Opinion: Are we being taken for a First(Group)-class ride?

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

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19 Comments

  • Or, just privatise properly…

  • @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.

  • Richard Dean 16th Aug '12 - 11:47am

    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.

  • Richard Dean 16th Aug '12 - 12:28pm

    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.

  • Robert Carruthers 16th Aug '12 - 3:37pm

    @ 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.

  • Richard Dean 16th Aug '12 - 4:15pm

    @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.

  • Alex Macfie 16th Aug '12 - 5:57pm

    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).

  • Mark Argent 17th Aug '12 - 2:22pm

    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.

  • Helen Dudden 17th Aug '12 - 11:36pm

    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.

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