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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  • Ben

    “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.”

    Ah, but you’re assuming that government would be able to run the franchise as profitably as private enterprise. And if there’s one thing we learnt from the British Rail days, it’s that government isn’t very good at running railways. Patronage has increased massively under private sector operation, and that’s because trains have become cleaner, safer and most critically of all, more reliable.

    Costs tend to spiral out of control under government management. Too many cooks (or civil servants)!

  • John Cartledge

    Like you, I was a little surprised at the government’s claim that a change in the law would be necessary to allow it to retain the East Coast service in the public sector. The 1993 Railways Act required the Franchising Director (subsequently SRA, now DfT) to designate services for franchising, but did not stipulate that all services must be so designated. It also required him to secure the continued provision of services in the event of a franchise ending or being terminated without a successor agreement being in place, and did not set a time limit on how long this could be. Indeed, the Act also allows the government to exempt any raiil service from the requirement for franchising at all (and all non mainline railways have been so exempted). It does not allow the government (or a government-owned company) to be a franchisee, but does not prevent them from running a railway on any other basis.

    But what I am curious to know is your own answer to your own oft-repeated question about the purpose of franchising. The Transport Committee’s 2006 study asked the same question, and in its report you can read the replies of all of the multitude of bodies and individuals which submitted evidence to it – but you were not among them. Is it particular characteristics of the currrent franchising model (length, boundaries, specificity, risk allocation, etc) about which you have doubts, or the fundamental principle of vertical disintegration and private sector delivery of publicly-determined outputs? If it’s the latter, what would you put in its place? Do pp 256-258 of Broken Rails still represent your thinking on this, or has it evolved in the subsequent eight years? Are there, for instance, good reasons why the apparently successful TfL model (DLR, London Overground) should not be applied more widely?

  • Ben:

    British Rail was never given enough money to do its job properly. Even so, they still managed to invent the tilting train, run the entire network for a *fifth* of its present subsidy, and order the new Networker trains for the south east’s commuter services. Considering the money they had, and the environment they had to work with, it’s a miracle any trains ran *at all*.

    BR’s problem was never BR. It was the Treasury, and the short-termist politicians.

    I think a hybrid approach using the TfL model as a basis is best: give each region *complete* control over its local and commuter services. (The existing PTEs like Merseyrail and Tyne & Wear have a very good reputation.) Most of the UK’s rail network is commuter in nature.

    That leaves just the (usually profit-making) inter-city routes for the national government, with freight firms remaining as the only commercial enterprises using the network.

    HSR will give the inter-city sector a boost and free up a lot of capacity on the classic lines for improvements to local and commuter services. A complete HSR network could also reduce interfaces with the classic systems, making it even easier to run as it’ll be almost self-contained. This will reduce long-term costs.

    Job done. And no need for this ridiculous continuation of artificial competition.

  • Derek L

    Ben, I am not sure that the argument that BR ran trains less efficiently than the current private sector arrangement really holds water, although the argument is wide, far wider than one could deal with here.

    Your example is that patronage has increased massively, which is correct. But bear in mind that the privatisation preceded a period of continuous and significant economic growth against a background of little improvement in the road system, pushing traffic growth onto the railways. There is nothing to suggest that this would not have occurred under BR.

    I suppose some trains are cleaner, although that was not my experience on Northern services in the Manchester area, where they are often filthy and dilapidated, even where not filthy.

    Punctuality figures are only now approaching those of the latter BR days, often assisted by very slack timetabling. Try a Cross Country service of any length, and you will find the train sitting in stations for 5 minutes or more, waiting its time.

    At the “coal-face” operating procedures are much as BR. Drivers and guards work to diagrams, not dissimilar to those they worked under BR, and are directed by Operation Resource Managers (the new name for Train Crew Supervisors) in much the same way as they were under BR. They report to driver and guard managers in much the way they did.

    One “innovation” was to decrease the training time for drivers, on which the RAIB (and others) had a few comments following the Ladbroke Grove accident.

    Other “innovation” tends to consist of livery changes (interesting to some, but not exactly determinate of service quality) and marketing exercises. The newer (or refurbished) trains are often cramped and uncomfortable, but that may well have occurred under BR.

