Rail 665: How the franchise lottery works

The franchise merry go round is starting again with the ridiculous short contract for East Anglia, and the longer term one for the West Coast, which, in contrast, is premium franchise on the network. The franchise process is a long and arduous one, and despite attempts to simplify it, there are already complaints from bidders about the obstacles they face.

In order to familiarise myself with how a franchise bid is developed, I had a very long and informative meeting with a serial bidder, a senior train operator who has been in the business for years and worked on numerous bids, as well as an operator. He took me through the whole process and I came out reeling, wondering how anyone manages to do it and, indeed, why the bother (oh, ok, I know it is to make money).

The process starts with pre-qualification. So even if an operator has run half the country’s trains and has been in the business for a decade or more, they have to pre-qualify and occasionally has ruled out leading players if the Department gets the hump. Remember what happened when First did not get past the first hurdle on East Anglia, even though it was the main incumbent, because it was felt it had messed up on the Great Western – though that was not the reason given of course – and more recently National Express was banned from bidding by the previous government, although there were question marks over the legality of the move.

There are, however, are few players around, and no new entrants which means at times the Department is desperate for bids. Indeed, the process now demands previous experience, which seems to rule out anyone except existing franchisees and a few foreign companies, mainly state owned.  So much for the franchise system being used to bring innovation and new thinking as the process seems to deliberately ensure that bids are as unexciting as Walls Vanilla.

The prequalification is, therefore, not a formality. It used to consist of providing some 40 pages, but now has reduced a bit to perhaps 25 with only eight questions to answer. The key is the request for the bidder’s ‘vision for the service’, rather like the final ‘and how do you think we could do things better’ sort of question you get in a job interview. There is, too, all the usual stuff about being kind to the environment – eco driving, water harnessing, insulation and the like – which are actually just boxes everyone knows must be ticked.

The difficulty for the Department is that it does not want too many bidders or too few – three to five is considered optimal. And really this early stage is all about getting the number down – or up – to that number, so in practice the bidders are competing among themselves, rather than on clear criteria – however good they are, they can’t all get As.

That first process will be taken more or less seriously by the bidders depending on their situation. If a bidder is down to the last franchise or two – like Stagecoach which had failed to get many other franchises apart from South West Trains or National Express which once had nine but had lost so many it was desperate to win East Coast – then the prequalification is taken very seriously, but some bidders will just go through he motions of this relatively cheap process – a couple of hundred grand or so –just to please the big cheeses at the Department. This is clearly the case with the East Anglia franchise which is set to last all of 19 periods (four week each) and is seen as a foregone conclusion anyway.  The failures get feedback as the Department is ever fearful of the Judicial Review process, though in practice, an operator would be daft to challenge the government if it was keen on staying in the railway business.

Once prequalified, the second part of the process is far more serious and much more expensive. Huge bidding teams are created – and experienced bidders don’t come cheap – to prepare documentation on virtually everything from the shoelaces used by staff to the make of axle grease – only joking but the list is lengthy and includes: Finance, market assessment, fares, ticketing, operational matters, timetable, fleet engineering, stations, train crew, depot management, property, human resources etc. This will, of course, also be made more complicated this time as the Department is seeking bids which include an element of investment.

Overall, there will probably be 30 to 40 people working on this full time for a month and the total cost will be at lest £3m and more likely £5m. There will be plenty of work for consultants, accountants and lawyers, matched on the other side by similar numbers since the Department can’t cope with assessing these bids by itself. So one lot of private people assess the work of another lot, in order to assess the cost to the public purse. No wonder these people fiercely defend the current franchising system.

Ultimately, all this effort boils down to one number, the amount of subsidy/premium required adjusted by a process called Net Present Value to a single figure.  Of course, other things are supposed to be taken into account, and the highest bid has not always won, but it is the main determinant and likely to be decisive.

There is fundamentally a contradiction about this process. We are supposed to be moving towards ‘light touch’ regulation (presumably after the success of this approach in the banking industry), but it is unclear how that will work given that the performance of operators is supposed to be taken into account in their future bids. This issue is heightened by the need for the government to make savings across the piece. And that’s a big worry for bidders. A senior rail operator invited me for a chat the other day because of his concerns. Basically they run thus:  ‘The Department is talking about giving us more freedom over, say, the number of services and the provision of facilities, like catering. Are they setting us up for as patsies to take the blame for any such cuts?’ Freedom, he concluded, could be a form of torture. Look what happened to FirstGroup when they messed up with the Great Western franchise but only because the Department had signed an unworkable contract. Who go the blame – mostly the train company, as ministers were keen to pass the buck. My senior source is worried, very worried. He feels that there may be a blame game between government and operators. If that happens in the early ‘new’ franchises, look out for the Department getting ever more desperate to find enough bidders.

HS2 debate hots up

I will not dwell long on HS2 this time, but suffice to say that the consultation document does seem to have opened up the debate which is now raging fiercely, not least on my website where views range from suggesting I deserve a knighthood to people on the other extreme whom I would I would be fearful of meeting in a dark alley.

