RSA speech: What is franchising not for?  

What is franchising for – it is a question I have been asking for some ten years and never had a satisfactory answer. So obviously rather than trying to answer the question, the main part of this speech will be about what franchising is NOT for.

The problem with franchising is that, like HS2 which is another subject, it started with the wrong premise and therefore the whole house of cards is built on sandy foundations.

Let me explain this

Let’s start with the mindset of the people who privatised the railway. Why did they do it?

Well they started with a whole lot of assumptions and intentions

 

  • BR was inefficient
  • There was too much subsidy
  • The unions were too strong and there were too many strikes
  • There was no commercial flair
  • There was no competition

 

We can argue the toss about these points all night but while BR may have had inefficiencies, it had shed 500,000 – yes half a million – jobs in its 50 years of existence; from 650,000 to 150,000. Yes there were still guards in a few supposedly unnecessary places – but then South West Trains has not managed to change that situation in the past 20 years! BR was by and large a success story – and was broken up for ideological reasons not to improve the lot of passengers or, indeed, taxpayers.

 

That, again, is axiomatic and uncontentious.

 

As for subsidy, we all know the story. From a BR subsidy of around £1bn to £1.5bn in today’s money, we went up to £6bn at the peak and it is now running at around £4bn – but add to that the fact that a debt of £30bn has been built up by Network Rail over the past 20 years that has now been put on the government books, which adds perhaps another £1.5bn per year to the level of subsidy but is never factored in. So we get around £5bn per year throughout the history of privatisation.

 

Now not all of that can be blamed on the structure. There has undoubtedly been more investment. However, it is a substantial cost and that has to be partly put down to the way the industry has been broken up and franchised out. The reasons are varied and complex, but much is down to fragmentation, duplication, complexity and the lack of a fat controller.

 

Let’s get one issue straight – and something that the rail industry should actually be unashamed about. The railways are a public service that deserve subsidy because of the economic externalities they provide. The idea that they have to ‘pay for themselves’ is a nonsense in economic and social terms, but that does not mean that the level of subsidy should not be driven down – and privatisation has done the opposite.

 

And remember – InterCity was profitable and Network South East broke even under Chris Green and was starting a rolling programme of total route modernisation – and while we are at it, has the franchising process thrown up any railway industry figures of the stature of Chris Green, Gordon Pettit, or Bob Breakwell? I can in truth think of a couple (no names) but by the nature of the industry they either are no longer around or they do not have quite the depth of experience which BR could offer.

 

As for commercial flair, has the privatised railway put out anything as good as the InterCity TV advertising campaign – OK, I know they featured Jimmy Savile but they weren’t to know – or created a brand for London commuting like Network SouthEast and the Network Card

 

Franchisees by their nature do little marketing. And some of it has been downright awful. Why would a brand like Intercity be thrown away and replaced with

C2C? or First Capital Connect which given its performance was nothing of the sort?

 

Or the best – ONE – which led to the famous announcements at Cambridge of the ‘First train being the One train and the second train being the First train’

 

(There was also confusion about First’s antimacassars which had old ladies worried about being caught in the wrong seats walking the whole length of 125s as all the seat covers said ‘First’)

 

Odd, isn’t it, that all those with the worst names have thankfully disappeared!

 

Now we also know that the unions have been far from broken by rail privatisation – in fact, quite the opposite. ASLEF is sitting pretty with their drivers being paid £40k or more, far more than had they remained in the public sector – part of the added cost no doubt – and the RMT remains one of the fastest growing unions. So much for the unstated aim of smashing the unions.

 

So that leaves competition – and that of course was the real driving force behind the privatisation. And it was flawed and contradictory right from the beginning. Competition is difficult on railways – there is generally only one set of tracks. Moreover they are often pretty much full and therefore coordination rather than competition should be the watchword.

 

But the structure of a track authority model was created precisely because the Treasury wanted competition. They needed it rather like a junkie seeking their next fix – competition was good, monopoly was bad; the implication, though, is that cooperation is therefore bad – look at the crazy number of inquiries into bus competition or the lack of it.

 

The basic flaw  is so obvious that it barely merits explanation. The incredibly thin document that created the privatised railway, the 21 pages of New Opportunities for the Railways set the tone for the confusion. ‘The government wishes to encourage the greatest possible development of commercial rail services. It will therefore establish a framework and procedures through which companies wishing to provide new railway services….will have a right of access to the network

 

Only, of course, it didn’t – and couldn’t .If you have a franchise, you are operating a suite of services that mix the profitable with the loss making. You are providing a public service. If an open access operator – paying incidentally only marginal costs – comes along, they will clearly not want to run any loss making services’; why should they. This will result in cherry picking and inevitably if the franchise is devalued, then there is a loss to the taxpayer. So we got Moderation of Competition and oddly Virgin being allowed a monopoly while the East Coast was something of a free for all.

