Rail 819: Franchise future in doubt

It is some time since I discussed my oft asked and never answered question of ‘what is franchising for?’ The peg, of course, is that yet another foreign state-owned company has entered the market with the takeover of the C2C franchise (first task, change the silly name) by Trenitalia from National Express.

There’s two significant aspects of this. First, that an Italian company now joins French, German and Dutch state owned business operating trains in the UK. The TSSA has put out a rather amusing film (https://www.youtube.com/watch?v=gvagsSOlAy4) suggesting that the people of those countries are rather grateful for the fact that profits from these franchises are helping subsidise their rail services. While the amounts of money are not really sufficient to make much difference, it certainly makes an apt point that will cause embarrassment, especially to keen Brexiteers. It is ridiculous that any state company can run trains in this country except one owned by our own government as they are specifically barred from doing so by the legislation.

There is, though, a second, wider issue. There is now a paucity of bidders for franchises and the only companies which appear to be ready to take on the risks are those backed by government. The second important aspect of this sale is that National Express is now exiting the industry after 20 years of involvement. I always felt that it was a slightly uncomfortable incursion given that the company’s primary business was long distance coaches especially when it ran them between London and Stansted in competition with its own trains on the Stansted Express.

However, at one time it seemed that National Express would become National Rail as it ran nine franchises and was aiming to expand further. Now the company says it wants to focus back on its UK bus business and, interestingly, on its overseas acquisitions. Dean Finch, the rather abrasive chief executive and not a man who minces his words, has long expressed doubts about the viability of the UK rail franchise business because of the high bid required to win contracts which have to be based on expectations of continued passenger growth. Finch was

The haste with which National Express has exited the business suggests an element of desperation given that the franchise only started in November 2014 and had another 12 years to run. The price of £70m may have been ‘a small profit’ as National Express claimed, but most of it will have been the bond which the company had to lodge and therefore suggests Finch expected virtually no profits to be made over that long period. This was not entirely unexpected since for a time National Express has stopped putting in bids or done them halfheartedly

So here is a question for railway society pub quizzes – which is the only English operator left providing franchised services? Stagecoach and FirstGroup both have their headquarters in Scotland – which of course may soon not be part of the UK after last year’s tumultuous political events. That leaves Virgin, with its HQ based in London as the last one standing and even then it only shares its West Coast franchise almost equally with Stagecoach and has only a 10 per cent stake in East Coast.

The departure of such a big player, therefore, must raise questions over the future of franchising. Oddly enough, it is precisely because franchising has begun to deliver more benefits to both the taxpayer and the passenger that it is, in the eyes of companies such as National Express. Pete Wilkinson, who runs the franchising programme at the Department for Transport, has recently been in the news for making that silly remark about seeking ‘punch-ups’ with train drivers and expecting industrial action. He has subsequently apologised and it was definitely uncharacteristic given my personal discussions with him.

In fact, he is far cannier than that and actually has managed to use the franchise system to deliver far more passenger benefits than previously. Wilkinson has tried to use the franchising system to ensure that better services for passengers and measurable performance criteria are built into the contracts so that there is a continuous improvement in what train operators are offering.

The only trouble with this is that bidders are in it to make a few bob and don’t really want the hassle of having to constantly improve their service and innovate to keep on making a profit. Moreover, by scoring train operators’ commitments to passengers in the bidding process, an already complex process has been made even harder.

However, the main reason why National Express is happy to leave the business is inevitably about money. The company became worried about the way the bidding competitions were becoming frenetic, resulting in bids that were far too optimistic. The turning point for National Express was last year during the bidding process for the Greater Anglia franchise which coincided with the Brexit vote that was expected to lead to a downturn in passenger numbers. National Express was apparently worried that it had overbid and was about to go into embarrassing discussions with the Department for Transport, fearing it would not be able to fulfil the terms it had offered. The company was therefore relieved when it was announced that Abellio had won the contract, but was astonished to learn that it had been outbid by some 40 per cent, suggesting that the Dutch company is expecting that the golden egg will continue to be laid over whole length of the nine year franchise.

Similarly, when First won the TransPennine Express contract which started last year, it was revealed that the growth rate needed to ensure it remains profitable is between 12 – 16 per cent for a four year period in the middle of the franchise. East Coast, too, is based on very optimistic growth forecasts.

Add in the fact that the cost of throwing in the towel has been made more expensive by the Department for Transport, and it is hardly surprising that there are now quite often just two bidders on the final shortlist for franchises, rather the normal four.

There is, therefore, a franchise crisis, which must inevitably lead to a re-evaluation of the whole process. The mega Thameslink, Southern and Great Northern contract was already let on the basis of a management contract where the risk is with the Department for Transport rather than the operator. That was because the reconstruction of London Bridge and other work on the lines meant that there were simply too many unknown unknowns for private operators to take on.

I can’t imagine that the new West Coast deal, which involves both existing trains and HS2 can be let on a franchise basis, passing on the risk to the private sector simply because, again, there are so many uncertainties. The Welsh Government is, too, looking at a different type of franchise. Chris Grayling is already musing over the idea of reintegrated franchise, with the same operator being in control over both track and operations and in Scotland, there is a strong case for some sort of stronger alliance – indeed a possible merger – between Network Rail and Scotrail. However, to return to my question, what is this all about? Franchise deals have become ever more complex and yet seem to offer few precise benefits. Or am I missing something?

 

Shares