Rail 737: Franchising hold up leads to investment paralysis

It’s all gone quiet on the franchise front. Gradually the various franchise extensions are being let, invariably to the present holders. So we have had Govia’s SouthEastern contract extended for six months, with then a further temporary franchise to be let, First getting another 23 months on Great Western and so on.

All in all a dozen franchises will get an extension or what is called a direct award. All these will go to the incumbent except in the unlikely event that the negotiation breaks down and Directly Operated Railways, the Department’s in-house operator, will pick up the deal. All this is, of course, the result of the franchise fiasco prompted by the collapse of the West Coast deal for FirstGroup in the summer of 2012 and the subsequent report by Richard Brown which suggested a very slow programme of franchise letting.

There is a strong element of scandal around this and one in which the government is getting off lightly. The train operators essentially have the Department over a barrel. Given ministers’ undue haste in letting the East Coast franchise to get it out of the hands of the very successful but ideologically unsound current arrangements. State ownership is a no-no whatever the evidence suggests. The train operators cannot be blamed for trying to seek to maximise their profits given this opportunity. They are just like the scorpion in the fable about the frog who gives him a lift across the water but is then bitten because, as the drowning scorpion explains, ‘I am a scorpion’.

The media, with the exception of Private Eye and the odd piece in The Guardian or The Independent, is taking very little interest in a process that involves the letting of contracts worth billions of pounds without a proper process. That is not a criticism of the Department for Transport’s team led by the well-respected Pete Wilkinson which has been beefed up at considerable expense – those £500 per day contracts beloved of consultants – but rather of the ministerial mistakes that led to the fiasco. Philip Hammond, the Coalition’s first Transport Secretary, who made cuts that were far too deep in his own department’s franchising team without understanding the consequences must bear much of the responsibility but that’s OK as he is now in charge of our nation’s defence. Moreover, the present ministerial team must accept much of the blame because of the panic that led them to lose all confidence in their own department and consequently cobble together these temporary and unsettling arrangements.

I have always been critical of the opaque nature of the franchising arrangements. Although the Office of Rail Regulation has improved matters lately, there is still a lack of clarity about exactly what we, the taxpayers, are paying for. It is therefore hardly surprising that there is an element of suspicion about these deals. The most recent one is illustrative of the problem. The RMT union, which reckons that the train operators are about as welcome as Daleks to Dr Who, did not mince its words when the First Great Western deal was announced.

The headline figure is, indeed, quite shocking. For the 23 month extension, First will pay just £32.5m compared with £279 million in the last two years of the old deal. The RMT general secretary Bob Crow said, never one to hold back, said ‘The news that the rail franchising shambles is set to cost the taxpayer another quarter of billion pounds on the Great Western route will come as a bitter blow to staff and passengers contending with attacks on pay and conditions and eye-watering fare increases to travel on notoriously overcrowded trains. First Group are laughing all the way to the bank, not only did they dodge £800 million in premium payments by ducking out of the old contract early but they’ve now ended up with a rollover dropping into their laps worth a cool quarter of a billion pounds in further lost returns to the taxpayer.’

First did ‘duck out’ of the old contract but it was perfectly entitled to do so under the arrangement as it was an option which, not surprisingly given the large losses it was making, First did not take up. However, since First may well have won the initial contract on the basis of those promised payments for the extended period, Crow does have something of a point.

On the issue of the current contract, it is a bit more complicated than Crow suggests. I asked First to explain how come the payments have been reduced so dramatically and the company explained that there were various factors involved: ‘These include higher payments to Network Rail for track access charges, the expanded Reading station and the new traincare depot. We are also paying increased train maintenance costs for the existing InterCity 125 fleet, carrying out major overhaul works to prolong their lives. First Great Western’s part in supporting the £8billion investment in the route is also reflected in higher costs as we gear up to support the introduction of new trains and other service quality improvements.’  On pressing, the company said that ‘the big ticket items’ included in the arrangement include ‘circa £25m per annum for Reading charges and a total of circa £100m for track access charges, pension costs, charges for delays and IEP work. Stuart Butchers, First’s spokesman, also explained that the company was making around £30m per year losses on the franchise and therefore that has also been taken into account.

However, was unable to explain precisely what investment the company was paying for and said that ‘a full breakdown of costs is commercially sensitive. The costs were agreed after being justified, in detail, as part of an extensive DfT review and challenge process’. I certainly hope that is the case, but there is no way of knowing. Perhaps the brilliant team at the Department have negotiated us a fantastic deal. I somewhat doubt it. On the other hand, it may well be that we are being fleeced as Crow suggests. I have never understood this commercial sensitivity rule and certainly MPs ought to be doing a better job of trying to reverse this convention. What is most daft about all this secrecy is that First cannot even defend its position in public even if it is perfectly tenable. One for Margaret Hodge and her Public Accounts Committee. I hope she asks the Wolmar question: ‘what is franchising for?’

The FGW deal incidentally is only for 23 months – but even that is now not long enough for the Department to prepare a new franchise. So the expectation is that there will be another ‘single tender award’ for to cover the period between July 2015 and September 2016 when the permanent deal is to be let. I suspect that may be the Department may get its act together to obviate the need for such a short temporary franchise.

Remember, too, that this is a period of great uncertainty which is undoubtedly part of the reason for the reduction . The line is being electrified, the new IEP trains will be tested (though not introduced until 2017) preparations are being made for Crossrail and the modifications to Reading station will be bedded in. Yet some clever spark in the Department feels it is absolutely essential to pass on ‘revenue risk’ (i.e. an estimate of fares income) to the private sector even though it can only be, at best, an informed guess.

Certainly, the train companies are adept at painting the best gloss on these deals. Private Eye recently highlighted the contradiction between the message that Stagecoach presents to the wider public and what it says to City analysts which it is eager to butter up. In the Financial Times, Stagecoach chief Martin Griffiths, was quoted as saying that Britain can’t afford nationalised trains: ‘I think those people that hark back to the days of putting all of that risk back on to the UK taxpayer forget where we’ve come from and where we’ve got to. It’s nonsense about the operating margins that the operators make. On average they’re something like 2 or 3 percent.

However, as the article in Private Eye points out, it was rather a different story in Stagecoach’s annual report which boasted of a 4.2 percent operating margin which has ‘low cash injected, meaning excellent returns on capital’, a point I have often made. Most businesses relate profit to capital investment, not on revenue but train operators do not invest. Watch for FGW’s presentations to analysts about what a good deal it has got!



Resolving the double payment problem on advance tickets


I like the suggestion from a reader to resolve the thorny issue of people having to pay again when they are unable to take the booked return train. I disagree with my colleague Barry Doe that the punitive arrangement by which passengers are charged a full new fare – not even an off peak one – if they are spotted on the wrong train is required to prevent fraud. This could be easily resolved by allowing passengers right up to the time of the train’s departure to buy a different ticket with a small extra fee, such as £10, provided there is space on the train. Currently, as the reader pointed out, there is a real incentive to try to wing it, so the system is actually encouraging cheating, not discouraging it.

For those who get on the wrong train, the issue could be resolve with a slightly higher extra fee possibly bringing them up to the price of an off peak single but taking the cost of the amount paid into account. In these security conscious days, most people have some sort of ID and consequently

any ‘frequent flyers’ would be spotted.


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