Rail 957: How SouthEastern scandal exposed franchise failings

In writing this column every fortnight since 1995, I have always questioned the value of privatising an industry that is inherently in need of subsidy because it provides an essential public service. However, even an old Labour man like me recognises that at times there is a role for the private sector provided it is well controlled and regulated, and the limitations of its scope are recognised. I can understand, for example, why freight naturally sits better in the private sector but it is harder for anyone to justify schemes like the Public Private Partnership for the London Underground.

Similarly, while there may be a role for contracting out some services, I have never been a fan of franchising which depends on outsourcing revenue risk – in other words, the private sector collects the fares and its profit or loss depends on the number of passengers and the level of fares they pay.

Right from the start of franchising, there was the bizarre attempt of the management buy out team on the London, Tilbury & Southend to shift revenue from one station to another in order to maximise profits. Then there was the bizarre story of the West Coast franchise being won by FirstGroup as a result of figures being fiddled in the Department. Then there have been the numerous franchise failures which have been costly to both public and private purses.

In order to regulate the system, a vast bureaucracy has been built up, made even bigger by the huge subsidies that have been required to rescue the railways during the pandemic. As mentioned in the last issue, thanks to a question by Louise Haigh, Labour’s transport spokeswoman, we now know that there are 1,005 (well 1005.45 actually!) people working in the Railways Directorate. Now quite apart from that being an enormous number given that their contribution to making the trains run on time is presumably negligible, one would at least think that all this man(and woman)- marking would be effective. In other words, this huge bureaucratic machine is, presumably, ensuring that public money is well spent.

Well if the story of the SouthEastern debacle, as told by the report into it by the Department for Transport is anything to go by, it seems that somehow these 1,000 hardy souls missed a massive case of fraud right which took place right under their noses for nearly a decade. Let me start by saying that this scandal was such an overt and blatant to cheat money from taxpayers that it begs questions about the future role of the private sector in the railways. Even a sceptic like me about the role of the private sector would not have believed that this sort of thing would go on with clearly dishonest intent.

I could not use this language if it were not for the fact that it is all in the Department’s report and the facts are not disputed. The story is complex and inevitably I can only cover the bare bones but what makes it even more extraordinary is the enquiry has revealed  not one, but a series of related fiddles.

The report sets out a series of areas of transgressions, including failure to inform the Department for Transport of money that had been overpaid, attempting to recycle that money into the business without revealing its source and trying to dodge profit sharing agreements by transferring payments between accounts.  These details in themselves are fascinating but the conclusion is even more damning. Companies are supposed to follow ‘Good Faith Agreements’ whereby, according to all franchise agreements, ‘The Franchisee shall co-operate with the Secretary of State and act reasonably and in good faith in and about the performance of its obligations’.

In fact, as the report says, ‘LSER has demonstrated a pattern of similar conduct under successive franchise agreements, which has continued for more than 13 years (during which time various extensions and new franchise agreements have been awarded to LSER [London & South Eastern Railways Limited which trades as SouthEastern], resulting in significant revenues and profits being generated by LSER)’. In other words, the managers had, at best, a casual attitude, and at worst, a deliberate police of appropriating public money for the purposes of boosting profitability.

The whole affair started when because of an indexation problem (don’t ask) SouthEastern was receiving more in grant than it should have done. This lasted several years and rather than reporting the overpayments, the company created an account of ‘accruals’ which amounted to £22.7m and then attempt to feed this into the accounts in such a way that it would appear as conventional revenue. When in 2020 the DfT discovered the error, the company failed to admit that it knew of the error since 2014. There were, too, overpayments in relation to the HS1 depot which amounted to £6.5m which were also presented in the accounts as an ‘accrual’. The report is unequivocal: ‘LSER knew that the DfT was unaware of the overpayments and made deliberate decisions not to bring the Overpayments to the attention of the DfT over an extended period of several years’. Quite the opposite. The company deliberately concealed these overpayments.

No wonder that the franchise was suspended immediately and SouthEastern has been fined £23.5, and has apparently set aside three times as much in case further penalties are forthcoming. Of course there may be further fall-out as the Serious Fraud Office has begun an enquiry.

Possibly the most amazing aspect of this story is that Govia has been entrusted with a continuation of the Thameslink franchise which was announced barely a week after this scandal emerged. This has been justified on the basis that the company chairmen immediately put their hands up, repaid the money, accepted the fine, sacked the managers involved and did not try to indulge in any further cover ups. No evidence of any wrongdoing was found in the Thameslink franchise.

Nevertheless, this does show how few companies are able to take on these contracts as otherwise, surely, the involvement of Govia in train operation would be over. Given that the contracts that Great British Railways will offer may be even less attractive to private operators, it may be the there might be no bidders at all for some of the new contracts. Given the success of the ‘operator of last resort’ which has been running trains on Northern, SouthEastern and the East Coast, perhaps it is time for a rethink of the strategy for Great British Railways to of contracting out all services. Moreover, this episode shows that the contracting out of services requires extremely tight supervision which is both expensive and wasteful.



Crossrail at last


The opening of Crossrail is a rare reason to be cheerful in these tought times. As I have said many times already, the delays and overspend will soon be forgotten once passengers start to use the line. Transport for London has been very cautious about starting the service while there remained any possibility that it would not be reliable. The last thing that Andy Byford, the Transport Commissioner wanted to see was a repeat of the kind of chaos there was on the opening day of Heathrow’s Terminal 5.

The predictions about usage have been reined back. Originally it was expected there would be around 700,000 daily by 2025, but now the expectation is that in the first year this will be just under half a million initially increasing to 550,000 over the next three years. Mystic Wolmar reckons this will be an underestimate.

This pessimism about the passenger numbers on Crossrail ignores the transformational nature of this megaproject. People will flock to the line just to see it or say they have been on it, in the same way that in 1863 passenger numbers soared on the Metropolitan Railway well beyond expectations because the world’s first underground was a novelty. Again, as I have said many times before, Crossrail – or if we must, the Elizabeth Line – is not a modest addition to the London Underground but is a main line railway built under the heart of the capital to high standards that have been seen before in London or, indeed, anywhere else. You read it here first – people will travel across the world to travel on Crossrail.

I was shown round the Crossrail station at Canary Wharf in early May and the chief executive of the Canary Wharf group, Shobi Khan, was in a very confident mood. He said that numbers coming into the office were beginning to attain pre-pandemic levels in midweek and Crossrail would give an enormous boost by making it easier for people to travel there. He told me: ‘People will return to offices where there are good amenities. Providers like us will have to ensure that offices become places where people want to come to.’ This is an important point. The offices that will remain unused will be those which are poorly located and have few amenities. And the provision of good public transport is crucial for that.


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