Rail 409: A 20-year game of Monopoly that is just one big gamble

Twenty-year franchises are one of the centrepieces of the refranchising process, based on the belief that such a long contract period will encourage operators to invest. Yet the argument contains a fundamental flaw. Why should TOCs invest, asks CHRISTIAN WOLMAR when they don’t own the trains, track or stations – and can make their exit with virtual impunity at the end of the contract?

After one of those all too rare moments – the announcement of a decision from the Strategic Rail Authority – its Chief Executive, Mike Grant, boasted about the £1.7bn deal for the relet South West Trains franchise.

Those big numbers always sound good. Put a billion in it, and you are on to a winner. But where, I ventured to ask, was this £1.7bn coming from? After a bit of umming and arrhing, it emerged that actually the bulk of this would be in payments over the 20-year length of the franchise from the SRA to Stagecoach, the winning bidder.

Because the SWT deal is several months away from being signed, no details of the finances are yet available. However, SWT is presently funded to the tune of nearly £50m a year. On the basis that Stagecoach is unlikely to agree to much less than that – especially as extra services will be required – then over 20 years that accounts for well over £1bn (there is a bad habit in government circles of not discounting for inflation in these matters) of the £1.7bn.

Anyway £1.7bn is rather less than we had been led to expect. Indeed, somehow, the not-trifling sum of £1.8bn has been lost in the bidding process. On February 8, the company issued a press release setting out its £3.5bn vision for the SWT franchise which had been reduced to a mere £1.7bn by the time the SRA announced its decision on April 2. The explanation, according to Rob Ballantyne, Stagecoach’s Press Officer who, to his credit, did sound slightly abashed, was “the difference in committed output and the aspirational value of the bid”.

“Ah,” I said, “you mean the bullshit factor.”

“I think that is somewhat unfair,” replied Mr Ballantyne. Note the ‘somewhat’.

Anyway, apart from that, exactly what is coming from Stagecoach? There is, indeed, to be plenty of new rolling stock for South West Trains. There has to be since the Mk 1 stock has to be replaced and, indeed, the SRA had begun the process of placing an order itself in case the bidders did not do so. It was no surprise, therefore, when on April 25, a big new train order was announced. Angel Trains said it amounted to £640m with a possible option that would take it up to £1bn. But hold on a sec, Stagecoach’s press release back in February had promised £1.5bn “immediate investment in new, better and longer trains”.

The ever-helpful Mr Ballantyne explained that this included maintenance as well as the option. So remind me that next time you buy a new car, you can say it costs £20,000 – that’s £10,000 purchase price and £10,000 for maintenance over the next ten years. This chicanery does no one any credit.

Of course, it is not Stagecoach’s money. Angel Trains, the rolling stock company, is stumping up the cash and taking the risk. Stagecoach is merely agreeing to pay the leasing costs which any train operator would have to do.

There is a wider point to be raised about this issue. Exactly why does anyone expect the train operators to put their hands in their pockets to invest? The whole idea of 20-year franchises is based on this premise. Giving the operators a long franchise period will encourage them to invest. But why? Remember, franchise operators are a bizarre construct. They do not own the trains, the stations, the track or anything much apart from the staff uniforms. Any investment is going to be on other people’s equipment or property and will be sold on at the end of the franchise.

Apart from rolling stock, there are two other potential areas for investment for a TOC: stations and infrastructure. Other investment plans announced in the SRA’s press release on SWT include redevelopment of Clapham Junction, improvements at Waterloo, upgrading of stations and extra car park spaces. But all these are facilities owned by Railtrack. Why expect the operator to invest in them?

The third area, infrastructure, is even more difficult. It was noticeable that this was only mentioned in ‘aspirational’ terms by the SRA press release, whereas in Stagecoach’s original release there was considerable stress placed on it, with a promise to spend £1.3bn on “infrastructure capacity enhancement schemes”. The notion is a very complex one and it seems almost impossible to bring about: the operator would fund, say, a new set of points or a crossover in order to improve reliability or capacity. But who would own this improved asset? How would Stagecoach get a rate of return on its investment? How will disputes be resolved? And would this not create yet another interface and more complexity on an already overfragmented railway?