Nevertheless, when  spoke at an anti-HS2 rally in February, I was struck at how many rail supporters, some of whom have no Nimby interest at all, were against the idea.  As one of them suggested, the key question is what would happen to the rest of the railway. Yes, there are promises that lots of capacity would be freed up but how would it be used and who would pay for it. Regional services are notoriously unprofitable as they attract little commuter income and yet cover quite long distances, which means they are expensive to run. What would a West Coast Main Line without through trains to Birmingham and, later, beyond look like? Surely it would not be maintained to 125 mph standard, merely to serve the likes of Stafford and Coventry? And what would the subsidy requirements be?

That, too, is the big question for HS2. The aim of running it without any subsidy seems unrealistic. Track charges in this country are higher than elsewhere – ask Virgin – and they are hardly likely to go down. Virgin has, for example, only just gone into premium paying mode after receiving a staggering £250m in subsidy over the past four years, representing around £2 50 per passenger on fares that average a bit above £25. Even that, of course, does not take into account the fact that Network Rail receives £3.5bn in subsidy annually, which effectively means Virgin’s premium payments are an illusion. It is difficult to imagine, in the light of the fact that even a 5 per cent rate of return on £17bn would require £850m per year,  added to which there will be operational expenses including energy, staff,  rolling stock leasing, and the variable charge on the infrastructure for maintenance. So does anyone seriously expect HS2 will pay for itself. In a sensible world, of course, the Department would simply pay for the infrastructure and then accept that it could never be paid for, which is effectively what happens in Europe, but that’s not how we do things in this country

I ask these questions because my anti-HS2 stance is presented by some respondents  on my website as anti-rail. Nothing could be further from the truth. I am passionate about the railways and the benefits they bring to society. That is precisely why I am against this project which, the more I think about it, is a typical piece of political grandstanding. In a country where we rarely think long term, how come at this point in time, where services are being cut in an unprecedented way – lollipop ladies in Dorset, for chrissake – is the government proceeding with the most expensive engineering project Britain has ever seen on a benefit cost ratio that is pretty mediocre, however you look at it? Indeed, the consultation document accepts at one point that the business case is weak and that there are many other ‘non-monetised’ benefits that should be taken into consideration. Bloody hell, this lot are sounding like socialists. Of course, I totally agree with that, but how come they never seem to mention it when making horrendous cuts into the rest of public services? I suspect, too, there are MPs on the Tory benches who will not swallow that. This is going to be fascinating.

  • These people who are pro-rail but anti-HS2 — I suspect that they simply haven’t yet got the point. The main argument for it — the fact that capacity is running out and HS2 is the only sensible way to supply the want — hadn’t really been explained terribly well, but it has now: I refer to the article by Gordon Pettit in the current Modern Railways, which everybody should read. He sets the argument very convincingly in its wider context, which HS2’s own propaganda has largely failed to do.

  • Anonymous

    I’d have more sympathy for HS2 if:

    A – it went to Scotland
    B – it had a chord that linked directly to HS1, bypassing London completely, meaning that we becoming integrated into a proper pan-European high speed network
    C – and there was a guarantee that there would be no premium charged for using it over the classic network

    Doing those things genuinely would take planes out of the sky and cars from the road. Alas none of the three will happen.

    Given our lousy record at management and cost control on major infrastructure projects I rather think it will cost more than £30bn (how can 100+ miles of high speed railway cost just double what 15-20 miles underneath London (Crossrail) is costing at the moment) – AND considering that we’ve thusfar managed to run up £20bn+ on the never-never trying to run the existing railway. I’m sorry the costs just don’t compute.

  • “lousy record at management and cost control on major infrastructure projects” — well, the nearest similar project is obviously HS1, which came in on time and within budget. So your sweeping generalisation may be too pessimistic. As for Scotland — even HS2 it ends up never reaching Scotland, it will still cut London-Scotland journey times considerably.

  • RapidAssistant

    Sorry but I’m forced to dispute the “on time” argument – France had their high speed line to the Chunnel literally decades before we did – and 14 years before we had a fully operational high speed route is pretty late by my estimation! On budget – nah!! Surely all the times HS1 had to be bailed out and LCR restructured and all the rest of the shenanigans that went on….then we go and write off the £6bn construction cost and sell it back to the private sector at a massive loss. I’d hardly call that value for the taxpayer. All for a line that really only benefits the South East, and is sadly underused because it is too expensive for mere mortals to travel on. Has anyone seen how horrendous walk-up Eurostar fares are….?

    But here’s the rub. The problem with HS1 and HS2, if it happens; is this country’s obsession with making railways pay for themselves. The reality is that all of us will be on a cloud plucking our harps by the time the financial and political pain in building these lines is forgotten and then society really begins to benefit from their true value.

    Which isn’t much help for those of us at the moment facing the transport problems of today to be honest.

  • Anonymous

    Ha Rapid, you got there before me. I was going to make the point that given the restructuring of HS1, it was hardly on budget as widely claimed. And it was only on time second time round. I like, too, your point about railways having to pay for themselves. I never understand why the politicians can’t get into their thick skulls the point about what economist call ‘externalities’ . Its not rocket science after all – we all know that railways bring far more benefits than can be captured through the fare box. Yet, they insist on spurious concepts such as commercial viability, and even the ridiculous cost benefit analysises they use are largely mumbo jumbo.

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