BRITAIN’s unique passenger franchising model, which requires franchisees to either pay an escalating premium or receive a diminishing subsidy during the relative short life of the contract, has been under increasing strain for some time. Margins have become wafer thin or, in some instances, non-existent leaving some operators struggling to survive or, in the case of the InterCity East Coast franchise, defaulting for the third time.
The low level of profitability was confirmed earlier this year by Mr Chris Grayling, Britain’s secretary of state for transport. “The combined profit of every single train operator in the country was only £271m last year,” Grayling told parliament on February 5.
But the government appears to have made the terms for new franchises more onerous by including a provision for franchisees to plug a yawning gap in the Railways Pension Scheme. The Pensions Regulator wrote to the Rail Delivery Group (RDG), which represents the industry, saying that the scheme’s deficit had risen from £4.8bn to £7.5bn in three years.
Should franchisees with relatively short-term contracts of seven to 10 years be expected to take on a long-term pension liability? Stagecoach, which has been disqualified from three franchises for failing to comply with the terms in the franchise tender documents, says the DfT asked bidders for the three franchises to bear full long-term funding risk on parts of the Railways Pension Scheme as the Pensions Regulator tries to plug a funding gap because of doubts over the government’s continued support. “Along with many other train companies, we believe strongly that the private sector should not be expected to accept material risks it cannot control and manage,” says Mr Mark Griffiths, Stagecoach Group chief executive. To put this in context, the risk to Stagecoach could end up being greater than the value of the company.
The DfT confirmed to IRJ that Arriva was also disqualified from the East Midlands franchise along with Stagecoach, leaving just Netherlands Railways (NS) subsidiary Abellio in the running. Rather than cancelling the tender, the DfT decided to award the franchise to Abellio, which is already facing problems with its ScotRail and Greater Anglia franchises.
Virgin, which was bidding alongside Stagecoach and French National Railways (SNCF) for the West Coast Partnership, was also disqualified by default. Stagecoach and Virgin have run franchises since the beginning of rail privatisation in 1997. While the companies have not been banned from bidding in future competitions, it seems highly unlikely they will do so unless the government backs down on the pensions issue.
It was only recently that Grayling was full of praise for Virgin. “Virgin has transformed the West Coast from a poorly-performing service requiring a subsidy of over £75m a year to the franchise with one of the highest passenger satisfaction rates, at 91%, and returning over £200m per year to the taxpayer,” he said.
If the DfT continues along its current path, nearly all Britain’s passenger services will be operated by subsidiaries of foreign state-owned railways, as private British companies can no longer afford to bid.
Change could be afoot. An independent “root and branch review” of Britain’s railway is currently underway by a team chaired by Mr Keith Williams, a former CEO of British Airways. Williams has already said that the current model is no longer fit for purpose. “What worked 20 or 25 years ago no longer works today and will not work in the future,” he said in February.
Williams outlined some of his preliminary findings at the Accelerate Rail conference in London on March 19. “Despite growth in the sector, there is a lack of leadership and strategic direction,” he said. “The levers to affect change don’t come together coherently and in too many instances only do so in the DfT.”
Williams says the DfT has taken on roles it never intended to perform to fill a vacuum in the current structure. “Did it ever really set out to specify which trains stop at which stations?” Williams asked. “The DfT’s role, and the role of other industry players, will have to change.”
While Williams acknowledges that a lot has been achieved since 1997, namely the doubling of passenger traffic, he says passengers have had a rough ride with satisfaction at its lowest level for a decade. “Distrust now stands at 37%, 13 percentage points higher than three years ago,” he said. “Only second-hand car dealers are more distrusted by consumers.
“The railway is not customer focussed at all. Passengers don’t believe the railway wants or is able to run a quality service.”
Williams says there needs to be an improved focus on customers, a shift in accountability, and more collaboration. He believes consultation will be crucial, and the industry should have access to the skills it needs.
RDG’s CEO, Mr Paul Plummer, says a new body is needed to set policy and budgets and become responsible for procurement of services. “The impetus for a new body has become greater since Network Rail was nationalised and the tightening of contracts,” Plummer told Accelerate Rail delegates.
Williams will publish his recommendations in the autumn, and the government says reform will begin next year. In the meantime, the DfT is pushing ahead with letting new franchises, and its past record of largely ignoring the recommendations of independent reports does not bode well.