The trouble with franchises.

Route monopolies have led to cavalier revenue forecasts

When the Government enacted the 1993 Railways Act, it had a vision that the monopolistic nature of the proposed passenger franchises would erode quickly.

The benefit of compet it ion was recognised, but initially it was to be curtailed to allow companies running the new franchises some time to gain competency in running a railway business, before new operators were granted network access to offer alternative services.

The vison for freight operations was less diminished. British Rail had been instructed to create six freight operating companies (FOCs) into which operational assets would be transferred, with market entry barriers confined to the length of contracts with individual customers.

There was to be a mix of companies operating bulk services on a geographic basis alongside national market- based operators - Freightliner, Rail Express Systems, and Railfreight Distribution.

For bulk traffics, Loadhaul was to inherit flows based in the North East (including the Yorkshire coalfield); Transrail to encompass Scotland, the North West, West Midlands, Wales and the South West; and Mainline to cover the South, East Anglia and East Midlands. This plan was sufficiently advanced for companies to devise liveries and begin painting locomotives.

Added to the mix was another group of freight operators. National Power and Direct Rail Services had chosen to provide their own assets and obtain the necessary licence to operate services, which was permitted under the open access regime. Mendip Rail also owned locomotives, but was not a licensed train operator.

There was a setback to the freight strategy when Wisconsin Central outbid others for control of five of the six FOCs formed by BR, and began operations as the English Welsh and Scottish Railway. After this unpromising start, over the subsequent two decades the original objective to provide a competitive market for rail freight services has been achieved with DB Cargo, Freightliner, GB Railfreight, Direct Rail Services, Colas Railfreight and others offering bulk, intermodal and infrastructure support services. Job done!

The design of the passenger franchises was very different. The train operating companies (TOCs) had few operational assets, as they were not allowed to buy the rolling stock they needed to run the trains. And the vehicles they did own were confined to a handful of shunting locomotives used at maintenance depots.

Successful bidders had to forecast a revenue and operating cost outcome from the provision of a defined timetable, where the Passenger Service Requirement prevented any withdrawal of services that might cost more to run than farebox income. As a result, the word premium was hardly used - there was little expectation of growth, and as the Government wanted to buy loss-making services nearly all TOCs required revenue support.

Despite this background, the expectation was that new passenger operators would emerge to provide competition on busier long-distance routes. But even then, officials had to consider the value of franchises - bidders were not going to commit to a seven-year, ten-year or 15-year contract if the rules allowed new entrants to ‘cherry pick’ revenue from profitable routes.

Policy makers were reluctant to dilute the original vision, and a complex process described as the Moderation of Competition (MoC) was adopted which was intended to allow new services after a restrictive first phase. In the immediate period after franchising was established, the new TOCs were protected from new market entrants competing for nominated flows with a fare box value of more than 2% of revenue.

There were brave souls who attempted to promote new services from the start. North Western Trains, which had been acquired by Great Western Holdings, included a commitment in the franchise contract to introduce open access services from 2000, after it had acquired new trains in the form of 100mph Class 175s and 125mph ‘180s’.

The plan was to operate new services from North Wales, Rochdale and Manchester Airport to London Euston, and the latter services started in 1998 in advance of the new trains being delivered. It didn’t last long - however useful the route might be, the initial MoC controls would not allow a stop at Crewe for fear that passengers might choose to use the service in preference to InterCity West Coast services run by Virgin Trains.

Great Western Holdings had been a management buy- out, and when it was taken over by FirstGroup in 1998 the open access service proposals were dropped despite a more favourable opportunity being presented in 1999 under MoC - Phase 2. This provided more headroom for competition, in that a service could be promoted if it did not compete on a listed flow that made up more than 20% of the TOC fare box revenue.

Franchise managers soon realised that this position could be manipulated by removing lower-density flows from their protected list, thereby concentrating the 80% protection on the largest flows.

A proposal to run trains between King’s Cross and Sheffield via Retford was rejected, after the Midland Main Line management removed the protection rights from a number of smaller flows to ensure the Sheffield revenue accounted for more than 20% of their qualifying farebox revenue.

This was a route used when Deltic traction was introduced on the East Coast Main Line, with a portion of the West Riding express being detached and worked forward from Retford to reach Sheffield in a far shorter journey time than offered by the route from St Pancras.

There isn’t the space to describe the various measures taken to protect franchise monopolies on the West Coast and Great Western routes, or restrictions to enhance East Coast open access services, but it can be said with confidence that if bolder liberalisation policies had taken place we wouldn’t be facing the mess created by trying to extort the maximum amount of premium from bidders attracted by monopoly track access rights.

The framework seems to produce a mentality that significant revenue growth is inevitable, in part by raising fares, whatever product quality is offered.

The Virgin Trains East Coast failure will be followed by others, and nobody can describe the situation as ‘job done’.

“The framework seems to produce a mentality that significant revenue growth is inevitable, whatever product quality is offered.”