Rail 707: Franchise fiasco puts whole railway investment programme in jeopardy

Talking to railway managers about the West Coast debacle, time and again they came out with the same refrain, words to the effect that this is the biggest cock-up on the railways that they could remember. The words, of course, were not always so polite but there was a unified sense that his was a train crash without victims, except the taxpayer of course, that would have long term repercussions for the industry.

Let me start, however, with an abject apology. I wrote in Rail 704 (check) that despite my doubts about the bid, I felt the Department had learned from the mistakes on the East Coast and, specifically ‘  ‘ .

 

Oh dear, clearly Mystic Wolmar got his antennae in a twist there. How could I get it so wrong? Never, again, will I go against my instincts and put my faith in something I thought was decidedly dodgy on the basis of ‘surely they couldn’t make such an elementary mistake’

Right, got that off my chest, so now the fun bit. First, let’s look at what happened. It is clear that the story starts back in the early days of the Coalition when not only did they make extensive cuts to the Department for Transport, but also reorganised it. Already this had started happening under Labour with Mike Mitchell, who had been in charge of railways, being given a wider brief that included roads. With the consequent cuts, the railways were left without a single official in charge but rather responsibility was split mainly between two divisions but with bits and pieces scattered around the Department.  Moreover, to compound the situation of a rudderless ship adrift without a captain there have been three permanent secretaries and three transport secretaries in the less than two and a half years of the Coalition government. Of the three transport secretaries, Philip Hammond was decidedly not a details man and, according to insiders, he was interested only in very specific parts of his brief, leaving whole chunks to the civil servants. Justine Greening was more of a listener but her inexperience shone through. And now we have a newcomer, Patrick McLoughlin, who was forced to make a momentous decision within days of taking office. Nor could he turn to an experienced number two since the incumbent, Theresa Villiers was also moved and who, in any case, despite having the brief for nearly five years, never convinced the industry that she was on top of it.

That’s the background. The specifics are fascinating. The main two errors were the result of new features of the contracting out process.

The root cause of this debacle, though, stretches back further in time. The process of privatisation and outsourcing that started in the 1980s has resulted in a gradually deskilling of the civil service. This is across the piece, from Defence to Justice. The private sector with its bigger wages and, often just as importantly, more fulfilling roles, attracts better qualified people and increasingly the very notion of doing the job out of a sense of public duty has been forgotten. More and more tasks are put out to expensive consultants who are less accountable but more expensive further eroding the skills base in the public sector. British Rail had some of the best brains in the country to carry out tasks which are now the job of second rate civil servants struggling in a climate of cutbacks and chaos. That should be the finding of the first of the two enquiries into how the process went wrong but I suspect that it will not be the findings of the, euh, consultants asked to undertake the task.

As for the future. On the West Coast, it is clear that the politicians and civil servants are at odds over what should happen next. Indeed, a decision may have been made by the time you read this but while

the Tory ministers favour allowing Virgin to run the franchise in the 18 month period before the process can be rerun, orfficials have warned that this would be challengeable  under EU law and that FirstGroup might have a case to challenge it. So my money is on Directly Operated Railways, which had spent the three weeks before McLoughlin’s decision preparing to take over, being given the deal.

As for the wider repercussions, it is clear that franchising will never be the same again. To my mind all four bids were based on crazy numbers – the two losers estimated 7 per cent annual growth, Virgin 8 per cent and FirstGroup a reckless 10.4 per cent. The move towards longer franchises, promoted by Theresa Villiers will now be quietly ditched. It should be obvious to anyone with a C in GCSE maths that predicting 10 or 15 years ahead is quite simply impossible and therefore the attempt to pass on the risk to the private sector was misguided. That was, indeed, one of the difficulties facing the bid assessment team. The two leading bids were not that different for the first half of the franchise but then FirstGroup’s far more optimistic approach to continued growth won the day. It was based, Tim O’Toole the company’s boss told me ‘on our experience on the Great Western which despite being a full railway has seen this level of growth in recent years’. A consultant  who once worked for OPRAF, the organisation set up to manage the franchising process when the railways were first privatised, told me ‘It was madness to consider that the premium payments in the later years of the franchise should be treated in the same way as those in the early period.’ Of course a discount rate – 3.5 per cent per year is applied – which somewhat reduces the value of those later payments but he felt this was not enpough: ‘it is difficult to predict what is going to happen in five years, but far more difficult to know what will happen in 10 or 13. It was clear that those later payments were unlikely to be delivered but then all those concerned, ministers and officials would have long gone’.

As for nationalisation, it was hilarious watching Hilary Benn, the shadow minister for god knows what, absolutely refusing to answer questions from Jo Coburn, a BBC political correspondent about Labour’s intentions in this regard. Maria Eagle, the shadow transport secretary, is still working on her review and is clearly not completely averse to the idea, but would it fit into Ed Milliband’s idea of One Nation Britain. Possibly.

While my friend and editor Nigel Harris argues that this error does not necessarily mean the franchising concept is wrong, I beg to differ,as we occasionally do. The very fact that the errors were the result of new aspects of the franchising process, adding to its complexity, highlights why the whole structure is unworkable. It is precisely because the right balance between private and public risk has never been found, nor indeed between micromanagement and operator freedom, nor in fact has the right length for a franchise ever been determined that the Wolmar question – ‘what is franchising for?’ – has never been answered.

However, given that the review of the franchising process – the second and wider enquiry launched by McLoughlin – will be carried out by Richard Brown, the chairman of Eurostar and a rather unadventurous railwayman who once headed Midland Main Line, and is not in the habit of rocking any boats. That suggests the obvious root and branch reform of the franchising system will, again, be dodged. So there will be no suggestion to try out common sense solutions such as creating simple management contracts with no revenue risk, as with London Overground or Merseyrail, or simply allowing Directly Operated Railways to gradually take over franchises, ending the whole crazy bidding process.

Instead, we will probably get either a new railways agency, taking over where the Strategic Rail Authority left off when it was abolished in 2006 or, mercy, a private unit probably run by KPMG or PriceWaterhouseCoopers (the very name suggests indecision) to assess franchise bids which given their minimum £2000 per day consultancy charges, would be madness. But then, so, it seemed,  was accepting a bid on the basis of a 10.4 per cent revenue growth forecast over the next 13 years. Mystic Wolmar better untangle his antennae before ruling out that idea!

  • Mike

    East Coast and, specifically ‘ ‘ . Seems to be a bit missing.

    No doubt you are right about the next move though – more or less the same madness as before, with some wealthy suits trousering a bit more money from the taxpayer in return for nothing much 🙁

  • anonymouse

    You say that the coalition had been in power for 2.5 years then that Teresa Villiers had been in office for 5 years – was she working at double speed or something?

Shares