    I don’t know whether BR would have gone for the APEX style early booking, train specific, low price tickets, but I also question whether this is a useful addition to the travelling experience. It has certainly been the cause of numerous complaints and difficulties for passengers. I personally find it useless, as I really don’t want to plan my journey 12 weeks in advance, and then be tied to specific trains, but clearly many find it useful.

    I also doubt whether some of the useful innovations, such as the Chiltern services to Birmingham would have occurred under BR, as BR would have preferred to keep the London – Birmingham traffic on the WCML.

    Whether the few advantageous innovations really justify the enormous cost of privatisation is an interesting (and debatable) point. Do bear in mind that the millions spent on privatisation contracts would probably have paid for both a highly efficient nationalised railway, with new stock, redeveloped stations, and even a core TGV style network within the UK. Instead the money went to lawyers and accountants, and we have the railway we were always blessed with.

  • RapidAssistant

    @ Ben: But surely the point that Christian has been making is that even under British Rail, the railways were NOT directly controlled by government. They were run at arms length by a Board made up of highly experienced railwaymen who had a clear understanding of the “big picture”, and the whole network had to be run as one since this was the most efficient way of spending the limited government money that was being made available. Resources were directed towards what delivered the most bang for the buck, and calculated risks were taken on where to skimp (the famous example in Broken Rails/On The Wrong Line of the culvert on the WCML for example). Sometimes they got it right, sometimes they got it wrong.

    And if costs really went “out of control” under government rule of the railways how was BR able to electrify and resignal the East Coast Main Line in the 1980s for less than £1bn compared to the £9bn that has been spent on the West Coast?

    Even allowing for inflation and the rather iffy quality of the ECMLs overhead wiring – that’s a hell of a difference.

    But going back the fragmentation issue – running each region or line in isolation of the other will always lead to inefficiencies as it is impossible to see and plan for the knock-on effects of things like temporary closures, stock cascades and the like.

  • Dan

    “assuming that government would be able to run the franchise as profitably as private enterprise. And if there’s one thing we learnt from the British Rail days, it’s that government isn’t very good at running railways. Patronage has increased massively under private sector operation, and that’s because trains have become cleaner, safer and most critically of all, more reliable”

    Can anyone (inc the author) tell me which franchise is being run profitably? If you take away they subsidy they receive directly or indirectly.

    Cleaner – certainly not, filthy trains is one of my bugbears and it is no different now then in BR days really. I’ve never heard anyone say “I’ll take the train, they are so much cleaner these days”.

    Safer – well compared to the early days of privatisation – and of course at vast cost. But if people were tryuly worried about safety they would not take to the roads…

    More reliable – well – they are not more reliable than BR either in fact or in – I would argue – the public mind. Still if you slow down the end to end journey on many routes (certain FGW IC services being slower than their late 1970s BR equivalents for example, I suppose you can increase reliability….)

  • Keith

    “British Rail managed to…run the entire network for a *fifth* of its present subsidy”
    Exactly, and there are so many examples. Would BR have spent a quarter of a million on a few ticket gates? Where on earth does the money go?

    http://www.thisislondon.co.uk/standard/article-23764147-fare-dodger-barriers-cost-pound-230000-but-are-left-open.do

    The problem is the mainstream media is more interested in the side issue (in this case, the fact the barriers are left open)

  • Christian Wolmar

    John
    Interesting that you too should find no basis for the government’s statement that the franchises have to be run by the private sector. Perhaps it is a reference to EU legislation, but I suspect that it is just a way of hiding behind supposed legislation,in the way that the Tories justified the initial split between infrastructure and operations on the basis that it was made necessary by European legislation, always a far fetched notion from a Conservative government.

    On your wider point, I have struggled to find an alternative to the franchising system. All ways of running the railways have disadvantages. State monopolies are inherently problematic but as Rapid has pointed out above, BR was run at one remove by experienced railway operators who had considerable independence from government – although the budget was clearly set by ministers.

