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History tells us that most new industries follow a common trajectory. At birth, no one has unique expertise, cost of market entry is the same for everyone and anyone with backing and an idea can offer a product or service.
But after this innocent period, expertise and competence start to tell. Failures go out of business quickly, successful companies expand and God starts to side with the big battalions. Newcomers can still enter the market and succeed, but the cost of entry is rising inexorably.
With success breeding success, the larger suppliers gain economies of scale. They can spend more on research, development, training, or buying up smaller businesses for their intellectual property. And size brings the financial momentum to carry a company through the inevitable failures of ambition or execution.
Eventually you have a mature industry, dominated by a handful of competing companies. Think Boeing and Airbus and their engine suppliers, the traction and rolling stock market in Europe of diesel locomotives in America .
But, 11 years after the start of passenger rail franchising in Britain , none of this has happened. Instead of a small cadre of competent and confident companies getting on with the job, each new invitation to tender brings long-lists and short-lists as fragmented as they were back in 1995.
Back then, no one knew what it took to run a franchise profitably and some of the theories were dead ends. Now, after nearly 50% of the original 25 franchises had to be rescued, we have reached Franchise Policy Version 3.0, there is still no sign of a mature industry. Or, rather, there is no sign of a mature monopoly customer.
As a result, franchise procurement is full of anomalies. For example, when SRA introduced Franchising Version 2.1, there was First Group was running a highly regarded Great Eastern, while National Express ran a not so highly regarded ScotRail.
First was overconfident in prequalification, didn't tick the boxes in the right coloured ink, and didn't even get a chance to bid. National Express, then the biggest franchise group, took Greater Anglia and continues to struggle. But First, now the biggest franchising group, usurped National Express at ScotRail and has done a so-so job.
Most recently, in contrast, both the InterCity East Coast and Greater Western franchises stayed with the incumbents. We are not alone in regarding the winning premium profiles as highly optimistic. What gets the losing bidders is not that they lost, but that the losing margin was so large.
And here we find one of the reasons for the industry's continuing immaturity. Unlike the mature industries where, for the Rolls Royces, the Boeings, the General Motors or the Siemens, performance and reputation matter to customers and cost can be traded-off against quality, benefits and risks, DfT Rail awards victory to the cheapest, or most generous, bidder.
Despite the SRA having learned the hard way that bids must be evaluated for credibility and deliverability, DfT Rail continues to believe that the effect on the Treasury budget is all that counts. Obviously, no one wants to launch franchises which struggle to get airborne and then crash and burn, but DfT's way of avoiding to warn bidders that if they get it wrong, ejector seats have not been installed.
In future, other than in ‘exceptional circumstances', which are already covered by cap & collar or force majeure, DfT will ‘insist' that a franchisee which is unable to operate to its subsidy/premium profile should surrender the franchise. And if that is not scary enough DfT also warns that cross-default could apply. In other words a company holding a number of franchises, defaults on one and loses the lot.
This threat , of course, only exposes DfT Rail's weak hand. Just as, if you owe the bank £5000 it's your problem, but if you owe £5 million it's the bank's problem, so terminating one franchise, like Connex South Eastern, say, is the franchisee's problem, applying cross default to First or National Express would do more harm to DfT.
There is more unreality. DfT Rail does not intend to ‘second-guess' bidders on the ‘realism of their bids'. but it has to take into account the ‘adverse consequences' of an unrealistic bid on passengers and on the long-term financial viability of the franchise.
How it squares this circle is not clear. But if a franchisee gets it wrong there will be no SRA-type rescues. T he Department warns that it ‘will not follow that precedent'.
Rescues may have been justified in a ‘relatively immature market with limited experience on which to base revenue and cost forecasts', explains the gentleman in Whitehall, but today's market is ‘more mature'. Franchisees really must build ‘resilience' into operational and financial plans to deal with possible changes ‘in the economic environment to which a passenger rail operation may be subject.' Oh yes, but the bidder with the least resilience built in always wins.
Our quotations come from a guide to franchise procurement published back in March this year, only three months after DfT Rail has awarded First Group the Greater Western and Thameslink/Great Northern franchises on the basis of eye watering premium profiles. No rescues, remember, in this mature market.
Then came the media storm around the cut-backs to the West Country branch lines. DfT Rail panicked, and sought to renegotiate a deal with First Group to reinstate the services and avoid a public relations disaster. Fatal error.
Naturally, First Group expected a quid pro quo and a sizeable quid was indeed extracted, with the hardest nosed of the bus bandits negotiating from a position of strength. In exchange for retaining services, the heroic Greater Western premium profile has been de-risked. Instead of revenue protection, known as ‘cap and collar', starting in year five of the franchise, it now starts in year three. And, cap and collar is brought forward by a year at FCC for good measure.
Meanwhile, for the procurement masters of Marsham Street it is onwards and upwards to the two enlarged Midlands franchises and Cross Country. For all their claims of a ‘mature market', that is the last thing they want. Advertisements are being placed in Europe and North America an attempt to attract new bidders to the UK franchising scene.
That newcomers will have no experience of the contractual, regulatory and other arcana behind passenger train franchising UK-style matters not to the DfT Rail civil servants who are sure that there must be lots of chaps out there who could do a better, or rather, cheaper job. And, since there is one born every minute, they may convince some poor dupe of this, as well as themselves.
There are many things wrong with franchising, which has now turned into a management contract rather than a business opportunity, but it is the behaviour of the cost obsessed monopoly customer which has prevented the development of a mature market. Sir Richard Branson has already warned that Virgin will not bid to keep Cross Country if the new franchise is a ‘bus run'.
In railway terms the Department is staffed by people who in 1950 would have hurried by 10,000/10,001 and rushed over to the Fell locomotive with effusive cries of delight.
Gwynneth Dunwoody and the Transport Select committee have decide to investigate franchising and not a moment too soon. We look forward to the first Lady of Railways putting Messrs Rowlands and Lambirth to the question.