Virgin row with FirstGroup highlights franchise process inadequacies

THE wails from Sir Richard Branson

over his company’s loss of the West

Coast franchise have highlighted the

fickle nature of the privatised rail

network and have led to renewed calls

for the structure to be re-examined,

including calls for the entire industry

to be re-nationalised.

Should this happen? The

chairwoman of the Commons Public

Accounts Committee, Margaret

Hodge, has already expressed

concern about whether the system

is delivering value for money and,

with Branson having rapidly garnered

100,000 signatures in pursuit of a

rethink. This is a row that seems set to

continue when Parliament resumes

next week.

On the face of it, Branson has a

case. Rail travel on the West Coast

Main Line, which links London with

Birmingham, Manchester, Liverpool

and Glasgow, has greatly improved

since Virgin took over services 15

years ago and the numbers travelling

have more than doubled. Indeed,

passenger growth has been much

greater than on the East Coast thanks

to the increase in the frequency of

trains and the £9bn investment spent

on upgrading the track.

However, Branson’s case begins to

look thinner under closer examination

and, in particular, if the way that the

franchise system operates is taken

into consideration.

When the franchise was first put out

to tender in 1996 as part of the radical

privatisation of the railways brought

in by John Major’s government, the

bidders all had to include plans for

new trains since those on the existing

rolling stock had become life-expired.

Therefore, whoever won would

have had to lease new trains and

Branson’s implication that it was

simply his entrepreneurial spirit

which transformed services on the

line does not hold water. Nor do

Virgin’s claims that the company

has invested hundreds of millions of

pounds in improving the service.

In fact the trains are leased from the

rolling stock company which bought

them – with the help of various tax

breaks – and will simply be passed

on to the new franchisee, FirstGroup,

when it starts operating the services in

December.

The only difference, of course, will

be that the Virgin Red will soon be

obliterated by First’s dark blue livery.

This begs a wider question. What is

the purpose of the kind of upheaval

caused by this franchise merry-goround?

The failings of the franchise system

have already been exposed on the

East Coast route when first Sea

Containers (GNER) and then

National Express threw the towel in

after having bid far too optimistically

for the contract.

And that’s where the problem lies.

The franchise system is seen as a

way of reducing the cost of the

railway to the Government and

therefore there is a great temptation

for Ministers to accept bids which

are unrealistic and ultimately

undeliverable.

This has been made worse with

the change to longer franchises,

stretching up to 15 years. No-one can

possibly know what demand for rail

services will be in two or three years

time, let alone 15, given that it will

depend on so many factors ranging

from the state of the economy and the

buoyancy of the jobs market to

oil prices and the effect of broadband

on travel patterns.

It is a guessing game and FirstGroup

has guessed big. The company has

taken a remarkably optimistic view of

the future, with a bid that will require

growth of more than 10 per cent

annually throughout the whole life of

the franchise.

Other bidders, notably Virgin,

refused to make such heroic

assumptions and therefore lost out.

Given the history of the East

Coast franchise, this suggests that

the whole process has turned into

a sophisticated game of roulette

where losers have the option of

leaving the table before their losses

mount up. Therefore, while on paper

the Government’s acceptance of

FirstGroup’s bid looks like a canny

move, in practice Ministers – or more

likely their successors – may well end

up with egg on their faces.

So why go through all this pain in a

vain attempt to save money? It’s time

to stop pretending that the railways

are ever capable of being a genuine

private industry. The railways may

be notionally privatised but in effect

they are a socially-necessary industry

highly dependent on government

subsidy.

Last year, the railways received just

under £4bn in taxpayers’ money,

despite the massive growth in

passengers during the past decade.

Although this has been reduced from

a peak of £6bn five years ago, this still

represents far more than British Rail

ever received from the Government.

The truth is that the railways will

never be free of the involvement of the

state. Indeed, all the major decisions

on investment such as new trains,

refurbished lines, reopened stations

and High Speed Two remain in the

hands of politicians, not the private

companies who operate the services.

Network Rail, the infrastructure

company responsible for the track

and signalling, grew out of the

ashes of the failed private company

Railtrack which could not deliver on

its investment promises and suffered

a virtual breakdown following the

2000 Hatfield crash, which was caused

by a broken rail. Network Rail is,

therefore, effectively already staterun

as it no longer has shareholders

and most of its income comes from

taxpayers or borrowing backed by

government.

This quasi-privatised system

imposes huge costs on the industry

because operations, in the hands of

private companies, are run separately

from the track and infrastructure

which they use.

Bringing them back together again

would save vast amounts in terms of

the cost of lawyers, consultants and

engineers.

While no-one would want to see

Ministers take over the running of

services directly, the re-creation of

an overall state-owned railway body,

like the old British Rail, is the logical

step given the failings of the franchise

system.

