Posted 11th July 2018 | 7 Comments

Former Network Rail chief rejects franchising model

THE first chief executive of Network Rail has dismissed the present system of rail franchising as ‘bust’.

Sir John Armitt, who is now chairman of the National Infrastructure Commission, has highlighted the facts that Network Rail was ‘effectively renationalised’ in 2014, and that franchise holders shoulder high commercial risks because, he claims, the Department for Transport takes the highest and most optimistic forecasts of revenue when considering bids.

Sit John, who was in charge during the transition from privatised Railtrack to ‘not for dividend’ Network Rail in 2001-02, said the degree of revenue risk accepted by franchise-holders had ‘got them into trouble’, such as when Stagecoach and Virgin were forced to surrender the Intercity East Coast franchise in May.

They were the third operators on the route to retreat at an early stage. In each case, VTEC, GNER and National Express all found that revenues were not enough to meet the premiums they had promised to pay.

Other franchises have also needed to prop themselves up recently. Abellio pumped an additional £10 million into ScotRail and FirstGroup made provision for a total deficit of more than £100 million on Transpennine Express between now and 2023.

Related problems have also appeared, particularly since 20 May this year when both Govia Thameslink Railway and Northern proved unable to operate new, ambitious timetables. These have since been cut back, and the Rail Delivery Group has now said that the next round of timetable changes in December this year will be much less radical.

Sir John told the BBC: “The rail franchise companies, as we've seen, have to take very significant revenue risk, and that's got them into trouble, because the government will always go for the most optimistic forecast of revenue.

"That model, I think, is bust, and it needs to be reviewed, and a more appropriate sharing of risk on the railway needs to take its place."

The DfT says it applies a ‘deliverability test’ when assessing franchise bids. When National Express won the Intercity East Coast contract in 2007 it was widely rumoured that another bidder had offered even higher premiums, which the DfT decided would not be achievable.

Reader Comments:

Views expressed in submitted comments are that of the author, and not necessarily shared by Railnews.

  • Peter Evans, Kings Stanley

    The point about the railways being starved of investment when nationalised relate to a different age when railways were thought of as old fashioned & roads were the future.
    Also some of the patchy passenger growth being experienced now is purely down to the poor, unreliable service offered by some of these shambolic operators.
    As for competition on the railways, there is lots. Planes, cars & buses.If the railway could only get it's act together there would be no competition, it is by far the cleanest, safest & most comfortable mode of transport ever invented.It breaks my heart to see it run so awfully & unreliably.

  • david c smith, Bletchley

    Yes, renationalisation isn't the answer, for a variety of reasons already aired in these columns.

    Yes, franchising has proved to be an improvement over the previous BR model.

    But, no, franchising seems not to be the optimum achievable. For one thing , accountability via central government frankly just doesn't work at all well. Accountability needs to be much closer to stakeholders, through effective competition or via local - scale direct democracy. We can do better than the franchise model, recognising the need for different models for different, diverse operations.

    Vertical integration is mostly not now possible. The Beeching reports led to the elimination of duplicatory, competing rail routes, generally leaving only one line available between centres. If we want competition,we inevitably have to allow multiple operators to use the same infrastructure, and have separation between train and track.

  • claydon william, Norwich, Norfolk

    I have no idea why people seem to think re-nationalisation is a good idea.

    The railways when nationalised were starved of investment, because under a nationalised scenario, transport always came third behind Health and education in the race for investment. Labour have not solved this conundrum IMO, and have more questions than answers at the moment.

    The only reason Corbyn wants re-nationalisation is to give McCluskey and Cash their own train-set to play with........ the railways under effective union control failed miserably in the 70's and it will fail again if the happens under Corbyn....we are in a different era now in terms of what the public expects in terms of customer service, and re-nationalisation will represent an epic fail here IMO......

    Whatever people think of the franchise model, it has effectively 'ring-fenced' railway investment; (however stupid some of the investment decisions may have been); and we seem to have fleets of brand new trains everywhere at the minute. (Labour seem to have forgotten that the train fleets themselves are in their majority not owned by the TOC's; Labour has to answer the question whether they are going to re-nationalise the train owning companies.)

    I personally think the best way forward is to create 12 new privately owned and managed vertically integrated 'regional railways' owning track and trains, but with the government retaining a 17 x 3% 'golden' ownership stake useable at annual AGM or EAGM. This would give the new companies the stability of doing away with fixed franchise periods, but give complete infrastructure and operational control. I would re-create the 'Inter-City' brand, with those I-C TOC's (and other operators) paying access fees and offering meaningful competition to the new RR's.

    I would also create 15 'Metroplolitan Railway' companies and around 40 new 'Cityrail' companies to expand and develop new local services in our ever-growing larger cities outside Metro areas; (Bournemouth/ Brighton/ Oxford/ Cambridge/ MK/ Leicester/ Stoke etc etc); to take advantage of new 'tram-train' technologies......

    Those folks who dismiss the franchise model as 'failed' and 'broken' need to look at some of the rail ridership figures over the last decade and re-calibrate their views.

  • david c smith, Bletchley

    Apologies if I've laboured this previously, but the franchising system had in it the seeds of its own demise years ago ; a system of fixed - term /fixed conditions private monopolies under heavy state control, effectively killing off the potential for enterprise, innovation and capital investment that privatisation was meant to give.

    Passenger operations are diverse in reality ; whilst intercity ( both London based and cross country ) could well thrive on commercial , ongoing, open access competition, many commuter and suburban services are captive - market natural monopolies, needing another form of accountability, such as local, direct - democracy cooperatives. We need, I think , more of a "horses for courses" approach to the range of passenger operations.

  • John B, Woodford Halse

    What incentive is there for TOCs to abide by franchise agreements when they know that the govt will be there to bail them out if it goes pear-shaped after being encouraged by the DfT to make over-optimistic passenger growth forecasts?

    Given that there's hardly going to be a queue of bidders for the next EC franchise (profit margin barely 3% in good times), what does Grayling have to propose to fix the franchising system? From where I stand, it seems unfixable and state control as proposed by Labour would be preferable.

  • Chris Neville-Smith, Durham

    Agreed.

    The government made a big deal of Virgin/Stagecoach getting its forecasts wrong when they lost the franchise, and that they lost £200 million which was their fault. Which might work as an excuse, but that sets the precedent that if you set a bid which the DfT says is deliverable and then it turns out not to be deliverable, based on economic forecasts no-one can predict, you get the blame and you take the loss. So you can't win. Who's going to agree to that?

  • Tony Pearce, READING

    The current Franchising Model doesn't seem to be working too well, - except perhaps for a few like Chiltern Railways. The problem seems to be that the level of passenger use doesn't seem predictable and this means either big profits or big losses for the Companies operating the Franchises. Obviously their targets must be challenging, - to realistically reduce costs and increase passenger numbers and revenue, and they should be rewarded if they achieve them. But from the current Passenger numbers we now seem to be in a period where growth is very patchy, and also declining in some areas, as household income is reduced by other price rises. I have always admired the 'John Lewis' model of Business where the profits are distributed among the workers. Applying that to the Railways may also reduce the number of strikes and industrial disputes.

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