As someone who has used the west coast mainline regularly for the past fifteen years (and would have done so more if the cheaper fares were more readily available), I can testify to a significant improvement in reliability and levels of service in recent years. Much of this was of course down to the £9bn and more of public investment in upgrading the line, and much was down to Virgin themselves – I carry no torch for Sir Richard but there’s little denying that Virgin trains, expensive though they undoubtedly can be, ran what became a reliable, punctual, comfortable service.
But this isn’t why I’m concerned at FirstGroup being awarded the west coast franchise – I am perfectly happy to imagine another company running a reliable, punctual, comfortable service in Virgin’s place. I am concerned, however, at how FirstGroup won the contract – and the implications for fare-payers and taxpayers.
Most of us don’t know the details of the two bids being considered, but I’d have thought that the senior personnel involved in choosing between them ought to have understood them in their entirety. And yet we face a rail operator who managed to negotiate a very generous (ie, low) cap on their capital liability – according to reports today, FirstGroup can lose a maximum of £265m on the £5.5bn deal, in a similar arrangement to that used by National Express in the infamous East Coast deal (which ended oh-so-well…). Given that the deal rests upon an eye-watering 10.4% rise in revenues every year (a claim met with scepticism in the markets), I see three eventualities with unequal probabilities of materialising.
There’s a slim chance that the service will continue to be excellent, and provide better value, as First’s CEO claimed on Radio 4’s Today Programme (2hrs 10mins here). His repeated appeal to FirstGroup’s track record hardly inspires confidence, however, given their expensive, unreliable and overcrowded service into London.
There’s a chance that the levels of service may just about keep pace, but that fares will rise significantly; the requirement for revenues to go up 10% a year, coupled with the ambition to alter the pricing to exploit off-peak spare capacity, suggests this is more than likely. Unacceptable fare rises announced this week may end up at the low end of things for the London-Manchester-Glasgow line in years to come, if FirstGroup is to stay afloat.
But more troubling is the third outcome – that FirstGroup realises it has over-stretched itself, and hands back the keys to the franchise couple of years into the deal. The cap on liability suggests this is a real concern for the company themselves, and I’m sure Virgin would have had a cap in place as well – the question is, does having bid such a large amount in the first place make failure to deliver more likely? I would venture that it does.
Let’s be generous and give FirstGroup a chance – maybe they will pull this off and improve the passenger experience. But maybe, just maybe, the public sector has yet again been out-negotiated in procuring a private contract and become exposed to the asymmetric risk of the contractor failing to deliver on its promises.
I have argued that for large-scale projects delivering public goods through the private sector, we should set up Public Interest Corporations that divide both risk and reward evenly – rail franchises strike me as a perfect opportunity to put such entities into action, avoiding the possibility of First walking away with either a fat profit if things go well and a modest haircut if they don’t.
Furthermore, the exposure of passengers and taxpayers to significant downside risks raises questions about the process through which franchises are awarded – as Tim Farron tweeted, it is high time that passengers had a greater say in who runs the trains they use – to which I’d add that whoever decides who runs our trains should consider more seriously what happens if operators fail to live up to their bids, and be prepared to consider publicly-owned and managed competitor bids which may offer better long-term value.
* Prateek Buch is Director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee
19 Comments
Or, just privatise properly…
The problem is that the civil service employees negotiating this have no real interest in getting the best deal as it’s not their money being put on their line. Private business works when all levels of the chain have money to lose or to be made based on the success of the agreement.
Interesting thoughts – I agree that to some extent the civil service not having their own money at risk is a factor (although in some way of course, being taxpayers and probably rail commuters, they do…) I am genuinely keen to understand how “properly privatised” rail system would work… given that only one train can run on one track on a given route at any given time, how would competition in a privatised rail system work? what would firms compete for exactly…?
genuinely interested to know as I have no clue at present!
