Christian Wolmar
In the wake of the East Coast franchise returning to the public sector, CHRISTIAN WOLMAR tries to answer his own question: ‘what is franchising for?’
What is franchising for?
READERS, allow me a little gloat. A short one, I promise, but indulge me. For more than a decade I have been asking: ‘What is franchising for?’ But I have never received a coherent answer.
Now it seems, I will never get one, but with everyone in the industry agreeing that the present system is on the point of collapse, it’s time for me to try to answer the question myself and then try to map out a way forward.
There have always been two components to franchising - and that, in a way, has been the problem. Franchising has involved passing on both the management of train operations to the private sector, and the financial risk. And the motives behind these two aspects are different.
The view of successive governments is that the private sector is more efficient and will deliver more innovation than if services are run by public agencies. There is, so the argument goes, an entrepreneurial spirit in the private sector that cannot be replicated by public bodies because the latter are hamstrung by rules and attract workers who are indifferent to the customers they serve.
Then there is the second aspect, which is that the financial risk should be transferred to the private companies. Here the argument is somewhat different, as it is underpinned by the notion that ultimately this will save the taxpayer money. Private companies will compete for the opportunity to make a profit, and will therefore be prepared to take a risk on how many passengers will use their service, using their entrepreneurial expertise to attract more people onto their trains. The basis of the argument is that although there is an added cost to using the private companies because they require profits and can’t borrow money as cheaply as public bodies, their greater efficiency and propensity to innovate will make that worthwhile.
Let’s look at the first of these arguments. In the 20 years of franchising, there have been good companies and bad. Some such as Connex and Arriva Trains Wales are best forgotten, while others such as GNER and (at times) South West Trains have done a good job. But that was exactly the same with British Rail - there were well-run lines and basket cases.
There was, too, great commercial enterprise such as InterCity, as well as a brilliant cohort of managers, many of whom went on to run privatised train operators. The last time East Coast fell into the public sector, it was excellently run, albeit by a group of experienced private operators led by Sir Michael Holden (who incidentally opposes renationalisation but recognises the problems of the current franchising system). The notion that only the private sector can run services well is clearly a nonsense.
As the acclaimed economist Mariana Mazzucato puts it in her recent book The
Entrepreneurial State: “The increasing percentage of public services across the globe that are being ‘outsourced’ to the private sector is often justified using precisely [an] ‘efficiency’ argument. Yet a proper look at real cost savings that such outsourcing provides - especially taking into account the lack of ‘quality control’ and absurd costs that ensue - is almost never carried out.”
So, in this respect, what is franchising for? The answer seems to be that it is a way of breaking up the workforce into small units, with the hope that this will weaken the unions so much that they will not be able to take industrial action. To some extent this has worked, although the recent strikes across the country over the role of the guards shows that on a fundamental issue such as this, the unions
can still exercise their muscle and co-ordinate their actions.
In terms of the second argument for franchising, the transfer of the revenue risk, the justification is that this provides an incentive for the operators to boost their income. However, the past 20 years suggest that the train operators often have less commercial nous than British Rail. Certainly, with the odd exception, most of their marketing efforts have been poor or non-existent.
I came across a nice example of the lack of any marketing drive of train operators the other day, while travelling back from a bike ride to Broadstairs. The station boasts a sign at the entrance to the platforms that suggests Platform 2 is only for Ramsgate, and Platform 1 is for trains to various places finishing at London Victoria (see picture, below left). However, for the past decade, high-speed trains heading for London have called at both platforms, since it is part of a loop. But you would not know that from these signs.
Given there are likely to be a lot of first-time users of the station, as it is a tourist town, this is embarrassing. Indeed, when I tweeted as such, a rather sheepish social media person for Southeastern asked me what station it was and said they would tell the station manager. I did point out I had tweeted the same thing a year ago when on a previous ride.
The whole revenue risk transfer has always been a typical example of the phenomenon of what Mazzucato calls ‘socialisation of the risks and privatisation of the rewards’. The system has only survived so long because there has been an almost constant rise in passenger numbers throughout this period.
Now, though, it is clear (as all the commentators in RAIL have noted) that this golden period has ended. We are entering a period of uncertainty, and the implications of this will dominate my writings in this column over the next few months. The longer the period of no growth or decline continues, the more likelihood of further franchise collapses.
The collapse of the East Coast franchise and its return to the public sector, albeit supposedly temporarily, signals the end of franchising as we know it. Secretary of State for Transport Chris Grayling and his beleaguered officials in the Department for Transport are scrambling around for alternatives, but it is clear that there will be no return to the revenue risk model that has been the norm for the past two decades.
There was a telling moment at the Commons Transport Select Committee hearing into the East Coast, when Nicola Wood, a consultant with wide experience of the industry, said the “difficulty with macroeconomic risk is that there is a desire to put the risk on bidders as a way of saying ‘this is not now a Government risk but your risk as the private sector’. But… it is a public/private partnership, and ultimately the risk always comes back to the Government… if the risk is always going to come back to the Government, is it not perhaps better to start off with that and say ‘we know that is our risk so we will accept it now’?”
Grayling has suggested on the East Coast that some sort of public private partnership will be established, but has given no details. He is a fan of integration between track and train, but how this would work on the line is unclear since the East Coast long-distance services are not the main user and the relationship with other companies will be difficult.
Another witness at the committee, Iryna Terlecky from TBI Consulting, was quick to knock down the idea of partnership on the East Coast, saying: “I have to say that, if I was doing this kind of partnership, I would not do it on East Coast. It seems completely counterintuitive.”
Oddly, the contract that has given the most trouble, the Govia deal for Thameslink Southern Great Northern (see adjoining piece), is probably the only way forward. It does not pass on the revenue risk, but instead rewards the contractor with a small percentage of the revenue together with some incentives for performance (which have proved cheap for the Department, I would think).
I suspect, however, that as various franchises get into difficulties over the next year, my question will change to: ‘What was franchising for?’