 

So open access became a marginal issue – perhaps some 30 or 40 or so trains per day (excluding freight and the anomalous Heathrow Express) out of 20,000  daily trains – and all on the East Coast.

The attempt by German state railways – which incidentally would not allow us on their intercity turf if they could prevent it – to run a serious open access operator on the East Coast may have thrown confusion over the issue, but is unlikely to be allowed to come to fruition

 

Given that the structure of the privatised railway that was created was inherently flawed and could never deliver what its creators wanted to deliver, it is hardly surprising that the 20 years of privatisation have been troubled. As we know, John Major wanted an integrated system of possibly four or so railway companies, a la 1923 model. It fitted in with his ‘ladies cycling in villages to do their shopping’ view of Britain.

 

Major told me many years later that he had wanted an integrated railway and was worried about safety with a track authority model. He was persuaded by civil servants who advised him that the airline industry was safe and therefore the track authority model would be OK and would allow competition.

 

In a letter to a TV programme I worked on in 2008, he wrote  that in retrospect ‘we would have moved to a system in which there were fewer but longer franchises’ So already the instability of the structure was all too clear. And so proud of rail privatisation is John Major that remarkably in his huge autobiography of 774 pages that he never mentions it… I asked him about that, too, and he said he did not have time to look up the papers – eh?

 

However, he defended the track authority model and I did not have time to challenge him on the key point, understood by Steve Norris, my favourite Tory, at the time which was that open access and franchising are incompatible.

 

It is hardly surprising that the redoubtable Michael Holden in his presidential lecture struggled on this issue. There is no way out of it – the open access on the East Coast may have benefitted the people of Hull and Sunderland, but there is no doubt it has inconvenienced many others and has been a form of revenue extraction – or ORCATs raids as we used to call them. The optimum way to deliver a good rail service with a limited number of train paths is through coordination, not through a free for all – passengers want to be able to use all the services, the trains have to be compatible with one another, timings have to be determined by a coordinated timetable, and there cannot be cherry picking. Yes, Hull and Sunderland perhaps need direct trains, but that can be determined by planning.

 

So at the very heart of the structure, there is a contradiction which cannot be resolved.

 

There are numerous other issues with the franchise process, as the Wolmar question implies

 

Jim Steer is one of the few people brave enough to have attempted to answer the Wolmar question –He suggests that ‘franchising was designed to transfer risk and to protect customers while doing so’ But he also wonders if that is being delivered in the present structure

 

It is my contention is that these fundamental issues are simply not soluble which is why we have had so many different iterations of the franchise process, and none has been truly satisfactory

 

Let’s have a brief look at them after a bit of history first

 

 

History of franchises

 

Let’s have  a little rundown of the history. First, in what was a quite remarkable and amazing administrative feat, OPRAF – unlamented yet actually highly successful – under Roger Salmon and John O’Brien – managed to let out all 25 franchises between the end of 1995 and March 1997. Now it seems, the DfT is confined to letting a couple of franchises a year if lucky – (as an aside, is there not possibly a clue, there, in a solution? – or has the world simply got too complicated)

 

These were mainly plain vanilla franchises. The sonorous Sir George Young would have us in every few weeks – these were the days before the internet and one actually had the opportunity to go to press conferences and meet important people – announce that this was a ‘good deal for passengers and a good deal for taxpayers’ – without ever pointing out that to oil the process the overall subsidy to the operators in the first year was twice the level that they had received under British Rail

 

In other words, the government started as it meant to go on. The process had to be stuffed with money in order to work – the Treasury’s plan of course was that this would then fall away but this was always fanciful. As payments started to be cut back, the train operators started getting into trouble.

 

By and large these were seven year franchises, with the exception being those which were to have rolling stock such as the West Coast, and  LTS

 

There was a pretty chaotic beginning. I remember travelling on the first Stagecoach train from Twickenham early one Sunday morning and there was an army of revenue protection officers who caught a few hapless passengers used to taking these early trains for free.

 

I had a lot of fun. The best story was that the first train service was a bus from Holyhead to Swansea I think – and then things started to go wrong

 

More seriously, much else had gone wrong. There had been a shortage of bidders as no one was much interested. MBOs were encouraged and so were new start ups Indeed one won the Great Western franchise, Resurgence Railways, but it failed to obtain the required bank guarantees and was not helped by an FT report that its finance director had headed up a double glazing firm that had gone bust. Consequently, the  franchise had to be hastily relet to FirstGroup

 

A similar thing happened on LTS – the successful bidder, the MBO team, had fiddled the books in a very complicated way involving Barking – one should never involve Barking – that involve creaming off revenue from London Transport to the local operator. This was leaked by one of BR’s fifth columnists and the franchise had to be pulled at the last moment, ending up with the ridiculous name of C2C.

