Virgin row with FirstGroup highlights franchise process inadequacies

THE wails from Sir Richard Branson

over his company’s loss of the West

Coast franchise have highlighted the

fickle nature of the privatised rail

network and have led to renewed calls

for the structure to be re-examined,

including calls for the entire industry

to be re-nationalised.

Should this happen? The

chairwoman of the Commons Public

Accounts Committee, Margaret

Hodge, has already expressed

concern about whether the system

is delivering value for money and,

with Branson having rapidly garnered

100,000 signatures in pursuit of a

rethink. This is a row that seems set to

continue when Parliament resumes

next week.

On the face of it, Branson has a

case. Rail travel on the West Coast

Main Line, which links London with

Birmingham, Manchester, Liverpool

and Glasgow, has greatly improved

since Virgin took over services 15

years ago and the numbers travelling

have more than doubled. Indeed,

passenger growth has been much

greater than on the East Coast thanks

to the increase in the frequency of

trains and the £9bn investment spent

on upgrading the track.

However, Branson’s case begins to

look thinner under closer examination

and, in particular, if the way that the

franchise system operates is taken

into consideration.

When the franchise was first put out

to tender in 1996 as part of the radical

privatisation of the railways brought

in by John Major’s government, the

bidders all had to include plans for

new trains since those on the existing

rolling stock had become life-expired.

Therefore, whoever won would

have had to lease new trains and

Branson’s implication that it was

simply his entrepreneurial spirit

which transformed services on the

line does not hold water. Nor do

Virgin’s claims that the company

has invested hundreds of millions of

pounds in improving the service.

In fact the trains are leased from the

rolling stock company which bought

them – with the help of various tax

breaks – and will simply be passed

on to the new franchisee, FirstGroup,

when it starts operating the services in


The only difference, of course, will

be that the Virgin Red will soon be

obliterated by First’s dark blue livery.

This begs a wider question. What is

the purpose of the kind of upheaval

caused by this franchise merry-goround?

The failings of the franchise system

have already been exposed on the

East Coast route when first Sea

Containers (GNER) and then

National Express threw the towel in

after having bid far too optimistically

for the contract.

And that’s where the problem lies.

The franchise system is seen as a

way of reducing the cost of the

railway to the Government and

therefore there is a great temptation

for Ministers to accept bids which

are unrealistic and ultimately


This has been made worse with

the change to longer franchises,

stretching up to 15 years. No-one can

possibly know what demand for rail

services will be in two or three years

time, let alone 15, given that it will

depend on so many factors ranging

from the state of the economy and the

buoyancy of the jobs market to

oil prices and the effect of broadband

on travel patterns.

It is a guessing game and FirstGroup

has guessed big. The company has

taken a remarkably optimistic view of

the future, with a bid that will require

growth of more than 10 per cent

annually throughout the whole life of

the franchise.

Other bidders, notably Virgin,

refused to make such heroic

assumptions and therefore lost out.

Given the history of the East

Coast franchise, this suggests that

the whole process has turned into

a sophisticated game of roulette

where losers have the option of

leaving the table before their losses

mount up. Therefore, while on paper

the Government’s acceptance of

FirstGroup’s bid looks like a canny

move, in practice Ministers – or more

likely their successors – may well end

up with egg on their faces.

So why go through all this pain in a

vain attempt to save money? It’s time

to stop pretending that the railways

are ever capable of being a genuine

private industry. The railways may

be notionally privatised but in effect

they are a socially-necessary industry

highly dependent on government


Last year, the railways received just

under £4bn in taxpayers’ money,

despite the massive growth in

passengers during the past decade.

Although this has been reduced from

a peak of £6bn five years ago, this still

represents far more than British Rail

ever received from the Government.

The truth is that the railways will

never be free of the involvement of the

state. Indeed, all the major decisions

on investment such as new trains,

refurbished lines, reopened stations

and High Speed Two remain in the

hands of politicians, not the private

companies who operate the services.

Network Rail, the infrastructure

company responsible for the track

and signalling, grew out of the

ashes of the failed private company

Railtrack which could not deliver on

its investment promises and suffered

a virtual breakdown following the

2000 Hatfield crash, which was caused

by a broken rail. Network Rail is,

therefore, effectively already staterun

as it no longer has shareholders

and most of its income comes from

taxpayers or borrowing backed by


This quasi-privatised system

imposes huge costs on the industry

because operations, in the hands of

private companies, are run separately

from the track and infrastructure

which they use.

Bringing them back together again

would save vast amounts in terms of

the cost of lawyers, consultants and


While no-one would want to see

Ministers take over the running of

services directly, the re-creation of

an overall state-owned railway body,

like the old British Rail, is the logical

step given the failings of the franchise


It would get rid of the pretend

capitalism that has dogged this

heavily subsidised and socially vital

industry for the past 15 years and

result in a cheaper and more efficient

system. And, most importantly of all,

passengers might benefit too

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