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RAILTALK September 2002

Death of the franchise

For the Conservative Government and ministers and civil servants in the Treasury and Department of Transport, passenger rail franchising was a win-win-win situation.

First, private sector management would replace state railway jobsworths, bringing in innovative services and customer focus. Remember Roger Freeman's separate trains for toffs and typists? As a result, quality of service would improve and rail travellers would stop blaming the Government for late and dirty trains.

Second, although the initial level of subsidy would be roughly double British Rail's Passenger Service Obligation payments, in the depths of a recession to boot, competition to win franchises had produced steadily declining subsidies – even premia. By keeping most franchises short, if not the five years originally intended then seven at the most, it was confidently expected that competition to retain a franchise would keep subsidies falling long term. One privatisation wonk reckoned that passenger subsidies would eventually become a thing of the past.

Finally, franchising would mean an end to the link between the level of passenger subsidies and the economic cycle. When the economy boomed, franchisees would build up reserves which would carry them through the following recession without bringing out the begging bowl, as BR was wont to do.

With honourable exceptions all three expectations were dashed. Against a background of unfrequented economic growth, some franchises became financially embarrassed sooner than even we expected. Prism, for example, had to be rescued by the deeper pockets of National Express.

There were two factors at play here. First, levels of cost reductions achieved when privatising municipal bus companies could not be replicated in a railway which had been run up to privatisation by John Welsby in cost reduction mode. Second, the rail unions proved adept at exploiting a fragmented market and labour costs increased against assumed reductions.

All this was before Hatfield which saw the railway implode. While track access agreements included compensation for disruption, there was never enough money in the contracts to make up the short term, let alone the long term, damage .

So, with the former regional railways franchises already on life support the unthinkable happened and the InterCity businesses came under the cosh. And, as you can read in this month's Informed Sources, even the twin jewels in the franchising crown - Cross Country and West Coast - ran out of money. Despite £91 million of compensation they have needed another £106million for the remainder of this year. After that both franchises will have to be renegotiated.

Lost among the public row between the SRA and Stagecoach over the likely cost of the short term support for Virgin Rail Group was the news that the extended Midland Main Line franchise had also been renegotiated, dropping the proposed infrastructure upgrades and journey time reductions which had been the basis of the extension and the new trains. MML is now to be run on a subsidy neutral basis.

On this evidence, franchising has failed. Instead of decoupling the passenger railway from Government, swathes of the network are now even more dependent, with former franchisees running their bit of railway to the SRA's specification. As the wage negotiations at First North Western sand Arriva Trains Northern has shown, the SRA is now deep into industrial relations policy as it tries to stop the unions playing box and cox with railway management.

Some will see this as creeping renationalisation, but so what? It has already been made clear that Network Rail will be run as an arm of the SRA and that the SRA will decide which enhancements will go ahead - which effectively means determining prioritises for renewals .

From there it is a short step to scrapping the franchise system and replacing it with something which reflects the reality of the new relationship between passenger railway and Government. And in the management contracts for the two Virgin franchises we have at worst a viable holding position.

As we understand it, and the SRA has left it to Stagecoach to explain what is happening, the SRA will agree budgets for the franchise, including subsidy. The operator, Virgin will then take the risk on costs and ticket sales and make its money on a percentage of revenue.

Given the fragility of the industry, this would probably be a one way bet if things went seriously wrong, but in a steady-ish state economic climate we could see it working. And if budgetary control became sloppy, you could always invited competitive bids from other management firms. Or the SRA might choose to deal direct with the train operating company managements who have kept the railway running under the big franchise companies.

So it is time for Richard Bowker to come out from under the Shadow of his predecessor Sir Alastair Morton and march to his own drum. Already there is talk that the SRA has realised that Wessex as a franchise is as mythical as Hardy's county. No one north of Watford , well Rugby , believes that Trans-Pennine Express is a franchise: It is the InterCity spine of the Northern rail network which is already being run under management contract.

Franchising should be put on hold while a way forward can be determined which reconciles the Government's ownership and control of Network Rail with private sector management of passenger services and the private sector ownership and operation of freight.

As we have remarked before, there is no need to panic. If franchises expire before the new way forward is determined the existing owners can run them under management contracts too, pro-tem.

And there is a further benefit to stopping further franchising right now. One operator told us recently that his bidding costs for one current franchise had just topped £3million.

You can look at that as 10 years lease rental on an Electrostar. But we prefer to see it as the time and enthusiasm of railway managers and engineers who would be better employed in the real-world job of making the present railway work better.

It is time for radical and decisive action. Richard Bowker's Year Zero.

Continues.........