East coast saga will run and run

Long time no blog as I have been moving house and it takes a month to sort out the broadband, once one has negotiated with BT and Orange. What a nightmare especially as I also missed the rail story of the year when I spent a week cycling in France at the beginning of this month.

I only have time to offer a few preliminary thoughts, and hopefully stimulate discussion. No matter since the East Coast saga will not go away for quite a long time. As I have written in Rail magazine and elsewhere, Lord Adonis certainly did the right thing in standing up to Richard Bowker’s attempt to bully him into a new deal. He has saved the franchising system in the short term but whether it is salvageable in the longer term depends on the depth of the recession. If the economy continues to head south, then passing on any new risks to the private sector will be impossible and a new form of franchising will have to be devised.

It is interesting that the SouthCentral franchise was let recently on terms that Adonis said were good for taxpayers when, in fact, it is pretty much impossible to work out whether this or is the case or not. The deal is not comparable with the previous one because track access charges have been reduced by an average of £80m each year and various other aspects are now different, such as the inclusion of Gatwick Express. I have tried to work out comparable figures and it seems that Govia have got themselves a pretty good deal, since its boss, Keith Ludeman, is reckoning on making £10m in profit this year.

The bidders for the SouthCentral were allowed to put in new bids on the basis of the recession, and therefore the contract must surely reflect that. That suggests that East Coast bidders will make far more modest bids than the £1.4bn in premium payments that National Express had promised to pay, blowing a big hole in rail finances. Unless Adonis can get his hands on some contingency funding, there is no doubt that cuts in rail services and investment will have to be made in the next year or so. However, the franchising system makes cuts in services very difficult to bring about because of the protacted negotiations that would have to take place between the operator and the DfT over dividing up the spoils from any savings. So watch this space, instead, for investment cuts.

  • Jack

    The case of National Express is yet another case of the ‘winners curse’ whereby the lowest subsidy bidder (or highest premium payer) wins the franchise on the basis that they have fatally misunderstood the demand and cost conditions for the period of franchise operation. This has blighted the franchising model on numerous occasions following UK rail privatisation, particularly since the Hatfield event. The NE case has, in addition to this recurring theme, been the first to succumb to a bust which we were robustly told by New Labour was never going to happen.
    In using the problems of franchising as part of the argument for nationalisation are we in fact, however, committing the ‘Nirvana Fallacy’ by simply assuming that the solution to imperfect markets and/or regulation is perfect government?

  • Peter Kain

    Was the SouthCentral deal good for taxpayers? Even if we could make a direct comparison of the current contract with the previous one, the terms of the contract have changed. In particular, the cap-and-collar revenue risk-sharing leads to considerably less risk being transferred than previously. On THAT basis we should expect relatively lower subsidies/higher premiums.

  • Dan

    Peter’s point is a good one. It’s very strange of course, after all if franchising is so good, why not try it in other parts of the public sector (eg franchise hospitals or schools out to ‘school operating companies’ etc?) Adonis like of franchising seems a little out of step with his otherwise clear analysis of the rail issues. He’s known for his depth of analysis so he must clearly be able to see the issues just like the rest of us.

    It’s hard to see a political reason for sticking with it – after all the TOCs are not loved by the public – so the public view that stuck to BR sticks to them too. Politically no one would care if each TOC was brought back one by one. I guess the politicians don’t want to have to be the people who face ‘Crow Bar Bob’ so are happy to leave that to TOC management, but industrial unrest in the sector is no better or worse than BR days IMHO – others may have a view?

    The great private scetor is such a myth it really annoys me – service (in the Uk at least) is all too often poor – witness Christian’s comments about egtting his Broadband line sorted out! It’s pathetic really.

    As per the comment I made here when NXEC story broke, looks to me like Adonis did NX shareholders a massive favour by allowing them to hand back the keys. After all a good contract would have meant that NX would have had to keep paying the premiums until the whole group became bankrupt – as that is how they would have to honour their contract!

    Also occurs to me that by reducing track access charges, as Christian mentions, we have a further subsidy to the private scetor that artifically makes their bids / premium payments look better than they are?

  • RapidAssistant

    I agree with Dan that we need to get away from the old “public is bad, private is good” mentality. The truth of the matter is that you need to apply the model which fits best the particular industry you are dealing with.

    British Airways for example – perfect example of a “good” privatisation. Good for the company as being exposed to competiton and freed of government interference enabled it to get its house in order with little state help. It also appeased the anger of many taxpayers, many of whom (at the time, anyway) never got on an aeroplane. Contrast that to other so called flag carriers that have been getting propped up (at great expense) by national governments for decades.

    Similar arguments can be made for British Telecom (probably yes), the utilities (maybe). But the same time we’ve seen the family silver sold off like in the case of the BAA and British Leyland – where those organisations (or the remnants of them) end up in foreign ownership, run down, or closed completely.

    But this all boils down to the conundrum of how you make an inherently loss making industry attractive to the private sector. This is the fatal flaw of the privatised railway, and the root of the byzantine system we have now, and what has also bred monsters like the PPP of the London Underground.

    Creating an “artificial profit” for the private sector by padding franchises out with regulation and financial safety nets is no solution. And history has shown that the additional legal and management costs and those costs caused by all the inefficiencies and management inertia you generate in the process outweighs the supposed saving to the taxpayer by some considerable margin.

    Do I see politicians waking up to this fact? I’m afraid I don’t.

  • Peter Kain

    I agree with all the foregoing discussion.
    Three points. First: what do we get out of franchising? Private sector flair and innovation, apparently.
    Second, there is the suggestion that micromanagement of franchising removes the flair.

