June 16, 2021

Off the rails?

Dave Richardson analyses the trials and tribulations of the franchise model – and ponders its future

Any rail industry managers who were around when British Rail was privatised in the mid-1990s will probably be shaking their heads with a rueful smile at the state of it today.

Franchising as we know it has hit the buffers, but whether the politicians take any more notice now than they did 25 years ago is another matter.

Privatising the rail industry looked a bold move then, but the model that John Major’s Tory government chose was untested. It was warned that separating train operators from the infrastructure operator wouldn’t work, and would create a pass-the-buck blame culture. Passengers claim compensation for delays from train operators who then claim it back from Network Rail, whose track and signalling are more often to blame when things go wrong.

Instead of returning to the pre-nationalisation model of four large rail operators covering their own chunks of the country, privatisation created 25 train operating companies (TOCs) plus others for freight, train leasing and support services.

Instead of innovation, new monopolies were created with TOCs having exclusive rights to operate services on the majority of routes, except where some franchises overlap. In time the number of TOCs was reduced to under 20 as larger franchises were created – Great Western taking over Thames Trains, for example.

“No-one will ever know what a properly funded and motivated British Rail could have achieved”

On very few routes is there any genuine competition, and the number of “open access” start-up TOCs has been pitifully few and constrained in what they can offer. One reason is that capacity is very tight – another is restrictive franchise agreements that favour the incumbent.

The Department for Transport’s oversight of rail has proved to be highly contentious, and if a new public-private body takes its place many would welcome it. Civil servants have been accused of drawing up demands that the rail industry cannot make work, as with the timetable change fiasco of 2018.

And as the spread of coronavirus affects every day life as know it, the government has stepped in to allow operators to temporarily transition onto Emergency Measures Agreements which “suspend the normal financial mechanisms of franchise agreements, transferring all revenue and cost risk to the government”.

Hitting the buffers

Back in 2012, Virgin Trains successfully appealed against the DfT to keep hold of its franchise, which had been awarded to FirstGroup. Now, with FirstGroup and its partner Trenitalia having finally been given Virgin’s West Coast routes, various train operators are taking High Court action claiming they should not have been barred from bidding for franchises because of open-ended pension liabilities. These were imposed by the DfT, and as a result both Virgin and Stagecoach have pulled out of rail – for now.

What few foresaw 25 years ago was that companies would actually default on their franchises, leaving the DfT to pick up the pieces. This has happened three times on the East Coast route from London to the North East and Scotland, as Sea Containers (owner of GNER, 1996-2007), National Express and Virgin/Stagecoach have all pulled out.

The DfT has an “Operator of Last Resort”, and has now called on it again to run Northern. This publicly owned operator made a success of operating East Coast after National Express departed in 2009, and is now doing so again as LNER.

Trade unions and the Labour Party would like to see the railways re-nationalised, as indeed has happened to infrastructure operator Network Rail. This looks like a remote prospect but it is grimly ironic that the British government can only run railways as a “last resort” when many TOCs are essentially run by foreign governments.

Signal failure

So who has benefited from this scenario? The passenger is being asked to pay higher and higher fares, but the DfT claims it always gets the best deal for the taxpayer. Certainly it has tended to favour the highest bidder for a franchise, but sometimes those bids have been unrealistically high leading to a default – with rail industry sources warning that further defaults are inevitable.

Winning bids are often breathtaking in their scope, but have sometimes proved to be based on unsustainable passenger growth forecasts, a fact underlined by the corona-virus crisis. Some operators of large networks have promised to replace every single train, even those introduced fairly recently.

The unions and Labour might complain about big profits going to shareholders rather than to improve services, but in reality the picture is very variable. While Virgin Group did well out of its 22-year focus on the UK rail industry, its 90% majority partner on East Coast – Stagecoach – lost £200million.

Large shareholders in FirstGroup have even been in open rebellion over future involve-ment in rail franchises and would like to follow the National Express example and get out of rail completely.

Massive public subsidies continue on many rural and some commuter routes, with some estimates suggesting that supporting the railways costs more now than when they were nationalised. But the Rail Delivery Group, which brings together TOCs and Network Rail, can point to many innovations and a huge increase in passengers – roughly double – since privatisation.

Still, no-one will ever know what a properly funded and motivated British Rail could have achieved, like the much-admired (and still state-owned) rail operators of Germany, the Netherlands and France which have now taken much of it over.