The issue of investment by TOCs has implications for the whole SRA strategy. If TOCs cannot, or should not, be expected to invest anything, why give them 20-year franchises? In a lecture entitled ‘

Moreover, he argued that the process of reletting franchises “releases new ideas and challenges existing practices. Once the long-term franchises are let, what incentives do the incumbents have to perform?”

Yet, 20-year franchises have been one of the cornerstones of the refranchising process. If what Mr Helm argues is right, then why is the SRA proceeding down this path of no-return? Having such long-term contracts is an enormous gamble. Indeed, the fear of one going pear-shaped has delayed the refranchising process so that we still have no contract signed, nine months after the announcement of the first deal, Chiltern.

The SRA’s arguments that these contracts will deliver investment are unconvincing. OPRAF, the SRA’s predecessor, for all its failings, delivered deals which were clearly set-out business propositions and did so amazingly quickly. The SRA’s dealings have been anything but clear or fast. Announcing £1.7bn of investment is meaningless without knowing who is actually paying for the deal. It’s like those trite Ministry of Defence announcements about thousands of jobs being created on some mad weaponry, when it is all being done with taxpayers’ money.

We need to see more transparency from the SRA about this process. If the investment from train operators is merely in return for extra lumps of subsidy, what is the advantage of locking them into 20-year deals? Taxpayers and passengers have the right to know precisely what they are getting for their money, especially if companies like Stagecoach lose £1.8bn between announcing their plans and winning the bidding process. Taxpayers need to be reassured that the mantra of investment from TOCs delivers cost-effective benefits. Otherwise, the SRA should go back to the drawing board.

No story from the Tories

Four years ago, in the run-up to the 1997 election, virtually every column I wrote was full of analysis about Labour’s plans and policies for the rail industry. This time, I have been silent about Tory thinking on the railways and I have even been rebuked for this omission by a reader who suggested that it was a result of political bias.

Not so, guv, honest. There are two reasons. First, and most important, we are more likely to see the ‘Hogwarts Express’ becoming a regular service out of King’s Cross than we have of waking up on June 8 to William Hague taking up residence in Downing Street (unless he gets a job as Tony Blair’s butler).

Secondly, policies, what policies? Having privatised the railways, and seen them disintegrate as a result of their changes, the Tories don’t quite know whether to repudiate their past or embrace it.

In a surprisingly frank mea culpa, Tim Collins, the party’s Vice-Chairman, admitted on Any Questions in April that the Tories had made mistakes. He said: “The Conservative Party recognises… we didn’t get the rail privatisation right… The Conservative Party accepts that the Government is right to create a Strategic Rail Authority, that we should have created something like that when we were in office and we didn’t; we accept the Government’s plans for increased investment in the service.”

But wait a minute. Haven’t we heard the Tories argue that the SRA is an unnecessary encumbrance and an attempt to recreate BR? We have. Bernard Jenkin tells me that while there are no plans to abolish the SRA, it is “too bureaucratic and has too much power to intervene”.

Tim Collins also said that the track/services split had been forced on the Tories, who had wanted to pursue the John Major idea of recreating the inter-war Big Four, by a directive from the European Union. This is a rewriting of history that cannot pass unchallenged. The Brussels directive (91/440) only required an administrative split so that costs could be identified between the infrastructure provider and the service operator. There was no requirement for the fundamental split between the two, the key mistake of rail privatisation. Jenkin argues that the track/train split is ‘the right concept’, a platform on which he is likely to find himself very much alone.

To be fair, Mr Jenkin did produce a paper* on the railways earlier this year. It even has a few good ideas: creating a Rail Accident Investigation Branch (a suggestion which is very likely to emerge from the Cullen inquiry into Ladbroke Grove); creating a new National Rail Regulator, taking on both the main functions of the Railway Inspectorate and the Rail Regulator; and introducing rail-specific safety legislation, rather than relying on the Health and Safety at Work Act 1974. However, apart from suggesting a ‘simplified structure’ for the industry, a ‘lighter’ regulatory touch and the tediously predictable ‘allow competition to flourish’ (which contradicts the notion of simplifying the industry), the paper makes no attempt to address the fundamental weaknesses of the railway exposed by the Hatfield disaster and its aftermath.

So I’m afraid that’s all the coverage the Tories are going to get in this column during the runup to the general election.

* Believing in Britain’s Railways, Conservative Research Department

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