@Prateek
There are some instances of competition reducing train fares when there are multiple routes to the same destination, but in general I agree with you, railways are a quasi-natural monopoly (quasi-natural because it is possible to build more competing railways, but the costs of doing so in general outweigh the benefits for both the pubic and private sectors).
In general, private rail companies have little incentive (beyond the unlikely possibility that the majority of passengers may eventually seek alternate means of transport) to reduce fare prices. The government, on the other hand, has a slightly greater incentive to reduce or maintain prices because they are (in theory) accountable to the public.
The impression I got from Richard Branson’s interview on the news yesterday was that the officials and minister evaluating the various bids may have made actual errors.
One of these errors may have been that the officials and minister had not realized that, in a previous period, the government had originally promised to provide upgraded track to allow trains to run at 140 mph. This would surely have had a significant effect on Virgin’s business model. However, the government reneged on its promise. This may then have meant that Virgin lost out financially, and that customers lost out because Virgin might not have been able to keep some of its own promises. The error seemingly suggested here is that the failure was incorrectly blamed on Virgin, whereas it should have been blamed on the government.
Another issue seems to have been that FirstGroup’s bid was higher in price than Virgin’s. Although of course price is a difficult thing to measure.
Of course this is a high stakes game and who knows who is telling the truth? But making errors in a bid evaluation process of this magnitude is not a trivial matter, and not something to sweep under a table. Some clarity on the matter seems to be needed, and to start with the Minister needs to explain, and answer questions.
I think the competition occurs in the process of bidding for the right to operate a particular group of services on particular lines over a particular period of years. That competition occurs once every five years or so, and the fairness of that competitive bidding process, and the competence or otherwise of those administering it, seems to be what is in question at the moment.
Part of the bidding involves some form of estimate of ticket price levels and numbers of trains provided, degree of comfort, etc. Once a group has won a bid and starts operating, it is held to those promises in part by the government and in part by the responses of its customers. Customers do have alternatives, including car, coach, and relocation. And companies need workers to travel to work, and can in principle put pressure on train operators through various organizations and processes.
Re tommy5d’s point about civil service negotiators not having a skin in the game, I would say it’s a racing certainty that the govt side was deeply compromised by having the Treasury busily back-seat driving and imposing their own agenda (At a guess: More money! Stuff the passengers!) with only a dangerously little knowledge of the facts on the ground and the perfect fall back position that if/when it all screws up they will deny any involvement or responsibility.
@Richard Dean – regarding your second comment… my interpretation of this tendering process is that we ask companies to compete every five years for the right to run a line as a monopoly – in reality none of the theoretical pressures you mention actually come to bear, and the monopoly operator gets to act as it sees fit.
Effectively we have bids to run franchises based purely on projections, forecasts and guesswork, with very little way of holding operators to account.
I am close to @Rob’s position of rail being a natural monopoly – or almost anyway – and hence believe that at the very least there should be a public rail operator against which private competitors should bid for fifteen-year franchises (if not a nationalised railway with greater passenger input…)
@ Z
…or just renationalise properly.
Why are contributors not discussing this in more detail here and instead arguing frankly about how to polish a piece of the brown stuff that is rail privatisation? The idea was so fundamentally flawed that even the most ardent of privatisation advocates, Margaret Thatcher, wouldn’t touch it with a bargepole.
We should be examining how Swiss Railways are run and putting forward our plans to do likewise in the UK.
@Prateek Buch. You’re correct, they are bidding for the right to operate a monopoly for five years. But the monopoly is constrained by the promises it makes in the bidding process (or it ought to be, anyway). There seems to be no a priori reason to suppose that this can’t work.
Monopoliies naturally want to break freee, so monitoring and regulation are important aspctes of control. If the promises are not being met, then we presumably need to ask the Rail Regulator why they are nor regulating (http://www.rail-reg.gov.uk/). We should perhaps also look at whether rail user groups need support.
We should return to the BR immediately before privatisation: state-owned but independently managed. Civil servants have too much control over the minutiae of rail operations; in the old days, decisions on which services to run, and to where, were made by local railway managers. Now they are dictated by pen-pushers in Whitehall.