 

The overall modus operandi, though, was clear – the lowest bidder for subsidy got the franchise with pretty much no questions asked – apart from about their banking guarantees. Bus operators predominated and a start up, Prism, managed to get four, though soon got into financial difficulty and had to be rescued by National Express which consequently ended up with seven.

 

We have had numerous incarnations since then

 

There have been more types of franchises than flavours of Ben and Jerry’s ice cream.

 

 

We have had

  • seven year franchises
  • The first attempt at longer franchises (remember our late lamented Sir Alistair Morton and his tunnels under London for South West Trains and SPVs),
  • Combined franchises out of London stations (Thames and Great Western etc) pushed by Richard Bowker
  • Competitive franchises (Great Eastern and Anglia),
  • longer discrete ones (C2C and Chiltern),
  • franchises with open access competition (East Coast)
  • franchises without effective competition (West Coast mostly),
  • management contracts,
  • cap and collar,
  • and even state takeover (Connex and National Express East Coast).
  • Devolved franchises (Merseyrail, Scotland, Wales)
  • And a renewed desire for longer franchises which resulted in the West Coast fiasco

 

We have had one size fits all, and horses for courses, and in between

 

Certainly MacDonald’s would not recognise the concept

 

OK So let’s have a look at what is wrong with the model – or rather what is franchising not for

 1. Saving money? – no chance

 

The key is that there is no one there to drive down costs. There is no real incentive to do so – except oddly when franchises are in a capped situation and revenue increases are not relevant , but cost cuts are

 

The consultancy, Just Economics, estimated that the cost of interface between Network Rail and TOCs was annually £290m. Sir Roy McNulty – whose curious report blamed fragmentation for the high cost of the railway, only to recommend more of it – explained why:

 

‘‘Having multiple industry players, together with misaligned incentives and the existing railway culture, has made it difficult to secure co-operative effort at operational interfaces, or active industry engagement in cross-industry activities which need to be undertaken for the common good (such as the Rail Safety and Standards Board (RSSB) and the Technology Strategy Leadership Group (TSLG))’. Moreover, the lack of cooperation was another factor in the failure to reduce costs.

 

He added:

 

‘These same commercial interests, particularly within the scope of relatively short franchises, can lead to an unhelpful degree of “short-termism” in an industry that requires long-term planning for

its proper development. In addition, and most importantly, the fact that the TOCs are insulated from changes in track access charges and other financial changes arising from periodic reviews

means that they have no incentive to minimise NR’s costs, and there is currently no effective mechanism to encourage them to do so.’

 

There is the matter of profit, too, which clearly is an added cost. The Rail Delivery Group sent out a press release the other day saying ‘what has happened to rail company profits since 1997/8?’ Well indeed – as they admit, they run at around £230m per year, so that is £4bn over that time– since then; not a sum to be sniffed at. But what are these profits for? Have they done anything to deserve it?

 

One of the questions that intrigues me is what is profit for in a franchise – and how come it is the only industry where profit is expressed as a percentage of turnover and not as a percentage of capital invested.

 

In my little Blue book of capitalism, profit is earned for taking risks and for investment – but neither are applicable in this industry. Sure there is a small element of risk but much of that is taken on deliberately by companies overbidding to gain market share; why should we, the taxpayer, subsidise that. And as for investment, train operators don’t – cannot – do it. These are not the Victorian rail companies that I write about in my books and I love because people risked their shirts in the hope of making a profit and created the fabulous infrastructure we have today.

 

No these are, in the immortal words of Shriti Vadera, one time adviser to Gordon Brown, ‘Thinly-capitalised equity profiteers of the worst kind’ – actually that is a bit unfair; I don’t really see why train operators are any worse than other ‘thinly capitalised profiteers’ whoever they may be….

 

The question of how much profit is made by franchisees is interesting . The Atoc – I can barely bring myself to use their daft Rail Delivery Group name – estimate suggesting  it is in the order of just 3 per cent, say around £230m or so is likely to be an underestimate since there are transfer costs – administration etc – paid to parent companies which may or may not reflect real costs. The state owned companies that dominate the industry are hardly transparent entities.

 

There are of course numerous other ways in which franchising adds costs – the whole administrative and regulatory paraphernalia – the hundreds, and it is hundreds of people, allocating costs between franchises and Network Rail – and the costs of the bidding process.

 

Let me make a point here – even if we are stuck with franchising, very little effort has been made in the industry to address these issues and drive down the costs of the interfaces and the bureaucracy.

