Nigel Harris
We really must pursue light, not heat, on the East Coast
“Overbidding has been a core problem, but it is more complex than blaming ‘reckless privateers’. It is crucial we understand this because I suspect this will not be the last franchise to suffer this fate.”
“Former senior officials and ministers openly confirm there was an effective (if unspoken) requirement for overbidding”
The widely reported and popular East Coast narrative is captured by the following two quotes from former Labour leader Ed Miliband and journalist John Collingridge. They go to the heart of the two big East Coast franchising problems, but they are just not being adequately reflected in the wider media.
Ed Miliband first, as quoted by Michael Savage in the January 7 Observer: ‘…Ed Miliband… says the time for the public sector has arrived. “Experience clearly shows that the franchise system is broken - it ends up being a system that privatises the gains and nationalises the losses,” he says. “Companies have an incentive to say up front: ‘We’ll give you all this money’ and then pull out.”
Now John Collingridge in January 7’s Sunday Times: “Lord Adonis was right in one sense when he described the early termination of the contract last month as a huge bailout: the operators will not have to hand over £2bn of premiums to the taxpayer.”
I’d take issue with £ 2 billion - the figure is more like £1.5bn, but it’s still a huge amount of money.
First, let’s deal with Ed Miliband, who is either ignorant or mischievous. I suspect the former. Like most national journalists, most politicians also avoid actually acquainting themselves with the facts before letting rip.
Miliband is making the oft-heard allegation that TOC owners are reckless gamblers who hoover up profits in the good times and then dump losses on the taxpayer when it goes bad. The mechanism by which this happens has become known as overbidding. We were all aware of it in the ‘noughties’, when I wrote Comments berating the private sector for doing it - but equally condemning the DfT of the day for signing up to deals which common sense indicated were unlikely to survive.
What I didn’t realise then - but see clearly now - is that overbidding was not merely allowed, or even encouraged, but effectively required by the DfT. Fail to play the DfT’s overbidding game and you not only didn’t win, but your bidding costs of at least £ 5m went down the drain too. I have recently been vilified by critics as being an apologist for the ‘racketeering franchisees’ and their billionaire bosses. What tosh. I simply call it as I see it.
Here’s my evidence-based view. A couple of weeks ago, a former senior DfT official told me that overbidding has been endemic and the resulting risk of franchise failure was seen as an acceptable risk. It was all done by nods,
winks and in code - but very definitely done.
More powerfully still, in his Daily Telegraph column in early January, former Labour Rail Minister (2006-08) Tom Harris made it clear: “…ministers in the Labour government ( mea culpa) encouraged the private sector to overbid massively for franchises.”
Former senior officials and ministers openly confirm there was an effective (if unspoken) requirement for overbidding. The direct consequence of this is that despite healthy growth of circa 3%-5% pa the VTEC franchise has been steadily losing money because 8% pa growth is required to finance premia payments. In order to meet these financial commitments, around £ 100m of extra cash has already been drawn down from Virgin/Stagecoach to ensure premia payments are made. Virgin is meeting all its commitments and makes clear it will continue to do so - at a cost of a further £100m+.
Which takes us to the second big East Coast problem - Government failure to deliver the May 2019 infrastructure enhancements, and the later than agreed introduction of the new Hitachi ‘Azuma’ fleet. This will bring faster journey times, improved customer service, less wear and tear on track, and - crucially - tens of thousands of extra seats needed to fund the higher premia payments of around £1.5bn from 2020-23. Put it this way. If in 2015 you’d agreed to a massive increase in your flat rent in 2019 in return for your landlord building an extension, creating a roof garden and excavating an underground garage - and then he didn’t deliver those things, would you: a) smile and cough up anyway, or b) say ‘ I think we need to talk about that rent increase’?
That’s what’s happened. This upgrade was a regulated output in Control Period 5 and despite NR’s difficulties and the DfT’s silence, it was an obligation to provide the upgrades. It was clear at time of franchise award that these upgrades facilitated the more intensive services required to fund premium payments.
Interestingly, at no point has Virgin asked to surrender the keys, hand back the franchise or walk away. All it has requested is a renegotiation. Virgin would pay up - just not as much because the upgrade is not happening on time. No bailout.
The DfT decided not to renegotiate the franchise, but instead terminate it three years early and replace it with a new arrangement. By 2020, when its franchise now ends, it will have cost Virgin/Stagecoach £ 200m. Hardly a bailout. Stagecoach shares did indeed jump 16% at the news - but they are still less than £ 2. Before it took on the ECML, those shares were priced at over £4. It is ludicrous to suggest Virgin is walking away laughing. These are very significant losses with concurrent damage to corporate value and reputation.
The ECML franchise is in trouble principally because of the effective DfT requirement to overbid on a franchise whose business is uniquely vulnerable to economic shocks. GNER collapsed in 2007, incidentally, partly because owner Sea Containers filed for Section 11 bankruptcy in the USA and partly because its revenues fell off a cliff after the 7/7 bombings in 2005. With only 5% season ticket sales, most ECML business is discretionary. Plus, of course, GNER was also caught in the ‘overbid’ trap. As were National Express, whose 2007 franchise lasted just two years before collapsing in 2009. Overbidding has been a core problem, but it is more complex than blaming ‘reckless privateers. It is crucial we understand this because I suspect this will not be the last franchise to suffer this fate.
Let’s end, as we began, with Ed Miliband’s erroneous conclusions. He says franchising is broken. After 20 years the system is certainly overdue a long hard look and an overhaul, and we could debate many changes. But how about this. Why don’t we just do franchises fairly? Honestly. With flexibility to adapt to changing circumstances, be it a ‘Black Swan’ event like the 7/7 bombing that no one could have anticipated that wrecks an otherwise sound plan? Or delay delivering an agreed, crucial infrastructure enhancement, beyond the operator’s control? And, crucially, eliminate overbidding. VTEC growth at 3%-5% is good. If the deal had required growth of rather less than 8%pa we might not be in this mess. So, let’s have more honesty and flexibility. And if anyone still doubts about overbidding, Campaign for Better Transport has recently pointed out that last year the DfT made a shade less than £1.3bn from franchising.
Cool heads are needed right now.