    The Big Four idea I set out in Broken Rails still has some appeal but looks a bit rusty these days. The notion set out by Roger Ford for a reconstituted Inter City certainly has its attractions. So does the way that London franchises operate without revenue risk being transferred to the private sector. But as I say, any suggestion will have its counter arguments – eg longer franchises then raise the issue of what to do about revenue risk, reconstituting InterCity leaves a bit of a rump railway to be franchised out, and so on. Moreover, any suggestion for change will immediately raise widespread opposition from entrenched interests.

    As I am currently writing in my next Rail column, the train operators know that the franchising system needs to change, but they too are floundering on exactly how it should be done, and, as the column says, each suggestion has its counter arguments. All I know is that no one has ever answered the questions ‘what is franchising for?’ and that the best way to run a railway is through vertical intergration.

  • John Cartledge

    Christian

    Thanks for your amplification. At the risk of pedantry, my reading of the 1993 Act (as later amended) is that public bodies are not allowed to bid for and hold franchises, but services don’t have to be franchised. EU legislation does not prevent public ownership of railways (c.f. Ireland and numerous other examples), it simply obliges infrastrastructure managers to allow licensed operators access on equal terms (subject to precedence being given to satisfying any public service obligations, e.g. as embodied in franchise agreements), and prevents governments from paying hidden subsidies which might distort competition.

    For those with the time and stamina to read them, the various respondents’ answers to the HCTC’s question about the purpose of franchising can be found in the report at http://www.publications.parliament.uk/pa/cm200506/cmselect/cmtran/1354/1354.pdf.

    One of the more comprehensive and thoughtful answers came from Jim Steer, viz :

    — To create entities and managements that can be closely focussed on meeting customer needs in an operationally complex system [the railway] where technical, operational and engineering considerations have a natural tendency to dominate.
    — To introduce a managed level of competition into train service provision, avoiding the
    uncertainties and therefore costs associated with an on-track open access type of competitive environment, yet still deriving the benefits of competitive pressure as a means of delivering value for money to the public purse.
    — To introduce fresh ideas and a diversity of ideas on how best to deliver quality and value for money, removing any dependence on a single centrally determined prescription, and offering the prospect of a learning-from-rivals culture to achieve best practice.
    — To create an ability to measure and incentivise performance and performance improvement and provide the means to bench-mark.
    — To achieve an objective of successive Treasuries, which is to contain public sector spending, and in this case, specifically to keep the capital elements of passenger train service provision costs off the public sector accounts.

    But even if this list or something like it is accepted as a working hypothesis, whether franchising as it now functions is the best or only means of accomplishing these objectives is, of course, another matter.

  • Christian,

    The problem is there are too many interfaces, with complexity added for its own sake. “Competition” on the rail network is a meaningless concept: there’s only one possible company serving the vast majority of stations (e.g. Gravesend or Dartford); it’s only the hubs and major interchanges (Reading, Crewe, Clapham Junction) which can meaningfully support multiple operators. Trains can only go where the rails are.

    The present franchising system is very clearly inspired by bus franchising… and look what that brought us: lots of tiny operators creating healthy competition got bought up / merged, until we were left with just 3-4 major operators, often with effective local monopolies.

    It’s also worth pointing out that even when the rail network was privately owned, it wasn’t the huge, unmitigated success people like to believe. The SER and LB&SCR merged long before nationalisation, if only to prevent the continuation of their chairmen’s tit-for-tat stupidity—Greenwich branch, anyone? Crystal Palace High Level?

    Stephenson’s Stockton & Darlington Railway is often described as the first ‘modern’ railway, but this line was initially run as an open-access operation, with operators simply paying a toll to use the tracks. Horse-and-wagon operations were mixed with a few steam locomotive trains. As you can imagine, this didn’t prove particularly successful, so all subsequent rail companies became their own operators. Railways are *not* roads. Roads don’t have major signalling systems and routing options. If I want to do a left turn in a car, I don’t need a fully-interlocked set of points to let me make the manoeuvre!