 

Take compensation – surely the daftest aspect of the railway structure is that train operators are paid compensation when work is carried out on their lines which is designed to improve their service. Compensation for planned work typically adds £150m a year to the cost of the railway, and perhaps the same again for unplanned work

 

The formula, by the way according to which it is calculated matches even those devised for the London Underground PPP – which I understood once but thankfully, like the civil servant and the Schleswig Holstein question, have long forgotten. It takes into account

  • extra mileage the trains  may have to run,
  • missed stations
  • and monitoring points (usual places on the route that are omitted because of diversions),
  • the number of cancellation minutes and
  • extended journey times.

 

This is set out in an equation based on minutes which are then multiplied by three factors: a ‘busyness’ factor – assessed on the number of trains that passes the particular monitoring point and not on the number of passengers; a marginal revenue effect (which turns the time into pounds and is based, again, on a model, not reality); and the notification factor.

 

The latter means that the earlier Network Rail tells the operator about the closure, then the less it has to pay – 55 per cent of the total compensation if it is a year, 70 per cent at six months and oddly 85 per cent, rather than 100 per cent, even if it misses the 12 week deadline for notification.

 

There is more. Since 2009, two other components have been added. First, the compensation payment is reduced for trains not run – to cover the energy costs that have been saved as a result, which is set at a level of £2.1566 per mile (and alternatively if the train has to go further, then extra energy costs are added.

Secondly, train operator were feeling cheated because the regime did not recognise the cost of bus replacement. So, consultants were sent in and drew up a formula which means that for every mile of railway there was a payment of £9 19 – and that is multiplied not by the number of buses but by the number of trains cancelled, irrespective of whether it is 11 car Pendolinos or a Pacer. In London and the south east, it goes up to £13.

So, again, the compensation level is determined by a model, rather than the reality – surely it would be much better if Network Rail simply paid for the buses but in this Kafkaesque world that would be considered too simple and inequitable. Let me stress here – franchising leads to this level of complexity, By exposing internal costs which were once hidden, it ends up creating new costs.

Frankly, I think that is an argument for abolishing franchising all by itself, but then perhaps some of you earn your crust from doing these sort of calculations

 

 

Number two on my list of things not delivered is ‘smooth operation’ – The various fiascos since privatisation have often filled up my column in Rail magazine and have proved not only very lucrative to me – the number of TV and radio by Wolmar can be plotted against level of chaos on the railways – and very entertaining, but not for passengers and taxpayers

 

So my second ‘what franchises are not for is delivering’ a smooth railway:

 

  1. Smooth operation?

 There have been no end of fiascos resulting from franchising, from Stagecoach’s shortage of drivers and the lack of power for new trains in the Southern region (rare praise from me to Mr Bowker for sorting that one out) to the successive failures on the East Coast and culminating in the West Coast debacle.

 It would be possible to dismiss these if they all dated from the early days of franchising. But they just keep on happening and have most recently resulted in a complete paralysis of the process, at great cost and the wonderful innovation of ensuring competition in the industry by offering existing franchises single tenders. Or am I missing something here?

 

Let me just consider, briefly, first, the issue of the accidents which was the first and most disastrous aspect of fragmentation. Thankfully, the railways have been exceptionally safe in the past 15 years, but there is no doubt that the series of four major rail caused accidents – Southall, Ladbroke Grove, Hatfield and Potters Bar – had their roots in privatisation and fragmentation.

 

I have written extensively about this and will not repeat it – On the Wrong Line is available on Kindle – but suffice to give one example. Would the warnings about the series of SPADs in the Paddington throat which Alison Forster of First Great Western tried to get acted upon fallen on deaf ears had there been one organisation responsible? Thames’s poor driver training programme contributed to that disaster, too and similarly the other accidents all had their roots in fragmentation and franchising.

 

While I can give many other examples that helped lead to these disasters, thankfully subsequent procedures and most notably the introduction of TPWS has led to an unprecedented period of safety on the railways.

 Otherwise, probably the most costly in purely financial terms of these fiascos was the Railtrack ERTMS West Coast episode which again would not have happened without fragmentation. I will not dwell on this too much – my On the Wrong Line book has 20 pages on it – but suffice to say that no integrated railway organisation would have been dumb enough to think that you could install moving block signalling on one of the busiest lines in Europe when the technique was in its infancy. Quite apart from having spent £250m on developing the technology and then abandoning it, the debacle ended up being a git to Virgin which had the company at its mercy when renegotiating the contract. Virgin had the Department over a barrel.

 

Just to mention a couple of others – the most obvious one resulting from fragmentation was the shortage of power to operate the new trains ordered by the three Southern franchises, a mess that had to be sorted out at vast cost. This started in 1998 when it became apparent that they would all need new trains. And they began ordering them, but no one had thought about the power they would need – again is this something that could have happened on an integrated railway?