It would get rid of the pretend

capitalism that has dogged this

heavily subsidised and socially vital

industry for the past 15 years and

result in a cheaper and more efficient

system. And, most importantly of all,

passengers might benefit too

  • Luke Briner

    I agree Mr Wolmar although the ghosts of nationalised industries still haunt the minds of many so that re-nationalisation will be resisted, not to mention the reluctance of the current government to effectively nullify the decisions of their predecessors.
    It appears there is only one real way to run a nationalised industry but make it partially immune from much of government interference and that is to have a separate body which like British Rail to an extent and also London Transport of yesteryear, allows the government to have input only in appointing directors and otherwise to leave decisions to the board, who would hopefully be specialists rather than pen-pushers. This would require a brave trust from a government who would need to trust even large decisions such as HS2 (which would require large amounts of public money) to people who would make the decisions based on sound economics and social benefits and not to unnecessarily invest in rail where it doesn’t work but likewise to invest heavily in areas where it is much used.
    Personally I would like to see more investment outside of the southeast which is one solution to the overcrowding problems they face there – make it more attractive to live somewhere else.

  • Ian Raymond

    I’ve often wondered how much cost is added to taxpayer/tickets by every new franchise slapping new paint on everything as soon as they take over (compared to say, the London buses, where the operators have to maintain the same hallmark red).
    OK it’s a pipe dream, but wouldn’t have been far more conducive to marketing/appeal if whatever the ownership any ‘intercity’ franchise had to stick with the same livery – a small ‘operated by Virgin / First / Arriva’ vinyl transfer should be adequate!

  • RapidAssistant

    Well Ian, once again Scotland leads the way – one of the terms of the ScotRail franchise is that the train livery and typography is fixed regardless of who the operator is a la London buses. The other franchises would do well to replicate this policy.

  • RapidAssistant

    The Virgin-First spat is all smoke and mirrors really – First will win the day eventually, but it will be fun watching them squirm a bit first. The fatal flaw in Virgin’s argument is if the franchising process is a flawed as they claim it is (which it is…); why didn’t they raise these issues during the bidding process? The shoe would indeed have been on the other foot had they won.
    Equally though – the sheer number of people that have rallied around Virgin in the e-petition (pretty unprecedented for a TOC – these are the pesky “privateers” that everyone loves to hate…after all!) – this can’t be ignored if democracy means anything in this country – now whether or not they were/are taken in by 15 years of Branson ‘spin’ as CW says is another debate of course. Nonetheless, I’ve always said that Virgin were the “acceptable” face of rail privatisation, and even though they had a pretty appalling record in the early years of the franchise as we all know, a lot of it clearly seems to have been forgiven (no tears were shed when Connex or NXEC were stripped of their franchises, remember), and it highlights that maybe the public should have a stronger say in who runs the franchises – after all, they are the people actually using trains and infrastructure that were fundamentally paid for by us taxpayers??
    As an aside – something that has jarred me and has clouded the debate is the story that Virgin Atlantic were bringing in domestic flights between Heathrow and Manchester/Scotland; and this was painted by the media as some sort of “sour grapes” retaliation to losing the WCML – hogwash of course – and a genuine coincidence. Bascially it stems from Virgin Atlantic’s long standing arrangement with British Midland/BMI who supplied feeder traffic from the regions to connect with Virgin’s longhaul routes. With BMI now owned by IAG, there clearly is now a conflict of interest between Virgin Atlantic and its old nemesis British Airways, whom Virgin now has to rely upon for its interlining passengers. Was nowt to do with the WCML debacle at all!!

  • Steve Ashford

    Perhaps there is some hope in the debate about franchising spreading out from the rail industry and those with an interest in transport to the wider media. OK, so the debate is mostly focused on Virgin versus First, but with several other big franchises to be decided within the next year or two, maybe they too will receive more coverage. We might see First gaining West Coast, but losing elsewhere, or maybe winning everything.
    Given that the barriers to entry for new groups are very high, we are rapidly approaching a situation in which 3 or 4 (or maybe even only 2) groups hold all the franchises and rotate them every few years in a bizarre game of musical chairs. Even the most enthusiastic neo-liberal free-marketeer might wonder whether this is in anyone’s interest.

  • andrelot

    This is kinda ridiculous. The livery is the last thing that matters except for fanboys. Nobody cares about the color scheme of train except choo-choo and BR nostalgic types.

  • Ian Raymond

    Exactly. But every new franchisee seems to spend far more time and effort slapping their new colours on everything than attending to the basics. (Once you’ve seen the state the interiors are often in, you have to wonder why they would want to advertise on the outside that it belongs to them anyway…)

  • andrelot

    Well, re-painting the trains or even changing some of the interiors is light work, can be easily done off-hours and employs resources that are not helpful in accelerating any other program.

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