January 31, 2013

Britain risks squandering a golden opportunity for franchise reform

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THE chairman of Eurostar, Mr Richard Brown, published his recommendations for reform of Britain's passenger franchising system on January 10.

While Brown has proposed some sensible changes, he stopped short of the radical reforms needed to overcome some of the greatest failings of the current system and breathe new life into Britain's passenger rail operations.

The report was commissioned by the Department for Transport (DfT) in response to the cancellation of the refranchising process. This followed the collapse of the Inter City West Coast contract, which was caused by flaws in the DfT's assessment of the bids. The Brown report is the last of three investigations into franchising - the other two were published by the National Audit Office and Mr Sam Laidlaw.

One of Brown's main conclusions is that franchising is not broken and therefore there is no need for major structural reform. Britain's secretary of state for transport, Mr Patrick McLoughlin, quickly seized on this: "The review has confirmed that government's approach to rail franchising is still the best way to secure rail services for tax payers and fare payers alike," he said. To be fair, McLoughlin acknowledges that the report "has identified a number of detailed improvements," which he says he will consider carefully before outlining the government's franchising policy in the spring.

Contrary to Brown's findings, there is ample evidence that the franchising system is broken. There have been high-profile and damaging defaults, most notably twice on the prestigious London - Edinburgh East Coast Main Line (ECML), which is currently run by the DfT's own operator of last resort. Most franchises are receiving government support because they cannot meet their financial targets despite traffic being at record levels. The system has become far too rigid, stifling entrepreneurial flair and shackling operators, preventing them from adapting services to changes in demand.

Brown is correct in his assessment that the bidding process is far too complex and costly, and wants the government to set out clearly its requirements and objectives for each franchise. He is also right to say that franchises should be a minimum of five years and ideally between seven and 10 years with the option to extend them. This contrasts with the DfT's rather confused policy of issuing franchises ranging in length from as little as two years to up to 15 years. Brown also wants to see greater use of residual value mechanisms to encourage investment in projects which will give a return beyond the end of the franchise.

Both Brown and Laidlaw identified a major failing within the DfT: a shortage of staff with the skills to manage the complicated bidding process. This is the result of government spending cuts and a brain drain of key staff to the train operators who can afford to pay more. Brown urges the DfT to restart the franchising process quickly to restore confidence, but the DfT must allow sufficient time to recruit and train people, otherwise it risks another collapse.

Brown wants the DfT to put an end to the ludicrous requirement for bidders to accept risk for national economic performance through to the end of the franchise and submit bids which make increasingly unrealistic predictions for rising premium payments or falling subsidy requirements. Instead, he sensibly recommends that franchisees should only be responsible for the risks they can manage with a mechanism to adjust premium payments or subsidy requirements.

Controversially, Brown also says that the government should not be afraid of franchise failures. Adopting these recommendations should make franchises more attractive to a wider pool of bidders and increase their flexibility.

Brown goes some way towards recognising that one type of franchise does not fit all situations as he recommends devolving some franchises to urban transport authorities

in the major cities, along the lines of the successful London Overground franchise. He also says that management contracts could be appropriate where major infrastructure projects are underway, because the disruption they cause makes it difficult to operate services commercially. But surely the ability to cope with disruption is the mark of a well-run company?

Brown fails to recognise that the needs of an inter-city service are very different from say those of a regional operation. There is a real danger of missing a golden opportunity to try something new, such as micro-franchising for regional lines with a strong local involvement, and true competition on some inter-city routes. There is already evidence from Italy and Germany that competition spurs real improvements and increases traffic for both the incumbent and the newcomer.

The East Coast Main Line already has two open-access operators, so why not replace the DfT's own operator, East Coast, with one or two more private operators all competing on an equal footing, rather than risking a third franchise failure on this important route?

McLoughlin should resist pressure for quick and cosmetic reforms that will only end in disaster. Britain needs a franchising system which is fit for purpose, attractive to bidders, flexible enough to cope with economic fluctuations, and delivers real improvements for passengers. The question is whether McLoughlin is brave enough to go beyond Brown's recommendations.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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