Reports have emerged that the UK government is drawing up plans to launch another review of the UK rail franchise system. Downing Street is pitching it as the biggest review of the rail system since contracts were privatised in the early 1990s, aimed at determining how to improve the franchising system while still using private operators. Those familiar with the transport sector might be forgiven for feeling a sense of déjà vu: this would mark the government’s second review into the system in less than five years.
The failure of the East Coast franchise, the third collapse of the route’s operation in 12 years, is probably what pushed the government into renewed action. A parliamentary investigation accused the line’s operators VTEC – the joint venture between Stagecoach (STG) and Virgin Group – of overbidding for the franchise, and the government for setting unrealistic expectations for the franchise’s operation. The review called Stagecoach and Virgin’s forecasts of 10 per cent revenue growth each year "unprecedented", leading to a financial picture that was "bleak from day one". VTEC tried to blame external factors, such as slower GDP growth and cheaper petrol encouraging more drivers onto the road. But the committee balked at the idea that these were viable excuses.
The rail franchise system is less than perfect, with commuters often complaining about rising fares and shoddy scheduling. While a review of the system aims to tackle this, others are looking into more drastic measures. Jeremy Corbyn’s Labour party is in favour of renationalising the rail network. According to a YouGov poll, 60 per cent of Britons agree that railway companies should be run by the public sector, compared with a quarter who think it should be operated by private companies, while the remaining 15 per cent were unsure.
The British rail system has grown dramatically since privatisation began in 1994. In the years leading up to privatisation, revenue from British Rail passengers was around £3bn each year (based on 2016-17 pricing). Since turning private, revenue in real terms has increased 180 per cent between 1994-95 and 2016-17, according to a parliamentary report from the House of Commons, while rail usage has increased by just over 135 per cent over the same period.
Fares have been climbing too. In January 2018 fares across all operators were a fifth higher in real terms than they were in January 1995, with an average annual real increase of 0.8 per cent. Fare increases have been most pronounced on long-distance routes, rather than in London, the south-east or regional services.
We apologise for the inconvenience
Bosses at Go-Ahead Group (GOG) have said they would welcome another review of the rail sector, so long as any investigation is conducted by an independent third party. These comments were made after Go-Ahead revealed operating profits from its rail business had fallen by a quarter to £44.5m during the year to June. Its operation of the London Midlands franchise expired during the period, while its bid to renew the contract was also rejected. The company’s change to the Govia Thameslink Railway (GTR) franchise was a nightmare – both for Go-Ahead and passengers – but a new timetable introduced in July has seemingly proved more successful.
FirstGroup (FGP) surprised investors at its full-year results in May – but not in a good way. The company fell into the red, due in part to £106m-worth of onerous contract provisions on the TransPennine Express (TPE) rail franchise, which projected losses on the remainder of the contract. Passenger growth of 10 per cent was lower than expected at the time of the franchise bid, leading to an operating loss of £6.8m during the year to March 2018. However, chief financial officer Matthew Gregory said this wouldn't affect plans to increase capacity on the TPE network by more than 80 per cent to "create a true intercity railway for the North". The results also saw the sudden departure of chief executive Tim O’Toole.
Detour ahead
Some UK transport companies have been getting fed up with operating rail contracts, particularly as the volatile and often lossmaking sector proves unpopular with commuters and investors alike.
One of the most notable failures in the system this year was Stagecoach and its aforementioned VTEC joint venture with Virgin. A torrid year forced Stagecoach to cut its full-year dividend by more than half, from 8.9p last year to 3.9p in June, leaving the new payout at a "sustainable" level (payments are covered by non-rail cash flows). The failure of the East Coast franchise cost the company £85.6m in one-off charges during the year to June, but that hasn't stopped it from launching current bids for rail franchises including South Eastern, East Midlands and West Coast Partnership.
Others have given up on the sector altogether. Back in July, National Express (NEX) chief financial officer Chris Davies said there was "no chance in hell" the company would look to re-enter the UK rail market, while chief executive Dean Finch reportedly said he hoped fellow members of the board "would take me outside and shoot me" if he said the company should re-enter UK rail. Although National Express was once the UK’s largest train operator, it sold its remaining franchise, the c2c route from Essex to London, to state-run Italian company Trenitalia in January 2017.
Going once, going twice… Vendu!
The Department for Transport (DfT) has come up with a shortlist of potential operators for the West Coast Partnership and South Eastern franchises. The West Coast Partnership will include running the HS2 high-speed services between London and Birmingham from 2026, in addition to responsibility for services on the West Coast Main Line from April 2019. Currently, there are no UK companies with capacity for high-speed operations, so all bidders must team up with foreign operators. Even for the South Eastern bid, only one of the four vying for the spot are solely UK-operated.
Inevitably, the involvement of international companies has spurred criticism. Britain’s transport union, RMT, expressed outrage that a public sector option wasn't presented in the list of options, which it claims would be cheaper and more efficient than a private operator. But others assert that having foreign companies bid for the franchises is in the government’s interest as it increases competition and provides better value for taxpayers. But in the case of HS2, the need to partner with a foreign high-speed operator is, quite simply, a necessity.
