Rail 702: Franchising is a gamble but Olympics was a rail success story

The franchising programme represents the greatest risk to the finances of the railways. Deep inside the document setting out the investment plans for the five years from 2014, there was a table setting out the projected revenue from franchising over that period. It received little attention, though Insider noticed it, but its importance cannot be overestimated since it assumes rather baldly that around £300m annually will come from premium payments from the train companies.

In fact, the figure fluctuates rather inexplicably between £166m and £396m during this period, but this is, of course, merely educated guesswork. It is clear in that overused expression beloved of marketing managers that this is a ‘challenging target’ given that currently the franchises are subsidised to the tune of £1bn and therefore the figures imply a massive reversal of the current situation. Since the franchises on the key routes have not yet been signed – and indeed some of them are still to be even defined – no one can say how much the franchises premiums or payments will add up to over that period. These numbers are dependent on such a wide range of factors including known unknowns and unknown unknowns that the eventual figures are likely to be very different.

The importance of the table, however, is that we have been told that the overall budget for the railways is not going to be increased and therefore if the franchise premium target is not reached, theoretically there ought to be cuts elsewhere. I say theoretically because it is very difficult to see in practice how this will work out since the investment plans are being determined now and the overall total of franchise will vary quite considerably because of the cap and collar arrangements that take away some of the risk for the private companies. Under present contracts, this means that if revenue is less than expected, the Department for Transport takes a small part of the risk of initial first shortfall and then, if it income is more than 6 per cent below expectations, most of it.

Nevertheless, although we cannot know the detail, these figures must be of concern to all those hoping that the promised investment programme will see the light of day. The type of issue that arises was highlighted by the news about the West Coast franchise. Over the last weekend in July, rumours emerged that FirstGroup’s bid for the West Coast franchise was much higher than Virgin’s. These leaks are odd because they seem to serve no one’s purpose, except, possibly the Department’s or a jealous rival eager to throw a spanner in the works. There was speculation, however, that despite First being in pole position, there were precedents for not awarding the contract if the bid seems unrealistic – in particular, Arriva had offered an even higher bid for East Coast which then went to the lower bidder National Express who still threw the towel in because of big losses. Nevertheless, my judgement is that in the present situation, given the targets set out in the investment plans for Network Rail, the Department will be under intense pressure from the Treasury to accept the bid, however over-optimistic it may seem. Moreover, the bid implies massive cutbacks in catering services and other staff. The Treasury might see this as the price the railways have to pay for all the investment they are getting. More trains, poorer service.

Franchising, as this example shows, has always been a bit of a guessing game, but now it is going to become even more so. Remember franchise reform? This was supposed to be the way that franchises would become simpler and with less micromanagement from the Department. Well, if the 164 page ‘Invitation to Tender’ for the Great Western is anything to go by we can forget it. This is not only because of the sheer length of the document but the complexity of the contract. Because the ‘cap and collar’ arrangements are reckoned to be too crude and to remove too much incentive from the private sector, there is now to be a GDP (Gross Domestic Product) deflator. That means that there will be an assumption in the bids of a certain amount of revenue growth resulting from rises in GDP  (Leaving aside the fact that the way Osborne and his pals are going, the days of growth seem to be far off indeed). However, because the Department is worried that companies may still make superprofits if there happens to be a massive increase in rail use, some kind of cap and collar arrangement will remain. The precise details are not yet known as they will be in a document called the franchise agreement which is not yet available.

So rather than simplification, there is yet further complexity. This is typical of the progress of a crude concept like franchising. It starts off as a relatively simple idea, of passing on responsibility to the private sector. But then, inevitably, it gets more complicated as holes are found in the system. Despite injunctions to make it easier, the opposite happens. In the document, there are no fewer than eight priced options – potential additional services – but which are not included in the core franchise. Again, this is another way that promised improvements might not materialise.

The other aim of franchise reform was to make the contracts less prescriptive. Here again, it is clear that the Department remains in charge, although there are some minor changes. For example, the operator will have greater freedom over the detailed timetable, but, in fact, given that the lines out of London are pretty much full, there is not, in practice, much flexibility.

There is, too, some choice for the operator over rolling stock. In particular, with the electrification of many of the suburban and regional routes, there had been the expectation that the Thameslink trains would be cascaded to Great Western. However, there is now the possible option of the operator obtaining new trains or possibly receiving other cascaded stock (though can’t think of where they would come from).

On the other hand, there is no choice for the franchisee about the new trains from Hitachi. The IEP trains will come on stream about three years after the start of the franchise and there are bound to be teething problems. While it is welcome that we are getting new trains, there is no doubt that this is an overpriced deal that lumbers the train companies – or more exactly the Department – with a massively expensive commitment for 27.5 years. There was not a hint of irony when Charlie Johnson-Ferguson of PwC’s transport division  said: ‘in terms of deal size and value, the Intercity Express is without doubt the biggest privately financed passenger rolling stock deal in history, anywhere in the world’. This is the same PwC (PriceWaterhouseCoopers in old money) which dreamt up the Public Private Partnership for the Tube which was the biggest ever deal for rail infrastructure and promptly collapsed (publicity interlude: my book on the scandal, Down The Tube is now available on Amazon for Kindle) .

This is just one of the aspects of the franchise that adds a whole level of complexity to the deal with electrification and Crossrail being in the mix. Both of these are risks to be managed which the bidders will find difficult to quantify. The programme goes something like this – IEP will be introduced in 2017/8 which will lead to a major timetable change and then Crossrail will start operating a year or so later. There is no doubt that this will lead to intense negotiations with the franchisee but given that the Department will have no choice but to accede to demands, the taxpayer is bound to lose out.

There is an overriding theme to all this. The Department for Transport, ministers and indeed quite possibly the Labour Party, though we don’t know if they will change their policies, are all intent on making the interface between government and the private sector as complex as possible. Rather than, as in other countries, simply granting contracts for services which are relatively straightforward and easily understandable, the government insists on creating byzantine structures in an effort to build in safeguards that inevitably rebound on them. The lessons of the huge PFI catastrophe and, specifically, the PPP on the London Underground have simply not been understood. As Marlene Dietrich asked, ‘When will they ever learn?’

 

Transport chaos in the news

 

In the run up to the Olympics, I was asked by numerous media outlets, mostly foreign, to comment on the impending transport chaos at the games. Despite all the doom-laden headlines every time there was a broken down Tube train or a threat of a strike, I argued that thanks to the detailed preparation and the extra services laid on by the train companies and Transport for London, it would all be all right on the night. Not surprisingly, after a while the reporters in search of a story went elsewhere for their quotes.

So far, though, it seems I was right. London has not only coped, but actually the transport situation has in many respects been better than normal. Of course, as I am writing this with the Olympics less than a third of the way through, I may be proved woefully wrong. But I doubt it. There may be the odd hold up and breakdown – the Central line had a fire alert on the morning I wrote this – but the wider picture still holds true. London’s public transport infrastructure is actually pretty good in relation to those of other cities, despite the fact that much of it is very old. There has been major investment in recent years – not much in truth because of the Olympics, though some was brought forward by the Games – and there continues to be so.

The most interesting aspect is that even despite all the fuss about the Games Lanes and reducing the amount of space available for cars, London was not gridlocked. This suggests that the authorities should encourage a permanent shift towards public transport, which would actually be the best possible legacy of the Games.

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