What Is Franchising For?

Christian Wolmar writes:

Reports today suggest Labour is set to announce that it will allow parts of the rail network to come back into public ownership.

But it seems Labour, which has dismissed the story as "pure speculation", will only allow a recreated British Rail to bid for franchises rather than taking them all over as they run out.

The leadership's fear of a more radical solution has been apparent for some time and this patched-together compromise has always seemed like the easy way forward to avoid frightening the horses and satisfy the party's more radical elements.

Unfortunately, it will do neither and is a mistake, both practically and politically.

The franchise bidding process is a convoluted and difficult procedure that costs each bidder about £5m because it involves setting up a team with expertise in all aspects of railway operations and marketing.

If a BR-type organisation is expected to bid for every franchise, it will be an expensive operation with only a small chance of success since normally three or four bidders are in the frame.

It takes no imagination to see how badly such a waste of resources will go down with the public at a time of austerity.

The private operators will make an enormous fuss and cry foul at every stage, complaining that the government bidder will have inside knowledge and access to cheaper capital than they do.

Then there's the politics.

The Blairite rightwingers will say this idea is antagonistic to business and sends the wrong message to the City.

The left will argue it is a missed opportunity to put forward a radical policy that is popular and practical.

And both sides are right.

If Labour is going to anger the rail companies, the party might as well go the whole hog. After all, few sympathised with the energy companies when Ed Miliband made his conference promise to freeze prices. 

And there is support for the idea that an industry that receives state support of £4bn per year – about a third of its income – should be in public hands and not leech much of that to the private sector.

Taking a step back from these immediate considerations, the central question is: what is franchising for?

No other country in the world runs its railways in this bizarre way and the process in Britain has led to instability and uncertainty in an industry that thrives on consistent and long-term thinking.

The debacle over the West Coast franchise two years ago highlighted the inherent problems of putting long-term contracts to run the railways out to tender.

Hence the Department for Transport is now focusing on seven-year deals because the private sector cannot take the risk over longer periods (except on small well-defined franchise areas such as Essex Thameside).

As well as the cost of the bidding process, franchising creates an inflexible railway.

Any changes to the timetable sought by the DfT in response to changing demand will be the subject of dispute with the operator, inevitably leading to extra costs.

And the most outrageous aspect is that operators are paid massive compensation when services are disrupted by engineering works carried out for their benefit.

Labour's leadership may be worried about upsetting business interests, but franchising is a strange type of capitalism.

Conventional companies earn a rate of return because they are rewarded for taking risks and for investment. 

Train operators neither invest – improvements are paid for either by Network Rail or the rolling stock owners – nor take risks, since they know they can always throw in the towel if passenger numbers fail to meet expectations, as happened in 2009 when National Express cut its losses on the East Coast franchise and simply handed it back to the DfT where it has remained ever since as a publicly run franchise.

Even senior rail industry insiders think the game should be up for franchising.

When I mentioned to one long-established manager last week that I was a franchising sceptic, the response was immediate: "So am I."

It's a shame that Labour's leadership appears to not be brave enough to follow that logic and get rid of a system that has ill served both the industry and its passengers.