 

So hundreds of new trains began to be parked in sidings as finally Railtrack, bullied by the SRA, started providing more power. The  National Audit Office report in 2004 into the process of commissioning new trains found

 

‘that there had been an unplanned additional subsidy of £760 million from the SRA to four TOCs to offset’

 

and various other costs resulting from the fiasco, as well as the £700m that Railtrack spent to upgrade the power supply much of which was necessary but was more expensive as a result of the rush.

 

Then there is the big one – the collapse of  the West Coast franchise. We all know the basic story – two hungry bidders, one more desperate than the other (Wolmar’s rule of franchise bidders applies here –  if you are on your last franchise, you bid high). But clearly in this case, not quite high enough as FirstGroup trumped Virgin‘s bid by some considerable amount. The bearded one was appalled, and started making a lot of noise about it – threatening legal action, a rarity in this game as generally bidders do not like risking the wrath of the DfT.

 

But contrary to the views of some  commentators – I have to fess up here to being wrong – they were right to do so. It all boiled down to the requirement of the SLF – the Subordinated Loan Facility – which mysteriously was different for the two bidders. The details are complex but clearly what emerges is a denuded department that was completely unable to handle the deal and had civil servants who were not averse to telling a few porkies to ministers.

 

The key problem, though, was over the issue of risk transfer. In the past this has led to either super profits or losses on the part of the operators which if really severe would result in throwing in the towel or a purchase by another company. Then we had cap and collar, in order to mitigate losses or rein back profits, but this was now reckoned to be too crude

 

So the DfT developed a “GDP mechanism to reduce the exposure of the franchisee and the DfT  to fluctuations in national GDP, the key exogenous variable’

 

Here is the fun bit: ‘To calibrate the GDP mechanism, the DfT developed a financial model known as the GDP Resilience containing 500 economic scenarios’

 

Savour that a moment – can you imagine what kind of cost that model took to develop? And as those of us who like me have studied economics know, the economic outcome will probably be a 501th scenario!

 

It was in the interpretation of the GDP mechanism that things went wrong through differing interpretations of the likelihood of default

 

I will refrain from going into further details – but suffice to ask the obvious question – is this a sensible way to run a railway? Do we need this level of complexity and 500 possible economic scenarios.

 

All this resulted from the desire for longer franchises but that idea collapsed under its own contradictions

 

So this brings us neatly on to the third aspect of what rail franchises are not for is investment and the dilemma of Short or long franchises –aaaaaaaaagh

 3.Investment

 The desire to get train operators to invest has led to several efforts to introduce longer franchises. But this has always been doomed to failure and to the sort of ridiculous games of 500 scenarios. There is an inherent contradiction. It is simply impossible for bidders to take risks over a period of longer than maybe 5 years and therefore you end up with attempts to mitigate the ups and downs. Moreover, since train operators have no assets, why should they invest? And what happens to the residual value if they do?

 

The question is what are longer franchises for? Clearly not for investment – perhaps for stability but they can only be management contracts or else we end up with the tortuous games of 500 scenarios

 

 

 

Fourthly, the model has not delivered a stable system of franchising

 4. Structural Stability of the railways

 

Over the 20 year period of franchising, there has been no end of permutations over franchise areas and franchise size as well as length. Name changes have, too, been a great source of confusion for passengers – LTS to C2C to Essex Thameside; Thameslink to First Capital Connect to god knows what now – Thameslink, Southern and Great Northern

  • only the franchise system could throw up a name that incorporates a name, clearly devised by a civil servant with a sense of humour, that incorporates both Southern and Northern!

 

So what is the optimum size? Are Thames commuters better off as part of Great Western or not? Would the logic not be then that London Midland and Virgin were combined? Why were Great Eastern and Anglia merged when the system is supposed to be encouraging competition?

 

I once made Richard Bowker lose his temper at a press conference when at the same time as announcing that Wessex would merge with Great Western, he separated out Transpennine from Northern. I kept on asking why and he finally just moved on to another question. But this same randomness of approach prevails with the constant struggle to find that balance of risk/reward/incentives

 

Which brings us to the fifth failure of franchising, risk transfer:

 

5 Risk transfer

 

McNulty encompassed this well:

 

‘The Government’s recent [2010] review of franchising has highlighted a number of barriers within the previous approach, including franchise periods which are too short, overly-prescriptive franchise agreements, insufficient use of residual value mechanisms to enable investment to be amortised across the life of two or more franchises, and insufficient risk transfer to the private sector from

Government. Additionally, franchise agreements are difficult to vary in the light of emerging market developments or changes to policy, resulting in inflexibility. ‘

 

The Brown review, which of course did not challenge the concept of franchising, nevertheless got to the heart of the problem: ‘Franchisees should be responsible for risks they can manage and should not be expected to take external  macroeconomic, or exogenous, revenue risk’

 

And that’s where we get into unfathomable difficulties: what are exogenous factors, and what are endogenous ones. If a franchisee runs a good service to the commuter belt, will it really attract more people – who really have no alternative?

