Virgin row with FirstGroup highlights franchise process inadequacies (Christian Wolmar) 4th September 2012

THE wails from Sir Richard Branson over his company’s loss of the West Coast franchise have highlighted the fickle nature of the privatised rail network and have led to renewed calls
for the structure to be re-examined, including calls for the entire industry to be re-nationalised.
Should this happen?

The chairwoman of the Commons Public Accounts Committee, Margaret Hodge, has already expressed concern about whether the system is delivering value for money and, with Branson having rapidly garnered 100,000 signatures in pursuit of a rethink. This is a row that seems set to continue when Parliament resumes next week.

On the face of it, Branson has a case. Rail travel on the West Coast Main Line, which links London with Birmingham, Manchester, Liverpool and Glasgow, has greatly improved since Virgin took over services 15 years ago and the numbers travelling have more than doubled. Indeed, passenger growth has been much greater than on the East Coast thanks to the increase in the frequency of trains and the £9bn investment spent on upgrading the track.

However, Branson’s case begins to look thinner under closer examination and, in particular, if the way that the franchise system operates is taken into consideration.
When the franchise was first put out to tender in 1996 as part of the radical privatisation of the railways brought in by John Major’s government, the bidders all had to include plans for
new trains since those on the existing rolling stock had become life-expired.

Therefore, whoever won would have had to lease new trains and Branson’s implication that it was simply his entrepreneurial spirit which transformed services on the line does not hold water. Nor do Virgin’s claims that the company has invested hundreds of millions of pounds in improving the service. In fact the trains are leased from the rolling stock company which bought them – with the help of various tax breaks – and will simply be passed on to the new franchisee, FirstGroup, when it starts operating the services in December. The only difference, of course, will be that the Virgin Red will soon be obliterated by First’s dark blue livery.

This begs a wider question. What is the purpose of the kind of upheaval caused by this franchise merry-goround? The failings of the franchise system have already been exposed on the East Coast route when first Sea Containers (GNER) and then National Express threw the towel in after having bid far too optimistically for the contract. And that’s where the problem lies.
The franchise system is seen as a way of reducing the cost of the railway to the Government and
therefore there is a great temptation for Ministers to accept bids which are unrealistic and ultimately undeliverable.

This has been made worse with the change to longer franchises,stretching up to 15 years. No-one can possibly know what demand for rail services will be in two or three years time, let alone 15, given that it will depend on so many factors ranging from the state of the economy and the buoyancy of the jobs market to oil prices and the effect of broadband on travel patterns.

It is a guessing game and FirstGroup has guessed big. The company has taken a remarkably optimistic view of the future, with a bid that will require growth of more than 10 per cent
annually throughout the whole life of the franchise.Other bidders, notably Virgin,
refused to make such heroic assumptions and therefore lost out.Given the history of the East
Coast franchise, this suggests that the whole process has turned into a sophisticated game of roulette where losers have the option of leaving the table before their losses mount up. Therefore, while on paper the Government’s acceptance of FirstGroup’s bid looks like a canny move, in practice Ministers – or more likely their successors – may well end up with egg on their faces.

So why go through all this pain in a vain attempt to save money? It’s time to stop pretending that the railways are ever capable of being a genuine private industry. The railways may be notionally privatised but in effect they are a socially-necessary industry highly dependent on government subsidy.

Last year, the railways received just under £4bn in taxpayers’ money, despite the massive growth in passengers during the past decade.Although this has been reduced from a peak of £6bn five years ago, this still represents far more than British Rail ever received from the Government.

The truth is that the railways will never be free of the involvement of the state. Indeed, all the major decisions on investment such as new trains,refurbished lines, reopened stations and High Speed Two remain in the hands of politicians, not the private companies who operate the services. Network Rail, the infrastructure company responsible for the track and signalling, grew out of the ashes of the failed private company Railtrack which could not deliver on its investment promises and suffered a virtual breakdown following the 2000 Hatfield crash, which was caused by a broken rail. Network Rail is, therefore, effectively already staterun as it no longer has shareholders and most of its income comes from taxpayers or borrowing backed by government.

This quasi-privatised system imposes huge costs on the industry because operations, in the hands of private companies, are run separately from the track and infrastructure which they use.
Bringing them back together again would save vast amounts in terms of the cost of lawyers, consultants and engineers.

While no-one would want to see Ministers take over the running of services directly, the re-creation of an overall state-owned railway body,like the old British Rail, is the logical step given the failings of the franchise system.

It would get rid of the pretend capitalism that has dogged this heavily subsidised and socially vital industry for the past 15 years and result in a cheaper and more efficient system. And, most importantly of all,passengers might benefit too.


Read more from Christian Wolmar here...



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