The mystery of franchising deepens

The Labour government’s policy on franchising has always been something of a mystery. Inherited from the Conservatives, the structure of the railways under privatisation has been adapted somewhat by Labour but largely left intact. So it was very instructive, given the events on the East Coast Main Line and rumours of Arriva’s struggles on CrossCountry, to have a clear statement of government policy in the form of its response to the select committee’s critical report on franchising and fares published before the summer recess.

 Well, ‘clear’ might be a rather kind word for it but certainly it contained some guidance on government thinking. Franchising to me has always been a strange concept, a way of privatising services without really letting go, resulting in the railways being in a kind of limbo land, no longer in the public sector but not really truly privatised either. I have often asked ‘what is franchising for?’ and the government’s response does at least give a partial answer to the question of what the government thinks it is for.

 The franchising system, according to the government, has to ‘deliver value and certainty for taxpayers alongside protected service quality for passengers; it must balance being affordable in the short term with investing for longer-term benefits; it should be able to cope with change on the network, such as major projects, and changes in policy aims; it should encourage, rather than stifle, sensible investments and improvements and manage them efficiently and it must deliver acceptable outcomes under different economic conditions.’

 Well, as currently framed, it does achieves none of these aims. It certainly does not protect quality, as the recent fall in standards on the East Coast  and other ailing franchises, such as CrossCountry and London Midland palpably demonstrates. It is completely inflexible when coping with changes in the network requiring expensive alterations to contracts if circumstances changes, which invariably gives the operators a chance to make money. As for investment, the franchising system is not designed to encourage long term commitment by operators. Only Chiltern, which has a 20 year contract, delivers major improvements which are funded to a great extent by the private sector. And finally, the notion that it delivers ‘acceptable outcomes under different economic conditions’ is fanciful. We have not only seen the collapse of the East Coast franchise twice in three years, but we have seen operators desperately going cap in hand to the government in the face of the recession. The cap and collar arrangements have, for the time being, saved the day but if there were a prolonged recession, the whole franchise system would be in danger of collapse.

 The report does, however, reveal that the government is seriously examining the current system with the idea of making quite substantial changes in preparation for the new franchises which start coming up in a couple of years time. In particular, the government is ‘assessing whether there are changes that could help the railway perform better for passengers and taxpayers in a downturn as well as ‘delivering well during periods of growth’. The response says that potential changes to the current system will be identified and consulted on ahead of the next franchise competitions. Of course this may be irrelevant given the likely election result, though the Tories, too, have expressed disquiet over the system and may be prepared to make the same kind of changes.

 But what changes? The obvious one would be over length of franchise, but we have already been there before. Longer franchises would, indeed, encourage more investment but then the risk would be that in the good times franchisees would make superprofits and in a downturn they would have to throw the towel in. Taking away the revenue risk would seem to be the only sensible option for longer franchises, a measure which the private companies have opposed as they feel it would reduce incentives to boost passenger numbers. Trying to sort out the franchise concept always ends up in this type of circular argument.

 There is a further fascinating revelation in the document. The government argues that legally it could not hold onto a franchise unless there were new legislation. This is not something that ministers have said before and is a view that could be disputed. Having covered rail privatisation since 1993 when the Railways Act was passed, I remember that there was a late concession given in the House of Lords to allow British Railways to bid for franchises. In the event, the then franchising director, Roger Salmon, immediately barred BR from bidding once the process started but that suggests there is no bar to the government retaining a franchise.

 As if to back up its own case, the government then goes onto state that if it kept a lucrative franchise rather than selling it off, it would be deprived of the premium payments that the train operator would be required to pay over. But this is a dishonest argument. If the franchise is so profitable that large premium payments are available, then the money that would be generated will all go to the government. Therefore, far from depriving the Treasury of premium payments, it would boost its coffers since there would no longer be a train operator creaming off part of the profits.

 Overall, the government’s response to the Committee’s criticisms shows that it is floundering, desperately trying to seek a justification for a system that is widely recognised as a hotchpotch. Far from ‘evolving’, as the paper suggests, the franchise system is a messy structure that has been created by a series of events that affected the railways since privatisation. Labour, in the capable hands of Lord Adonis, has realised that the state cannot avoid having a very strong say in the running of the railways. Franchising was an attempt to try to export part of the risk to private companies and absolve the government of responsibility. The admission from the government that after nearly 15 years it is still not working properly shows that it is in the last chance saloon. No end of tinkering around will save it if the hoped-for recovery does not emerge in 2010.

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