Virgin lives to fight another day

When FirstGroup was announced as the winner of the West Coast franchise in mid August, this looked like the end of Virgin’s 15 year tenure in the railways. The company had arrived with the usual fanfare featuring Richard Branson, dry ice and attractive women but now seemed to be heading for a sad exit, leaving behind an innovative set of trains, the Pendolinos, and a record best described as good in parts.

Branson, however, had other ideas. He showed just what a tough customer he is, belying his vaguely hippyish image, by threatening to take the Department for Transport to court over Virgin Trains losing its remaining franchise after the loss of its CrossCountry contract five years ago. The decision by the government, fearing it would lost the court case, to relaunch the bidding process, which was announced oddly at midnight on Tuesday night, has triggered the biggest crisis in the rail industry since the series of accidents in the aftermath of privatisation.

The collapse of the deal raises fundamental questions about the future of the railways. In the short term, the government may allow Virgin to continue running the trains until December 9 when the contract runs out. However, the frosty relationship between Branson’s company and the Department officials resulting from Virgin playing hardball in the renegotiation of its contract following the collapse of Railtrack in 2001 makes it unlikely that Virgin will be allowed to stay on after that. In an effort to improve relations, Branson, in fact, had offered to run the service ‘for free’ if the government decided to re-examine the FirstGroup deal but the precise meaning of this is unclear since the franchise is actually profitable and no longer in need of government subsidy.

Instead, the government may decide to bring in its in house operator, Directly Operated Railways, which is currently already running the East Coast services where it has a reasonable reputation. This interim period will be lengthy since a new contract cannot be let until 2014 at the earliest given the complexity of the process, which must be restarted from scratch.

However, the result of this debacle will extend far beyond the West Coast line and has sent a shudder through the whole industry. In the short term, the whole franchising process, with several deals already well underway such as Great Western and the massive Thameslink franchise is being put in abeyance. That could proved damaging to passengers. New franchise deals often contain proposals for new trains or other types of investment, something the government has encouraged, and now such improvements will be further down the line.

There are to be no less than two independent examinations of franchising. One is a ‘quick and dirty’ investigation into the precise failings in the West Coast bid due to be completed this month and the other a wider examination of the way that the franchise process is carried out. The franchising process cannot be restarted until these enquiries are completed. If, however, they result in changes to the way that bids are assessed, it may well be that the bidding processes on other franchises will have to be restarted, leading to massive extra costs in addition to the £40m already wasted on reimbursing the four bidders in the West Coast competition.

However, both these investigations are rather narrowly focussed on the process rather than on the overall structure of the industry and there are bound to be questions over whether franchising itself is an appropriate way of running the railways and on the ability of the Department of Transport to oversee the railways. Franchising was originally conceived as a way of encouraging competition and innovation on the railways. It was realised that it was difficult to offer customers a direct choice between different brands of trains, so instead franchise competitions were held in order to attract the best bidder.

It has not worked out like that. The government has retained strict control over the process, not least because it is still spending around £3.5bn of taxpayers’ money on the railways. Moreover, the private companies have not brought in as much innovation as expected. The Pendolino trains are somewhat an exception in this regard and many franchises have been run in a way little different from the days of British Rail. Therefore, there have been increasing questions over the usefulness of the franchise concept and this debacle is bound to intensify this debate.

The other effect may well be the creation of a British Rail type body to oversee the railways. One odd result of Labour’s reorganisation of the railways in 2006 was that the abolition of the Strategic Rail Authority meant that civil servants in the Department control many day to day aspects of the railway and, as we have seen, assess the bids for franchises. The railways needs an arms-length organisation, like British Rail was, staffed by experienced railway managers to oversee the industry and not civil servants who may have come from Health or Education and depart for Defence or Culture Media and Sports.

Finally, there may, too be a knock on effect on passengers. Railways are a long term business and its managers like certainty in order to be confident of investing and improving services. The uncertainty engendered by the delay in the franchise process, together with the doubts about the competence of the Department, may lead to a drop in standards of customer care and routine maintenance. Safety will remain uncompromised, but journeys may be less pleasant in carriages that are not cleaned as often and with staff who are less concerned about passenger comfort. That makes it imperative for the government to learn from this scandalous lapse in basic administrative standards and to remedy the situation as quickly as possible.


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