Posted 14th September 2020 | 4 Comments

Monday essay: is franchising finished?

All the franchises in England were transferred to Emergency Measures Agreements in March this year, to coincide with the start of lockdown. The EMAs essentially removed commercial risk for the operators, who neither pay the bills nor keep the revenue but simply receive a management fee. At the time, the EMAs were set to last until 20 September, but that deadline is less than a week away. In reality, the EMA with FirstGroup for Great Western Railway has already been extended into next year, and it seems virtually certain that the other franchises will follow. In the first part of a two-part special Sim Harris considers the franchise journey so far.

WHEN rail franchises were being let in 1995 and 1996, the Office of Passenger Rail Franchising must have known that it was running a very unusual privatisation. There were no tv ads inviting individual shareholders to invest in a newly-liberated industry (who remembers the British Gas campaign, ‘if you see Sid tell him’ from 1986?), and indeed it was not possible to buy a share of the individual franchises at all, although many of the franchise winners proved to be companies listed on the Stock Exchange.

This was a privatisation offering no obvious profit. British Telecom, British Gas and the rest were state-owned industries that did offer a return, but the railways did not – and had not done so since the mid-1950s.

After British Rail had been reorganised into ‘businesses’ in the 1980s, it was sometimes claimed that InterCity at least was making a profit. In reality, the businesses were cunningly restructured so that all the best bits went to InterCity. So IC gained remunerative Gatwick Express but was spared London Waterloo-Exeter and Plymouth-Penzance, both which had been main line railways serving cities but were now transferred to Network SouthEast and Provincial (later Regional) Railways respectively.

John Major’s government seems to have known what had been going on at the British Railways Board. Its 1992 White Paper about railway privatisation admitted rather wistfully that ‘BR’s passenger services do not lend themselves to outright sale in the short term because despite improvements over the past ten years they continue to be unprofitable … The Government would hope to receive payments from franchisees for the right to operate profitable Intercity franchises thus bringing a return to the taxpayer’.

The trick was to find the profitable InterCity franchises, which when push came to shove appeared to be in remarkably short supply. With one exception, all the franchises based on sections of BR’s InterCity business proved to need subsidies after privatisation. The exception was Gatwick Express, an unusual railway with a steady stream of traffic, a short route and a small fleet. 

There had been hopes that other IC franchises would move from subsidy to profit during the course of their contracts, such as Intercity West Coast, whose contract with Virgin included a cross-over from subsidies to premiums around 2002. This, however, depended crucially on Railtrack’s modernisation of the West Coast Main Line, which failed to keep within its costs or fulfill its ambitions (the plan to introduce ‘moving block’ signalling – a precursor of ERTMS – cost several hundred millions but was then abandoned because the technology was unproven and the risk of trying it was rightly seen to be too great). 

The impact on the West Coast business plan was severe, because without route modernisation the operator couldn’t run enough trains or move them quickly enough (the original plan had featured top speeds of 140mph or 225km/h). The main result was that premiums payable between 2003 and 2012 which should have been worth roughly a billion to the government became subsidies of about the same amount, leaving the taxpayer at least £2 billion out of pocket.

Since the early 2000s a number of franchises have indeed paid premiums on the face of it, but when the financial blanket is lifted it becomes clear that in nearly all cases this was only possible because the Department for Transport had been making increasingly substantial direct grants to Network Rail, which was then able to reduce the track access charges it levied on operators. In other words, the DfT was (and is) paying some of the operators’ bills for them.

A telling statistic comes from the Department for Transport, which admitted in 2015-2016 that every passenger kilometre travelled on National Rail was being subsidised by an average of 3.54p.

To take a specific example, in that year East Midlands Trains paid premiums of £165.9 million. Taken on its own, it’s an impressive figure. But before you open the champagne, you have to take into account ‘revenue support’ payable by the DfT worth £87.8 million, which effectively brings the premiums down to £78.1 million. But there is more to come. The value of the ‘Network Grant’ paid to Network Rail to maintain the EMT network in that year was £155.7, and at this point we have to admit that the emperor is actually wearing no clothes. The cost to the nation of EMT in that year was really £77.6 million, which is equivalent to an average of 3.23p for every passenger kilometre travelled.

Three points need to be made. One is that East Midlands Trains was not a special case: nearly all franchises were in the same position or worse (Northern topped the English franchise subsidy league with an average passenger/kilometre payment worth 21.9p). The second is that in that year both South West Trains and Southern really were profitable, even after taking their shares of the Network Grant into account. The passenger/km figure for SWT was a positive of 2.05p, and Southern’s was even better, at 2.36p. Together these two franchises paid the DfT a genuine return worth a total of £168.2 million to the taxpayer. (It is possible that Southern’s profits were due at least in part to the fact that by 2015-2016 it had absorbed Gatwick Express.)

The last point is that even although the passenger railway is undeniably subsidised, the same could be said for the emergency services, the armed forces and the NHS. The results – both financial and otherwise – of not keeping the railway and these other organisations going would surely hit the national economy far harder than their actual costs. 

Now, as one result of coronavirus, we have an effectively renationalised passenger railway. Next time we will try to offer some answers to a very tricky question: where do we go from here?
The September print edition of Railnews, RN283, was published on 3 September. The new edition and some previous issues can be obtained by calling 01438 281200 from UK numbers or +44 1438 281200 internationally, and selecting Option 2.

Reader Comments:

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

  • david c smith, Bletchley

    The "central question" , with choice between public and private brings into question the means of accountability.
    It would seem that a problem with the monolithic,, centralised model is that an organisation the size of BR was answerable through "parliamentary accountabilty", which was unwieldy, beaurocratic, slow and lacking expertise. However, a series of smaller organisations such as TfL, or Merseyrail would be small enough to be in the public domain, with local direct democracy giving more immediate answerability. Such operations are mostly inevitably local monopolies, and thus unsuitable for private enterprise.
    On the other hand, longer distance, "national " services are generally the converse, too big and extended to have effective accountability in the public domain , whilst direct interoperator competition becomes a real option as their means of accountability.

    So, maybe "one size doesn't fit all", and we need "horses for courses"?

  • Stephen Dearden, New Mills

    The central question, as it has always been, is whether a more efficient railway can be run by a publicly owned and centrally planned organisation (ie a variant on BR) or through a series of management contracts (the predictable outcome of recent Conservative reviews). It is disappointing that there appear to have been no attempts to carry out objective studies of the available evidence, however difficult this may prove.
    [Perhaps Keith Williams will close that gap?--Ed.]

  • Giles Webber , London, UK

    No country in Europe expects its railway to break even (let alone make a profit) without government support. Neither should we.

  • david c smith, Bletchley

    Yes, we do need to address the question " what do we mean by profitable?"
    How broadly or narrowly should it be defined?
    Should we include all the "spin off" benefits of rail operations? (And any similar costs too).
    If such "hidden" benefits and costs are represented in the marketplace through a system of subsidies and charges, can many passenger operations become viable and profitable to operators? Again , such subsidies and charges could be utilised to incentivise operators.
    Rather than a"command and control" role for DfT, should their function be to administer such a system of subsidy / charging ?