    Finally, then, why “micromanage”? Christian’s “Public Finance” interview with Lord Adonis gives the answer. Christian noted that the SouthCentral franchise was given detailed specification on ticket office opening hours, station staffing, cycle parking etc, to which Adonis responded “I do not regard that as micromanagement but rather as protecting the public interest”.

    I empathise with Adonis here. But it does leave us with the question: if the public interest is so strong that government has to specify everything apart from the colour of seating, can the private sector really do anything that makes this franchising leviathan worth the effort?

  • Amir

    BA does well or not as it seems to have no government interference! If the railways were left alone then they might come up with some good ideas. Franchising you could say is a waste of time its a way to nationalise the railway without paying more money.

    If they just privatised it properly as a whole real company like Southern Railway plc then you would probably had had half this nonsense! It would be a real company that could buy out a bus company and it wouldn’t have the short termism of a contract. It would also include infrastructure but on a smallerscale.

    Whether or not it would make money i don’t know. But you rent out stuff on the stations and the old companies used to own the hotels and pub chains they were not just railway companies. This was all broken up by govt. who knows best! Dutch Bahn makes money and now so does indian railways so its not impossible!

  • Dan

    Here’s a good example of the state of this company – yesterday I had to travel to London on business (the penultimate day of Nat Exp East Coast service). I don’t mind paying for 1st class myself when i want to travel 1st, but my employer will not do so – thus if you want a decent meal you can only select a very few trains they run that still operate the Restaurant car for both classes of ticket holder. I did this, intending to take a full breakfast south bound and an evening meal north bound.

    South bound they had “run out of food” by the time I got on. Northbound the restaurant servcie was not provided at all – despite it having been a train when it should have been provided. No announcement before boarding (so I could have tried the next train), no announcment or apology on board.

    So I guess at least £40 of my own money (employer would not have re-imbursed) that I was happily prepared to give to National Express remains in my bank account.

    Oh – and I was reminded how badly over priced and mediocre in quality (and thus poor value) the on board catering for standard class passengers actually is!

  • Ian Raymond

    Think yourself lucky Dan – at least in theory you can get a meal on board sometimes, rather than us mugs on X-Country who have to put up with a few paltry snacks from a trolley on what are some of the longest journeys in the country! When are companies going to learn that a good catering offering can actually help abstract traffic from road and air?

  • Dan

    Spot on Ian – sadly a fair few of my journies are with XC – although I now actively try to route myself away from them to get better quality – both catering and space – which I often pay more for! Happily so, but it does mean I have to cross London in some cases – at personal inconvenience obviously. So they are losing money I’d otherwise happliy give them. I thought things might look up space wise (certainly not catering) with their re-intro of 125s, but the refurbs are cramped and now I think I heard they are putting some back into store.

    As Christian has said in the past – you’d think this was the sort of thing private busines flair would at least have delivered on rail – but not so it appears. Pack ’em in and sell em cheap – no, not that either – pack ’em in and charge ’em high!

  • RapidAssistant

    Dan – re. catering, one consolation is at least Virgin have kept their complimentary food and drink in 1st Class – even if it isn’t quite as generous as it used to be before the downturn (my record for “free” G+T’s off the trolley during a Glasgow-Euston run was 4 – have only managed an average of 2 this last few trips!) and the cheapest Advance fares are now notoriously hard to find. But they have started doing an at seat service on weekends. And they actually advertise it to get bums on seats – as naff and cringeworthy as the recent television advertising campaign was.

    NXEC has been a bad joke in the last 18 months – it was fine in the early days (they continued GNER’s standard of service) but then the bean counters got their teeth into things and it’s been downhill from thereafter.

  • Dan

    Yes, fair point re Virgin rapid – all credit to them.

    The problem I have is as follows – my employer will not pay 1st class travel (but it will, daftly, pay full price Std class travel when cheaper 1st Advance tickets exist but that is another story) – but I value the chance to eat a decent meal in a restaurant car (and sometimes this is important given meeting times and leaving / arriving home times) – and am happy to pay for that from my own pocket. But you can’t do this with Virgin (or EMT or NX E Anglia) as they have moved on to decent dining for 1st class only.

    My understanding is, from the spin much quoted, that NXEC had problems due to cost concious businesses trading down from 1st class (I don’t really beleive this – think it is part of the story, but in reality much more will be down to just placing the wrong bid on the franchise, surely).

    So, one way to make money out of down grading std class ticket holders is to open up the restaurant to them to at least make the money on the meal sales! Seems to make sense to me. BR seemed to manage it during every previous recesion after all! You could even charge std class diners a few pounds more than 1st class diners on the cost of the meal to reflect the better travelling environment?

  • Dan

    East Coast Sage certainly will run and run:

    http://www.guardian.co.uk/world/2009/nov/30/east-coast-railway-fares

    “The transport secretary, Lord Adonis, is also exploring cutting the journey time to less than four hours between the capital cities on the state-owned East Coast service after warning that running half-empty trains on the line is “not acceptable”. “I simply don’t think it is acceptable to have trains running on the line half-full. I want to see rail become more competitive with both aviation and motoring. Our stewardship of the east coast main line is an opportunity to do that,” he said.”

    Bound to be some spin here but given that Adonis is clearly a man to be reckoned with is this a signal that we are going to have some fun here? I can’t see him putting up with the govt being some lacklustre operator of last resort!

    Is this the benchmarking franchise you have been arguing for Christian? Do Elaine Holt and her team know what has hit them?

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