 

If a huge housing estate is built near a station, then the railway is clearly benefitting from a piece of luck. But on the other hand, the housing estate was built precisely because the railway was there – and may be the operator had a good reputation.

 

Or, to take another example, GDP growth has in the past been in line with passenger growth. This has changed in recent years as growth has actually well outpaced GDP growth. But will that continue in the future – or will that relationship be reversed, and GDP growth outstrip passenger growth, given the reduction

 

No formula can take all that into account – therefore franchisees will at times benefit or lose out from luck or bad fortune – so what is the point of transferring this risk?

 

My sixth point is over stability in general. There is too wider instability in an industry that essentially is about the boring and admirable point of delivering the same service day after day after day.

 

  1. Instability

 

Douglas Alexander when he was secretary of state for said it was a good idea for the odd franchise to fail and collapse. I could not disagree more.

 

There have been 33 train operators (including a couple of open access ones) go out of business in the 17 years of franchise – two per year. It is a record that exceeds even what happened in Victorian times.

 

This adds a terrible burden on the railways. There are both overt costs – redundancy for senior staff, changes of livery, setting up a new company – as I said many years ago, privatisation has done well for the logo and livery designers –  and hidden ones: the staff become fearful for their jobs and dispirited, the company loses focus, services become run down and so on.

 

This is, of course, quite apart from the bidding costs which ultimately are paid for by passengers or taxpayers in one way or another – and the drift into cost plus contracts that caused extra costs and instability.

 

Yes, we live in a world where a job for life is no longer feasible, where everything is governed by legal contracts, and everything is challengeable – but do the railways have to be like that? Do we have to slavishly follow a neo-liberal agenda that has proved so disastrous on the world stage in a 180 year old industry that, for the most part, has been operated in a far simpler manner

 

Number 7 is franchising a boost for British business:

 

  1. Foreign ownership

 

I was at a dinner this week hosted by Deutsche Bahn – the duckling was excellent by the way. DB can indeed afford lavish because it operates in 16 countries and has a turnover that far exceeds the whole industry in this country. That could, of course, have been British Rail with its expertise in consulting, technology development and research.

 

Instead DB operates a substantial part of our network and no UK company can hope to expand abroad in the same way, apart from taking over a few thinly capitalised franchises

 

So not only has privatisation prevented us from developing a large railway company able to expand abroad, but we have allowed our network to be taken over by foreign interests.

 

So allied to the Wolmar question, is why are foreign governments allowed to own franchises, and ours are not.

 

Look I’m a great European – my mother was Swedish, my father Russian – I don’t mind foreigners; I am one. But this is very different – why are our markets open to European state owned companies but not to ours?

 

There are a lot of perverse results of privatisation but the fact that most of the franchises have been nationalised , only to foreign governments who have access to cheaper capital and who cream off profits to support their networks, is not justifiable politically, economically or practically

 

DB had a turnover of 12bn euros from its foreign investments and proudly boasts in its annual report – in German ‘We’re skimming from the entire Deutsche Bahn and ensured that it is anchored in our budget – that way we can make sure it is invested in our rail network in Germany.

 

DB makes 42 per cent of its profit from overseas, and yet only 7 per cent of its investment is outside Germany

 

It was interesting that when I made this point on the Sunday Politics show at the weekend, I was greeted with a host of approving tweets

 

Well it would all be all right if franchising had delivered low fares:

Sadly not

 

  1. Fare rises and regulation

 

Yes there are bargains on some long distance advanced purchase journeys and season ticket and off peak returns are regulated. But ironically, that regulation, has been exploited by the government to drive up fares, with the RPI + 1 per cent formula, which I suspect, post election may well be reinstated. So legislation designed to protect commuters has been used against it.

 

And here’s the clever bit. Because the RDG is too pusillanimous to bat for its own interests, let alone those of its customers, it salutes these every year – or three times every year since fares rises are announced in July, December and January! So rather than the government getting the blame, the train operators do.

 

The operators are culpable, too, though. They have implemented increases in fares far above inflation for peak time fares which are not regulated.

Between 1995 and 2013 a single from London to Glasgow, went up from £to £169, a rise of 160 per cent. A single to Exeter was £37.50 but increased to £114.50 – a rise of 205 per cent.

 

Does it make economic, social or commercial sense for a single to Manchester to cost £160.50 ( I love the 50p, a kind of ridiculous precision)

 

All this suggests that they could not be trusted but that perhaps the wrong fares were regulated.

 

Can we trust the operators not to exploit their monopoly position?

 So my ninth point is that we do not have an industry we can trust

 9. Trust

 

Passenger focus provide annual statistics on this. No operator scores more than  50 per cent and down the bottom there are the usual suspects, the franchises run by FirstGroup and Govia with figures around as quarter.

