Rail 820: Franchising is the problem, not the solution

In this post-truth age, there are not just the alternative facts put out by the White House. There are also the bits of conventional wisdom that are seen as so obvious and axiomatic that no one would wish to challenge them.

That, in short, is the problem with the Commons Transport Committee Report on franchising which has just been published. In a way, as a long time critic of the whole franchising process I should be rejoicing. Here is a report from a cross party bunch of MPs that considers the franchising to be dysfunctional and not delivering on its key objectives. It is pretty hard hitting stuff that for a time on the Sunday it came out – they have good PR on the committee and know to release stuff on a slow news day – it was leading the BBC news.

But it did not deserve to. The report showed exactly why a bunch of amateurs sitting on a committee in Westminster from all sides of the political spectrum find it difficult to deliver an intellectually coherent argument on a very complex matter. And the report goes wrong right at the beginning when it argues that ‘franchising delivers the most benefits to passengers where there is robust competition between bidders to operate services’. Once that emphasis on competition is accepted as gospel, then all the subsequent conclusions which follow on from it are inevitably flawed.

The notion that competition drives everything that is good in business is the bedrock on which modern capitalism, or neoliberalism to give the name of the credo that drives it, rests. Competition is the guiding principle for all economic activity, irrespective of the evidence or of the costs of trying to develop a competitive framework in a natural monopoly like the railways. Privatisation, outsourcing, fragmentation, and marketisation are its handmaidens. Nothing is of value that can’t be counted, no monopoly business can ever deliver good services, everything must be market tested – this is the constant refrain.

So the aspect of franchising that most worried the MPs was the fact that franchising was not stimulating competition. They were told that there were not enough bidders for contracts and that many deals are being awarded directly by the Department because it does not have the ability or the capacity to let bids through the normal competitive process.

As a result, they concluded ‘The current structure of franchises limits the ability of the private operator to deliver on the core policy objective of driving efficiencies and delivering benefits for passengers. Specifically, the general size of current franchises does not provide a clear enough market focus for the operator; and the relatively short length of franchises reduces the incentive of operators to both invest and drive down costs’.

Of course, competition can at times deliver improvements and make competitors respond to the needs of their customers. But franchising is a far more complex process than trying to choose between Pepsi Cola and Coca Cola, or Hertz and Avis. Franchising went wrong over the West Coast fiasco in 2012 precisely because the whole process had become too competitive and companies started putting in unrealistic bids. Now the MPs are blaming the report produced after the fiasco which led to far greater scrutiny of bids and a more cautious approach from the Department.

Because the report is constrained by the assumption over competition, all its recommendations are flawed and, indeed, have all been tried before. More franchises: there were 25 originally but it was considered more sensible to have fewer in order to enable the coordination of all services from particular London stations. Moreover, with the growing complexity of the bidding process, having small franchises that would offer low levels of profit would not attract sufficient interest.

Longer franchises: This has been mentioned as a potential solution to problems with franchising ever since the process began in 1996 and it will not work for the simple reason that it is impossible to assess risk over such a term of say 15 or 20 years. That was one of the reasons the West Coast franchise process collapsed in 2012 as FirstGroup had taken a punt that proved to be unrealistic. Chaps and Chappesses, there is a good reason why franchises have remained short term and it is hopeless to try to go against the grain.  Open Access: Groan. Equally, there is a good reason why Open Access has never taken off over the past 20 years. Remember why they were constrained in the first place; they are simply incompatible with the franchise system. If an open access operator is able to cherry pick the busiest services and routes, leaving the dregs to the franchisees, then franchise bids will be more expensive, costing the taxpayer more money. Frankly the amount of energy and cost devoted to trying stimulate competition through open access is simply not worth the candle.

The MPs also complain that the franchising process does not transfer sufficient risk to the private sector which was, they say, ‘a central premise of rail franchising’.  They say that several witnesses told the inquiry that by letting the mega Thameslink Southern Great Northern (what a daft name for a contract which, given its inclusion of two compass points, clearly has no sense of direction!) as a management contract rather than as a conventional franchise, the opportunity to pass risk onto the private sector was lost. This is completely daft and should not have been mentioned in the report. The private sector, rightly as it is in the business of making money, would never have taken on all the unpredictable risks of the franchise given the major works being carried out at London Bridge and elsewhere. A franchise arrangement for TSGN was, therefore, impractical and no company would have taken it on – the losses that occurred have been the direct result of the way the contract was written. The MPs fail to understand – and over the years I have to explain this many times – that any attempt to pass on risk to the private sector is costly. Private companies do not take on risk for free.

I am no fan of the franchise system but actually it is precisely because the public sector is getting a better deal and that the Department, through the efforts of Peter Wilkinson, the franchising director who has been trying to ensure that the contracts deliver improvements for passengers.

Rather than suggesting impractical ways of improving franchising, the MPs missed a chance here. They should have started with the Wolmar question of ‘What is franchising for?’ and considered whether there are different and possibly better ways of running a railway. Chris Grayling, the transport secretary, would have liked that since he would like to see a different structure but is constrained by lack of Parliamentary time to push through major changes. Instead, we have been left with a report full of the same old recommendations which are either impractical or inappropriate.



HS3 should be the priority


The shadow Chancellor, John McDonnell was spot on when, in a speech recently, he was very clear about where rail investment was lagging behind. He has committed Labour to spending serious money on the nebulous HS3 project for railway improvements in the North originally promoted by the after dinner speaker extraordinaire George Osborne. There is no doubt that the biggest single stimulant for the Northern Powerhouse would be the creation of a Network SouthEast type railway system in the North. Imagine if all the major cities were connected by modern electric trains running on reliable fast tracks with much enhanced capacity and frequency. It really would become a powerhouse.

Every time I travel on local trains in the North I am struck by the contrast to London and the South East. It is almost as if our political masters are deliberately telling local people that their need are insignificant compared to the very important commuters and residents of the richer parts of the country. Completely modernising the network is about much more than simply providing an enhanced rail service. It is about telling people across the country that the North matters and is genuinely seen as a Northern Powerhouse.

It is so much more important than HS2 which is a conduit to shovel yet more people and resources to the rich South East. If only more local politicians in the North realised this. Some undoubtedly do as they have said it to me privately, but dare not raise their voices against the accepted hegemony. It is time they did. HS3 is the future for Northern Britain, not HS2.


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