Personally, I’d just move back to a publicly-owned railway [ the infrastructure is effectively already publicly-owned; the franchises could be taken back ‘in house’ at little cost as they end; the sticking point is the iron grip of the ROSCOs who own the stock and make HUGE profits].
Good riddance to Virgin (backed up by their partner Souter, incidentally). Worst train service *ever*, nothing can be worse and delighted to see them go
@Prateek Buch completely agree – railways are a quasi-monopoly and are not built for competition. The need for a regulator (ORR) to regulate the industry is evidence in itself that true competition cannot work (and I’m speaking as a competition lawyer). Yes, there are some destinations that are served by multiple operators, but typically these are on different routes, with one being less competitive (take the two routes from London to Portsmouth) or where one operator can only run a limited service (take London to York with East Coast or Grand Central).
And then there is the very limited range of rolling stock controlled by a few leasing companies and where train operators often don’t have any choice of what rolling stock they can operate and must lease that stock at very high prices.
The current system just doesn’t work (unless you’re a director or shareholder of one of the few companies involved).
Interesting seeing the weight of comments here – although I know the LDV crowd isn’t necessarily representative of the party as a whole I do sense quite some support for reform of the how the railways work. Is this something we should press the (Lib Dem!) Transport secretary on perhaps…?
I wonder how far the broader economic picture is considered. There is a narrow question of how much money the government gets from the rail franchises, but there is also the much less well-defined question of the benefit to the economy as a whole from the rail network working well. That’s sort-of obvious on commuter routes — where the state gains from what commuters pay in taxes on the jobs they are able to have because they commute — but for franchises like this one, which are only partly about commuters, there is a big question of what the nation as a whole gains from the rail network operating reliably and at sensible ticket prices. That could argue powerfully against picking the operator who offers (or claims to offer) the best direct financial inducement to the treasury.
£6B bid – so that’s more money to fill a bit of the National Debt. But if the Government actually wanted to encourage traffic off roads onto rail – a quaint idea that sadly only a few environmentalists and Lib Dems now seem to care about – the bid criteria would have been a nominal fixed payment to Government with the bid going to the company which could guarantee the best service for the lowest fares.
@ Prateek
We certainly need to reform how the railways are run. Aparently, not a single member of the Major cabinet that privatised the railways thought that this was a sensible model – proof if any were needed that commitees work in the most mysterious of ways. And to cap it all, Virgin was then given a guaranteed subsidy of £400 million on the West Coast Mainline alone although it had been profitable under BR. (Simon Jenkins in “Thatcher & Sons”)
The railways would be much better back in public ownership with a clear brief (c.f. Mark Argent & David Wright’s comments above) and an arm’s length relationship with govt. In practice, this would mean a rolling 10 year plan with annual updates that, once agreed, would confer operational independence without endless meddling by the Treasury et al.
The Transport Secretary could perhaps commission some work to uncover the true cost of losing network benefits – for instance the extortionate cost of rolling stock (c.f. crewegwyn comment above), the destruction of our train manufacturing base, the reported 300 lawyers working for the operating companies who spend their time disputing with 300 lawyers working for Network Rail etc etc.
I find it quite impossible to belief that any amount of privatisation magic pixie dust can offset these costs.
I have just written another letter to First Great Western on the safety issues on the subject of the crowded trains they run into Paddington from the Bristol area. Just a couple of weeks ago I went again to the capital, one train was taken off and that meant two trains go into one. That means with the train running late, I spent over an hour and half in a carriage where you could not move, and standing all the way into London from Bristol.. This is not the first time, this happened only weeks before my last visit. If you have booked a seat you can’t use it, if someone has got there before you. Booked seats are not in use, I have lost track of the rules using this rail provider. Well it improves my letter writing skills, and of course listening to the excuses on why they are able to run, a very over crowded service.