 

I think, actually, in part this is not their fault; it is the nature of the business – people just don’t think that the private sector ought to be operating a monopoly public service, even with all the checks and balances that there are – which the public are probably not aware of.

 Franchising, too, would be great if the customer experience made it all worthwhile

 

But can anyone argue that it is wholeheartedly better than British Rail –which incidentally invented the packaged sandwich and yet is blamed for the curly edged one.

 

10 The customer experience

 

A few weeks ago, I travelled up for a football match to Manchester on Virgin. The company had kindly provided me with an upgrade which would normally have cost £15. I had hoped that might include a sandwich. Instead you are provided with a box that contains a few crisps, cheeselets, and some sweets including a packet of four, yes four, Tic Tacs. There was a small bottle of water, too, and a small packed of chocolate – a kind of ghastly combination of Scrooge and Poundshop.

While on the subject of Virgin which claims that ‘A savvy mix of excellent service, fast trains and dedication has helped secure us as one of the most highly rated rail operators in the UK’,

 

How is it, too, that a supposedly customer conscious commercial organisation can bombard you with about 30 automatic messages on a train journey between Manchester and London – and do they not realise that while ‘do not throw mobile phones and your ex’s underpants down the toilet’ may be mildly amusing once, when you have heard it a dozen times you want to commit an offence that merits on Richard Branson that merits life imprisonment.

 

If I had nightmares, which fortunately I don’t the prospect of seeing Branson with some poor attractive (and probably underpaid) women launching the overpriced Hitachi trains some time in 2018 in a spray of dry ice would be one of the worst…

 

And just to end my rant on Virgin – and ensure they never offer me a free upgrade again – how is it that the problem of smelly trains has not been properly addressed in the dozen years they have been operating – it is the dishonesty, too, that gets me, the sheer denial that there is a problem. ‘What smell sir?’ – well the one that just nearly had me retching – ‘can’t smell anything’ – do they brainwash their staff or do something nasty to their olfactory organs?

 

More widely, it is clear that passenger experience is as patchy as it was under British Rail. Thameslink trains, for example, when Keith Ludeman was boss of Govia at one time were so poor that they almost seemed like some sort of dystopian future post apocalyptic railway with toilets permanently out of order, graffiti in the trains and a totally rundown air – yet oddly, the neighbouring franchise of Southern at the same had some excellent services.

 

Number 10 is growth – well since the industry clearly has delivered growth, I have to specify – endogenous growth

11. Growth – exogenous or endogenous factors

 

In the words of Gordon Brown, most of the growth has been due to exogenous factors. There are lots of them

  • London jobs market
  • Mobile devices
  • Congestion and fuel prices
  • Students
  • Oldies and railcards
  • Company cars

 

What would, indeed, be the endogenous ones – it took 20 years for ATOC to come up with a new Railcard – whereas BR devised half a dozen in as many years.

 

Has the industry been innovative – well we still have the same tickets devised 30 years ago by British Rail – would that still be the case without franchising? Introducing an entirely new generation of smarter tickets – which might, for example, contain rather better information – is going to be some task – and guess who will bear the cost; which is why it has not happened.

 

On Passenger information, too, there has been little progress. Yes, of course the good TOCs have active twitter accounts and good communication at times, but the overall the performance is very patchy especially during delays

12.Dealing with delays

 

Here there is clearly a real issue about fragmentation. There have been countless efforts towards integrated control – and some have been quite successful. But if, like me, you have been caught up in a major delay scenario such as happened at Paddington to me recently

 

I was heading to speak at the Cheltenham literary festival but there had been a track circuit failure overnight that was proving difficult to sort out.

 

When I got to Paddington, I found that there was one train heading for Reading, a Penzance via Temple Meads service, and as my direct Cheltenham train had been cancelled. I rushed onto it. So did everyone else wanting to get away. It was chaotic and lots of people standing. However, there was plenty of room in the aisles but instead of asking people to move along and ensure as many passengers got away as possible, I heard one of the guards say: ‘We must close the barriers, stop any more getting on’, leaving many people who could have got on the train stranded.

 

Instead of – let’s try and get as many people as possible away.