    What we now have is a ‘steady state’ network, where relatively minor nips and tucks are all that need doing. The days when competition was even *needed* are over. No private company is going to build brand new railways. At best, they might re-open a few easily-restored branches—the low-hanging fruit—but if a private operator is to invest in infrastructure as well as rolling stock, it has to be given the right to *own* said infrastructure too, and reap the rewards of their investment. Chiltern is the only TOC which can come even remotely close to this, given its long-term franchise. But not even they are willing to build entirely *new* railways.

    The DLR model might indicate one possible future for rail privatisation. A similar, more local focus for the classic railway network may be possible once we have a decent HSR network in place. But we have to build the latter first. That leaves a solid local network which can boost the attraction of major conurbations outside the South East, providing useful links and better commuter services. The HSR network then takes over all fast, inter-city services, without worrying about sharing infrastructure with freight, locals and semi-fasts.

    At present, the only rail operation which seems to work as a private concern is freight. The existing private operators in that sector don’t appear to be demanding massive subsidies either, so we have one success story there at least. Maybe this is a wake-up call for a greater push for freight to move onto rail. Releasing capacity on our roads is certainly one option for improving local transport. Rail and road need to work together, not in isolation.

    And now, I’ll shut up.

  • Christian Wolmar

    John

    I am going to get to the bottom of the legislation on whether the DfT can run trains permanently or not. I bumped into Lord Adonis in the street the other day and he said that the 1993 Act had been later amended to prevent the government having franchises permanently but it was allowed to have them temporarily provided that there was no value for money offer available. I have now asked the press office to provide me chapter and verse, so watch this space.

    And Sean – I so agree about the interfaces. I have often argued that in a way that is a worse problem than the mere act of privatisation.

  • John Cartledge

    Thanks, Christian. I shall be interested to see what DfT comes up with.

    The provision in Section 213 of the Transport Act 2000 which allowed SRA to be an operator (following the winding-up of BRB) was repealed by Schedule 1 (1) 36 (6) of the Railways Act 2005,. It did not pass to DfT, and this may be what AA had in mind.

    And it is true that under Section 23 (1) of the Railways Act 1993 (as amended) it is ” the duty of the appropriate designating authority [i.e. DfT or the Scottish government] from time to time to designate such services for the carriage of passengers by railway … as it considers ought to be provided under franchise agreements.”

    But Section 24 says “(1) The appropriate designating authority may by order grant exemption from designation under section 23(1) above in respect of such services for the carriage of passengers by railway as may be specified in the order … (2) A franchise exemption under subsection (1) above may be granted (a) to persons of a particular class or description or to a particular person; and (b) in respect of services generally, services of a particular class or description or a particular service, or in respect of part only of any such services or service”.

    This seems to me to allow DfT to exempt any service from franchising, if it so chooses.

    For those who wish to research the legal references, they can be found on the Statute Law Database at http://www.statutelaw.gov.uk/legResults.aspx?LegType=All+Legislation&Year=1993&searchEnacted=0&extentMatchOnly=0&confersPower=0&blanketAmendment=0&TYPE=QS&NavFrom=0&activeTextDocId=2294687&PageNumber=2&SortAlpha=1.

  • Al

    In terms of an alternative to the franchising system, why not start by adopting anj approach to franchising more along the lines of the way Transport for London contracts out the operation of London Overground – which is broadly similar to the principle it adopts for London Buses. Essentially TfL sets the service frequencies, sets the fares and lets the framchisee get one with the day to day running of the railway (and not much else).
    The advantages of applying the principle nationwide would be along the lines of:
    – less necessity for tying the state into long terms contracts on the basis of encouraging investment, that might not end up providing good value,
    – more co-ordination of investment priorities at a national level rather than individual TOCs carrying out schemes just where they see benefit
    – consistency of ticketing arrangements (as these would be determined centrally), which would give the railways a more joined up feel, for instance by alllowing cheap advance fares to be offered for any journey rather than one on just one TOC
    – etc…

    Obviously this removes the supposed advantage of leveraging TOC investment, but as is stated above, there’s not a huge amount of evidence of it anyway.

  • Dan

    Al – that seems to be the model Barry Doe outlines in his column in Rail (when he touches on the topic) it does seem to make sense.

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