Franchising is dead. Long live franchising! That seems to be the message from the unexpected announcement of the new deal on the West Coast which came days after the abandonment of the franchise process for Southeastern.
This one of those times where writing a column like this is just sheer pleasure. Trying to find out from my various sources what an earth is going on in the Department for Transport is rather like trying to make sense of the long lost language of Etruscan. Despite being away in Italy, my phone and inbox have been red hot and therefore it is possible to discern some patterns in the Department’s policymaking process but signs of an overall strategy are as distant as that recently discovered dark star.
So first, why did ministers, for it is they who make the final decisions, ditch the Southeastern franchise? Well, my best information is that it was going to go to the incumbent, Govia, and, to put it mildly, the new big cheese in the Department, Grant Shapps, does not have a particular liking for the company given the deterioration in service from his constituency of Welwyn Hatfield after last year’s May timetable chaos. Now I am sure there are lots of other sensible reasons why the process was ditched but politically – and folks, note that absolutely everything is politically motivated at this historic moment of crisis in our governance – giving a vote of confidence in Britain’s most loathed train operator would not have looked good. Oddly of course, that makes a renewed direct award inevitable but again, politically, that will not look as bad as giving Govia a whole new deal.
OK, so onto West Coast. There are two obvious questions. Why make the announcement now and why launch a complicated franchise just as other contracts are in deep trouble and the whole process is being questioned? For the first one, it is politics again. The deal has actually been ready to go for some time, and it has been confirmed to me that actually the Department was ready to go with it in May. However, the prospect of Chris Grayling being allowed to announce anything apart from the raffle winners at the Ewell Garden Fete sent shivers down the spines of what was left of Theresa May’s government and with a new PM heading for Number 10, postponement was inevitable. Then someone in charge of the ‘grid’, which is the schedule for announcements that is worked out in order to maximise their impact, thought up the clever wheeze of launching a new franchise on the same day as the publication of the July Retail Price Index on which the January fares rises will be based. The scheduling was clearly in homage to the hapless Jo Moore who was Stephen Byers’ adviser in the Department for Transport and is famous for having suggested 9/11 was a good day to bury bad news. Not quite as good as 3,000 people being killed by terrorists but not bad in these slightly calmer ties. And for Boris Johnson’s purposes, an excellent plan.
Johnson, as we must learn to call him as there is nothing ‘cuddly Boris’ about him (as it happens my father was called Boris so I have a particular reason not to use the name which in any case is the PM’s second name), wants to be seen as the all-action, all-singing new premier and this deal fitted the bill perfectly. It gave the impression that Johnson had interests other than Brexit, reassured the private sector that the railways would not be renationalised under his watch and even gave the impression that HS2 was safe in his hands. This last point is clever politics but just announcing the terms of a management contract that will start in seven years’ time at the earliest in no way ensures that HS2 will not be deferred or scrapped. In fact, Johnson’s appointee, Doug Oakervee, the former chairman of HS2 has been, according to one of my sources, ‘all over HS2 and seems very likely to recommend sharp cuts in its budget’.
The details of the West Coast contract are supposed to represent a novel way of dealing with the fundamental problem of franchising, which is distinguishing the exogenous from the endogenous. To those not versed in GordonBrownese, this means separating out exogenous factors – changes in fare revenue caused by external factors such as the state of the economy and employment levels in central London – from endogenous ones – such as investment in new trains, improved performance and good marketing. In recent times, in an effort to sort the exo from the endo, franchise contracts have been subject to cap and collar arrangements. This has meant that if revenue has fallen below certain levels – say 92 per cent of forecast – or above them – say 108 per cent of expectations – then the government would take most of the extra loss or profit. The problem with this arrangement was that if a franchise was in these ‘special measures’, then there was no incentive to increase revenue as it would simply mostly go to government.
This new, enhanced, version xx (we have all lost count) of the franchise contract is supposed to mitigate against that. Not only will there be a GDP deflator that will be taken into account in determining the premium payments, but also there will be a second calculation that will take into account a variety of factors to ensure that incentives to improve fare revenue or reduce costs will remain. The idea is that this will make matters simpler for bidders though critics of the process remain sceptical that the fundamental difficulties encountered by franchisees in recent years can be overcome by ever more clever formulae.
This is in effect franchising’s last gasp. There is a strong body of opinion within the Department that the concept can be kept alive and that the idea of turning all the contract into management contracts, whereby all the revenue risk – in other words any increases or reductions in the fare box – falls to government , will kill any incentive for franchisees to improve their performance and will result in the Treasury being responsible for all investment decisions. Yet, as the success of London Overground and several similar arrangements on the Continent show, it is quite possible to ensure that management contracts do result in good performance and big increases in passenger numbers.
Oddly, despite the antipathy towards the concept in the Department, the arrangement post the opening of HS2 in 2026 – or later as is widely expected – will be in the form of a management contract. This is inevitable given that no one has the foggiest idea how many people are likely to use HS2 when the new line to Birmingham first opens, or, indeed, how many will desert the West Coast for it.
Just space for yet one more point of interest is that granting the contract to the combination of FirstGroup and Trenitalia, on a 70/30 basis is a risk given the former’s travails, with a hostile large shareholder and a board that is sceptical of the profit making potential of the British railways market. It was, though, something of a Hobson’s choice since the alternative was a consortium led by Hong Kong based MTR in partnership with a Chinese railway company. To put it mildly, it was hardly a propitious time to grant that consortium such a contract at a time when relations with China over Hong Kong are, euh, difficult. Politics again.
Now for the laugh out loud (LOL) moment. Remarkably, the announcement of the deal included a reassurance that the concept behind the franchise was in accord with thinking that is emerging from the review into the industry by Keith Williams. When I asked a senior figure in the industry how this could be when no one yet knows what Williams is going to come up with, the response was a prolonged bout of laughter. In a world dominated by political expediency and short term thinking, there is no point trying to make sense of what is happening, which, of course, is equally true of Brexit. But that is a subject for another time and place.
A tale of two branches
I spent a few days holiday in a cottage in Wales near Pensarn which was only reachable by crossing the railway on a farm crossing, which was very exciting for the grandchildren who were with us. We had travelled there on the train from Birmingham International which terminates in Pwllheli, a service which must get the prize for being the most confusing in the UK. First, at Birmingham New Street, where we boarded,, there was no mention of Pwllheli, perhaps because the announcer cannot pronounce it, but instead it implied that the service only went as far as Machynlleth. Then, once there a mix of a human and automatic voices made a service of confusing announcements, warning about request stops which then did not show up on the in-train screens. So for much of the journey, the next stop was shown as Harlech, when in fact there were half a dozen intermediate stops. Since this service is heavily used by lots of holidaymakers probably unaccustomed to rail travel, this not only gives a confusing series of messages but may also deter them from ever using a train again. One for the new franchisee to sort out soonest.
However, at least the two hourly service ran, kind of, on time and according to the schedule. That is not the case with the line in Italy nearest to where I am staying. This is the Ferrovie Centrale Umbra, a lovely little line that runs nearly a hundred miles through the heart of Umbria. Or at least it did, until a series of mishaps, poor maintenance and a complete lack of focus on customers means that there is now a truncated service along part of the line, operated by heavily graffitied one carriage trains restricted to 50kph rather than the 90 kph it used to enjoy because of poor maintenance. Worse, the line was re-electrified a few years ago and new electric trains bought but these were only briefly used and have not been mothballed – or rather left to rot at Umbertide station – because they are too expensive to repair. It is a tale of corruption and neglect that puts the travails of the Cambrian Coast Line, which itself is desperately in need of investment and upgrading, in perspective.