 

The train eventually left about 20 minutes late, but there were virtually no announcements, and no explanation apart from ‘signalling problems’ . Eventually, one train guard, a woman called Jo, did make an effort and deserves praise but there were half a dozen others, clearly connecting with their intended trains or simply going home, including the one making announcements, who just hid in the restaurant car

 

From the post bag in my inbox, that is fairly typical – indeed I am going up to York next week to see how ‘perturbations’ are being dealt with and what improvements could be made –

 

 

And finally,

13. Revenue protection

 

This is the oddest one to me. Time and again I am amazed at how little effort is made by the train companies to collect revenue. One chap wrote to me recently to say how Virgin trains between Crewe and Liverpool was basically a free service since checks were never made, and canny scousers knew this – eschewing the London Midland services as a result

 

The introduction of barriers seems to have given the operators false security in this regard but the barriers are often open, particularly when it involves collecting another company’s revenue. A driver recently wrote a long letter to me explaining that Virgin does not bother to close its barriers at stations that are mainly served by London Midland except for a couple of peak hours. East Coast are guilty of this, too, at Kings Cross where the barriers, imposed by the DFT are left open most of the time. The whole of the old Southern region is, too, a free railway after 8pm

 

 

So there is an awful lot that franchises have not delivered. Of course, the railways are a success and revenue has been boosted – but showing that there is any correlation between franchising and this increase is impossible. There are no initiatives by the franchisees that would point to ways in which their efforts have lead to these rises  – the endogenous factors I mentioned above

 

 

To be fair, Pete Wilkinson at the DfT is doing his best to make sense of this mess. He has pushed forward passenger interests and tried to rewrite the franchise framework

 

But nothing can take away from the fact that the system causes the three Cs

 

cost,

complexity,

confusion

 

I wish him luck

 

So the final question is, ‘Is franchising the least worst option? which as you have heard enough of my voice, is for another lecture. Just to say, though, there are alternatives.

 

 

Yes the Railways Act precludes public sector bidders but it does not say that the railways have to be franchised. So they can be allowed to wither away and simply be taken back in house. The Fourth railway package may preclude that, but it is currently subject of intense debate.

 

The Labour party has suggested that there should be a public sector bidder for franchises – I feel this is the worst of all worlds, entrenching the dysfunctional franchise process but not profiting from the savings that would be made if the process were dispensed with.

 

Compass, the left wing pressure group, has come up with suggestions to democratise the process through having an overall guiding mind – a GB Rail that would take over the franchises – but then having regional boards overseeing the operation of local railways as in France where regional authorities have driven down costs.

 

There are many possible structures. Wales is looking at a cooperative model, for example. But to accusations that we are going backwards, there is a simple answer. Do we or can we recreate the monolith BR – no, and nor would we not want to. But we can do a damn sight better than entrenching a structure that is costly, complex, unaccountable and not fit for purpose. So here’s a target for the railway : ‘it should seek to provide a high quality service that passengers understand, with simple system-wide ticketing and affordable fares’. Does franchising help it do that?

 

  • ferroequine

    The current railway industry structure is so bizarre: what other industry would be arranged on this basis? If car manufacturing was organised (!?!) in a similar way it would be
    broken down into profit centres thus: design, tool-making, pressings, assembly,
    paintwork and then delivery with each function adding on its own margin. The way
    they have been privatised has made the railways into a form of pyramid selling
    with the consequence that they cost far more than they need to.

  • Keith

    Great stuff Christian. But why does not a single party propose your example of an integrated DB German type operation? It could even be a PLC, and rail workers could receive shares. I don’t think our country’s expertise in railways is completely gone (yet), just horribly fragmented.

  • RS

    So franchises were designed to transfer risk? When Ken wanted to introduce Oyster PAYG on heavy rail in Zone 6, the franchised TOCs ran a mile. Even when he offered to pay for all of the equipment, they still didn’t want to know – there were risks changing to a zonal fare structure, risks to fraud and risks to commission.
    Of course when forced to implement Oyster and indemnified for any losses, the TOCs are quids in – but it was hardly a transfer of risk – quite the opposite.

  • marty

    Many useful, valid points are made here. But is anybody listening?

  • BSDetector

    BR … had shed 500,000 – yes half a million – jobs in its 50 years of existence; from 650,000 to 150,000. … does this include the divestment of shipping routes, hotels etc.?

  • greypoplar1

    I think that the 650,000 figure on nationalisation included the BT Hotels, the railway workshops and the shipping routes. The Hotels and Sealink were sold off so that reduced the staff. The workships mainly closed and a few have ended up in private hands. So the fivestment is the cause of some 50,000 of the jobs being shed; the workships perhaps 50,000 but most of those jobs were abolished not privatised. The Business History of BR by Terry Gourvish Volumes 1 and 2 may give more detailed figures.

  • PNBinLondon

    “There was no completion”. Terrible typo in the introduction! There was no *competition*

  • corrected

    Christian Wolmar is seeking the Labour nomination for the 2016 London mayoral election. We need funds to help the campaign. You can donate now to http://www.crowdfunder.co.uk/help-me-become-mayor-of-london/ Twitter: @WolmarforLondon
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    Website: http://www.WolmarforLondon.co.uk

  • PNBinLondon

    2 more typos:

    1/ There was also *confusing* [confusion] about First’s antimacassars

    2/ the Treasury wanted competition. They ]were[ needed it rather like a junkie seeking their next fix

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