything but the short term.

Then in October, the National Audit Office joined in the criticism of the franchise process from the opposite angle, suggesting that there are severe doubts over whether this short term policy will deliver the savings which it is designed to do. Though its report, Letting Rail Franchises, 2005 – 2007 was pretty tepid stuff and went over much well trodden ground, the NAO did show clearly that the assumptions behind the recent franchising contracts are remarkably ambitious. The eight franchises let in this period go from a subsidy from the taxpayer of £811m to a payment by the operators of £326m to the Department in just five years between 2006/7 and 2011/12. Without these savings, part of the Department’s plans for investment by Network Rail will have to be shelved.

And I am convinced that these targets are unachievable. In this column in July, I suggested that rising oil prices might allow the railways to escape the worst effects of the recession. Now that the situation has got far worse, and the oil price less than half the peak level it reached in the summer, there is no doubt that the franchising system will be put under severe strain in the New Year. Already FirstGroup is losing money on Great Western because of the remedial measures the company had to take early this year after punctuality plummeted. Now at least one other franchisee is reported to have approached the Department seeking variations on its contract.

Then operators face a double whammy in January. Fares are going up by an average of 6 per cent, with some increasing by nearly double that, and many people will not renew their season tickets because of the downturn. Moreover, with world demand clearly in decline, oil prices will undoubtedly fall well below the $100 per barrel mark. Then the sounds of the begging bowls at Great Minster House will be unmistakeable.

The most fascinating aspect of all this is that the Tories have realised that the whole franchising process is deeply flawed. They have taken the initiative on rail policy in a remarkable way by promising to build a high speed line and suggesting there should be longer franchises. Beware, though – these are still Conservative politicians who believe in low spending and small government. Teresa Villiers, the Tory spokeswoman on transport, admitted there would offer no extra money to build the line, instead suggesting that £1.3bn over the space of 12 years would be diverted out of the existing railway budget to fund it. Moreover, the private sector would have to take on all the risk.

Now given that longer franchises, with investment plans, are likely to cost more, there are holes as big as the Channel Tunnel in the Tories’ plans but nevertheless since such minor details have passed most of the media by, there is no doubt that they have taken the initiative on railway policy.

With the Tories at least ready to consider change, Labour cannot afford to be on the back foot. Hopefully Geoff Hoon, son and grandson of railwaymen, will be brave enough to re-examine the franchise issue. But don’t hold your breath.

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