Rail 663: franchise consultation offers no answers

The word ‘consultation’ fills me with dread. Governments have a legal duty to ‘consult’ or otherwise they face a judicial review, but for the most part the whole process is a sham. People and organisations are asked for their views, which are promptly ignored. Ideological governments like the current one are particularly prone to ignore the responses to their ideas and proceed anyway. Remember the Poll Tax!

This is certainly the case with the current plans to reform franchising. The core idea of the whole reform process was to create longer franchises and to reduce the amount of interference in the operation of the railways from government. The trouble is those damn consultees have minds of their own.

Theresa Villiers, the rail minister, who was pushing for these reforms when she was in opposition, has just released the government’s response to the consultation process and the result is a document more full of contradictions than a banker’s justification for higher bonuses. So, the paper says that the idea of longer franchises was welcomed by the train operators who as Mandy Rice Davies might put it, ‘would say that, wouldn’t they’. Interestingly, though, while the government suggests the reason for longer franchises is to enable the train companies to invest, that seemed to be the least important argument for the train operators, who instead suggested it would allow them to ‘develop better relationships with their customers and suppliers, and work more innovatively’. They did not mention, of course, the main reason which is that they would have more opportunity to make profits without the considerable expense of going through the bidding process every few years. (I have no problem with the train operators wanting to make money, but I just want them to be honest about it, rather than pretending that they are in the business for the benefit of passengers – or indeed taxpayers.)

One train operator, however, was the honest exception standing out like the cad in every Bateman cartoon, admitting that ‘longer franchises would not by themselves encourage investment in many of the quality and facility improvements that passengers would like, but which did not earn additional revenue. Such improvements would continue to require state funding’. Indeed. Other operators I have talked to concede privately that the investment argument is less than compelling– they would only refer to investment that would require more than, say, 7 years but less than 15 years to earn a return.

Later in the consultation document, the government suggests that some of the investments will have to be effectively guaranteed by the government which will cover their residual value at the end of the franchise. This demonstrates that it is impossible to get away from the fundamental fact that commercial organisations will only invest if they can get a return, and otherwise the money has to come from the state.

In fact, ‘the majority’ of other consultees such as local authorities and user groups – in other words, us the passengers – were distinctly less keen on the idea of longer franchises suggesting that the present arrangements offered more competition and potentially better returns for the government.

So what does the consultation paper conclude from all this? Well, not surprisingly, that ‘significant benefits’ will derive from longer franchises, even though it admits later that many investments will still have to come from the taxpayer. Surely, only Winnie the Pooh would believe that this consultation exercise was anything but a shameless sham on the issue of franchise length.

On the issue of reducing interference from government, the consultation paper ends up with the sort of contortions that would have made Houdini struggle. Take the issue of service levels. Ministers have suggested they want to give the operators greater freedom to decide on which services should be provided. But as we all know, if profit were the only motive, a lot of marginal train services would disappear. First trains would be later, last trains earlier and on branch lines, there would be a seasonal service at best. There would undoubtedly be a furore if operators were given anything like total freedom and the consultation paper recognises that: ‘We would expect to specify first and last trains, by day of week and specify an off-peak level of service, although the level will vary by route. On a commuter franchise, this level of service specification will be supplemented by a requirement for the operator to satisfy a crowding metric’. Moreover, the government may even require franchisees to provide new non-commercial services. Not much flexibility there, then.

Or take the issue of service quality. The paper recognises that ‘in a lightly specified contract it will be especially important to protect those elements that do not provide a commercial return for the operator, but which passengers value’. Well yes, but then it won’t be ‘lightly specified’, will it. For intercity operators, the government thinks that the incentive of generating extra revenue will ensure that operators provide a good quality service – euh, have the authors ever travelled on a Great Western train where the high seat backs restrict one’s view and the lighting would be something that the Stasi would have been proud of when applying sleep prevention torture techniques – but even then the paper suggests that the operators cannot be entirely trusted: ‘We may ask bidders to commit to quality improvements which are within their control, such as the onboard environment; station environment; customer service and information’. These lightly framed contracts are getting heavier by the minute!

For commuting and regional operators, there is the suggestion that there might be a need for ‘contractually binding service quality benchmarks and targets within new regional and commuter contracts’. Some contracts just got very heavy indeed.

In truth, the franchise document fails to resolve any of the fundamental conundrums around franchising’. The most obvious is the issue of franchise length combined with quality. If a franchise is granted for 15 years, and the contract is ‘lighter’ in order to avoid micromanagement, then what happens if the operator starts going rogue, as has happened, or simply gets into financial difficulties, and provides a lousy service? If there are break points built in, as happened with the failed London Underground Public Private Partnership, the obvious solution, then how would differ from today’s situation of short franchises?

Then there’s the issue of revenue risk, only superficially covered in the Consultation Paper. If an operator took the full risk for 15 years, there is no doubt that the contract would have to include a substantial payment for taking that risk. At the moment, this is covered by the cap and collar arrangements which are universally recognised to have perverse results – in particular, there is no incentive for an operator in special measures to boost revenue, as most of it goes to the government, but on the other hand cutting costs goes straight into the operator’s coffers. So the issue of risk is another irresolvable conundrum.

Theresa Villiers, in opposition, set out with an ambitious plan to change the franchise arrangements but she has come up against all the insuperable issues. Hence the Consultation Paper is full on ‘on the one hand, but on the other’ arguments that remained unresolved. And, to be fair, cannot be solved. And nowhere does the Paper begin to answer my oft repeated question of ‘what is franchising for?’.

Rejoice at record numbers

Like everyone else I am delighted that more people are using the railways than since before the Second World War. However, while not wishing to be churlish, the record levels which the Association of Train Operating Companies proudly boasted about – they always seem to use a different year and this time its 1928 – are not quite as impressive when scrutinised carefully.

First, the biggest year on year growth was in the London area where figures have been hugely boosted by the adoption of the Oyster Pay As You Go system for the train operators, something that they resisted for years. This has clearly been a great stimulus for train travel in the capital. Secondly, although the ATOC press release mentions cheap advance fares, a crucial point is that overall rail fares went up below the inflation rate in 2010 thanks to the low inflation – or actually deflation – in July 2009 which was the base for the fares rises. Again, at the time ATOC whinged about having to put up fares so little, by just 1 per cent, and lobbied the government unsuccessfully to be allowed a higher increase.

Thirdly, several major operators – notably First Great Western and First Capital Connect – are in the cap and collar zone, which means that actually their predicted rate of growth when they won the franchises has not been achieved. For this they bear little responsibility since passenger numbers are so dependent on national income and external factors such as the price of fuel, but equally they can hardly boast that they have managed to attract record numbers onto the railways.

All this is not to deny the fact that the railways are a successful industry which deserves – and is currently getting – government support. But as we know, dangers lurk around the corner in the shape of the McNulty report and fares rises.  Mystic Wolmar now will put on his gloomiest face and predict that numbers will have peaked in 2010, and will fall slightly this year as the austerity measures strike and a double dip recession looms. I desperately hope that Mystic is the class dunce again.

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