Rail 622: National Express on fast track to oblivion

When Douglas Alexander was transport secretary and Sea Containers abandoned its GNER contract, he told me that the occasional failure of a franchise showed that the system was working well. It was a sign that the government had got it right as bidders took risks in order to win franchises and sometimes got it wrong.
I could not disagree more. The rail industry is based on long term investment, huge fixed assets and a largely constant customer base that requires stability and continuity. It is not a business for fly by night operators trying to make a few bucks in the short term, irrespective of the long term consequences. The last thing passengers want or need is to have different operators frequently chopping and changing their customer offers, rebranding their trains and messing about with their fares structures. Yet, when it is relet next year, the East Coast will have seen four different sets of managers within five years, hardly a recipe for an efficient service.
And that’s why the very fundamentals of the franchising system are wrong because they are incompatible with long term thinking. The collapse of the National Express East Coast franchise demonstrates this in spades. National Express was forced to bow to pressure from its shareholders and give up on the franchise, saving the company money in the short term but wreaking irreparable risk on its reputation and leading to a breakdown in relations with the Department for Transport.
Make no mistake, though, if his intention was to save the franchising system, Lord Adonis did the right thing, despite the criticism he has received from many business commentators. To answer his critics, just consider the alternatives. If he had acquiesced to the pressure from Richard Bowker the now departed chief executive of National Express and agreed a renegotiated deal, then he would have had no case either practically or, indeed, in law, to have held firm on other contracts. As he said, Moir Lockhead, Brian Souter and Keith Ludeman would all have been knocking on his door asking to cut a deal.
I suspect that had Bowker been more adept at negotiation, National Express would not have got into this mess. Bowker seems never to have understood the subtleties of dealing with government departments. Indeed, soon after he got the job of heading the Strategic Rail Authority, he allowed the Treasury to impose wide-ranging cuts and I wrote at the time that he should not have acquiesced to them because he was in a strong position to stand firm. While he did score undoubted successes at the SRA by sorting out the West Coast Main Line and power upgrade fiascos, the very fact that the organisation was abolished under him when, in fact, there remained a desperate need for an independent railways agency suggests he never quite learnt how to handle the civil servants, a perception confirmed by this latest debacle.
Transport department sources suggest that he tried to play hardball, intimating to ministers that if National Express were allowed to fail, then the whole house of cards would collapse. When Adonis did not cave in, he seems to have thrown the towel in all too readily, storming off to a new job in the United Arab Emirates, the modern equivalent of a failed diplomat being despatched to the consulate’s office in Peru.
There is, though, another side to the story. National Express bosses suggest privately that the civil servants were chopping and changing their demands, and seemed to have agreed a deal which then was taken off the table at the eleventh hour. This sounds somewhat familiar. Negotiating with civil servants can be very difficult because the people who are doing the talking are not necessarily those who have the authority to conclude the deal as ministers have the ultimate say. There may well have been suggestions from the civil servants that went beyond what ministers were prepared to accept but that does not mean National Express was betrayed by scheming politicians.
Adonis is a man who is a fan of the private sector but canny enough to be aware of its limitations. My take on this is that Bowker was trying it on and lost out because he pushed too hard. Since he must have felt that if the government knew that the company’s loss would be limited to £72m, he could toss in a few extra million because that was worth it in order to protect the company’s reputation but it was not enough to satisfy Adonis. It was a very high stakes game of poker and clearly he came off worst.
There are, though, no winners from this episode which is why Douglas Alexander’s trite comment is so misguided. National Express clearly has no future in the rail industry and will go the way of Connex, Prism, MTL and Sea Containers. Even though I suspect that Adonis will not be able to foreclose on the other two franchises, the fact that the company so readily handed back the keys on a deal will reduce its chances of winning any further contracts. It will have made itself many enemies within the Department who will not forget about this incident and while the European procurement regulations preclude the company from being openly barred from bidding, there will always be technicalities that can be found to make life difficult for bidders who are out of favour.
National Express’s new boss is confident that the cross default aspects of the contract cannot be applied because technically the East Coast franchise is in the hands of a Special Purpose Vehicle, a subsidiary created specifically to run it. Such legal technicalities may appear clever and elegant but they do not cover the practicalities of the situation. Carrying on a vendetta with the government department that feeds you is not a long term strategy designed to safeguard shareholders’ long term interests. As an aside, Stagecoach too, has recently decided on a much more bullish approach to its relationship with the Department suggesting a real air of desperation amongst operators that will do nothing to build up the trust between government and the private sector that is essential for a successful relationship
As for the government, the franchise system is in the last chance saloon and there is the prospect of a major financial crisis in the rail industry. Already, Adonis has delayed the reletting of the East Coast franchise until September 2010 because he wants improvements to the terms of the contract (even though he knows full well that he will no longer be in post by then!). But those improvements, such as better cycle and car parking, improved catering and more facilities at stations will come at a price because anything specified by the Department has a cost attached. Adonis knows this and he also realises that there is no hope of a deal that will bring in anything like £1.4bn over the course of the contract as had been promised with National Express. Moreover, there will be genuine fears from bidders that the East Coast contract is a poisoned chalice, given that two operators have failed within three years.
While killing off one franchise, Adonis has, at least for the time being, saved the franchising system but it is only hanging in there by a thread. If the recession is prolonged and another company decides that its shareholders are best served by throwing in the towel rather than making continued losses, then the whole system will have to be rethought.
There are several options. What is called the GDP risk – the variation in passenger numbers attributable to the overall state of the economy – could be taken out of the equation by relating premium and subsidy payments to economic growth. Or, the government could go even further and take out the whole passenger revenue risk, simply letting management contracts to the private companies in the same way that Transport for London does with the London Overground. Even more radically, the Department could simply run franchises directly, through a new railways agency, which would effectively be renationalisation, an option that has consistently been ruled out by Labour ministers but which may become inevitable should the market for bidders collapse as happened with the Post Office.
The collapse of the franchise, together with the continuing effects of the recession, pose the ultimate test of whether the promises made at privatisation can be borne out. The one aspect of the privatisation which could make the whole upheaval and financial cost at least partly worthwhile – even the most wholehearted supporter of privatisation could never characterise the events of the past fifteen years as unequivocally successful – is the ability of the rail industry to avoid the effects of the boom bust economy. As we all know, rail investment requires a long term steady approach and the whole complex and expensive arrangement of privatisation with Network Rail control periods, the SoFA (Statement of funds available), the HLOS (High Level Output Specification), the Office of Rail Regulation and so on was designed to shield rail investment from the vagaries of the economy. This is the system’s biggest test. If the major projects start to be delayed or fall by the wayside, we will know that privatisation has failed its most important test.

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