The acrimony surrounding Virgin’s loss of the west coast main line to FirstGroup marks the start of two hectic years of franchise auctions – and new concerns over the way the system works
The trouble with bidding to run the railways, muses one veteran of many franchise bids, is that the people who mark the bids are not supposed to know who they’re marking. Fine in an exam; but, he says: “It’s like the henhouse choosing security guards from whoever writes the best application letter, and only then finding they’ve given the job to Mr Fox.”
Tim O’Toole, the head of transport giant FirstGroup, which has just landed the contract to run the west coast main line, will be doing his level best to keep his henhouse intact. Already the nation’s biggest rail operator, FirstGroup will soon be running trains from London to cities up to Glasgow – ousting the Virgin brand from British railways, possibly forever.
But some question if FirstGroup will make good its promise to pay at least £5.5bn to the Treasury over the next 13 years, with the bulk of that sum to come towards the end. Labour has already accused rail operators of “gaming the system” after FirstGroup’s decision not to take up the last three years of its Great Western franchise, to avoid paying £800m in premiums.
The defeated fury of Virgin’s Sir Richard Branson took the headlines: he branded the decision “insanity” and a recipe for bankruptcy. While few expect a fiasco of the magnitude seen on the east coast franchise – when first GNER in 2006, then National Express in 2009 couldn’t meet their financial commitments – the size of FirstGroup’s bid raised eyebrows, including those of transport group executives eyeing the deluge of train franchises due to be to be awarded over the next two years.
For Virgin, the bruising rejection is compounded by the belief that they know the numbers better than anyone. FirstGroup’s growth predictions were based on the government’s – and as the Office of Budget Responsibility has shown, these can be as wildly optimistic as anyone else’s.
And bidding is a costly, time-consuming business: train operators typically recruit dozens of consultants, squirrelled away with parts of the management for months, if not years, to tailor a detailed bid to the government’s equally detailed specifications. Each company’s plan can run to 1,500 pages: bid teams talk of working around the clock. Branson, four times thwarted now, has spent £60m in vain.
Some question who, consultants aside, gains from a system that often appears to end up with no more than a reshuffled pack of operators and new brand names on the trains. How could something as straightforward as trains on tracks throw up a system this convoluted? Franchising, critics say, is a messy compromise, a hybrid offspring of free-market ideology and misdirected EU regulation spawned in the John Major years, something no minister now has the energy to change.
But others laud the ejection of Virgin as proof that the franchising system is, as the Department for Transport demands, operating under the most rigorous rules. Anonymising code names are employed – FirstGroup’s bid was referred to as “Reno” within the DfT. Ministers, meanwhile, are kept out of the loop until the winner’s name is handed to them in a sealed envelope.
Yet most in the industry believe it would be impossible for the DfT’s assessors not to quickly divine the identity of each bidder they mark on a “scoring matrix”. That makes reports that FirstGroup’s bid earned a higher rating for customer service – despite the contrary evidence of passenger satisfaction surveys – hard to fathom.
And cynics suggest the only number that really matters is the one that follows the pound sign. The highest cash offer hasn’t always won – the ill-fated National Express winning tender for the east coast was actually outbid – but now the purse strings are pulling tight on the railways as much as anywhere else: in March, transport secretary Justine Greening declared that she wanted to save £3.5bn a year by 2019.
There is a textbook for this new era of austerity on the railways. Last year saw the publication of a report into the industry’s costs and structure by Sir Roy McNulty, former chairman of the Civil Aviation Authority. Commissioned by the Labour government, it was also backed by the coalition, which saw a perfect fit between McNulty’s cost-cutting agenda for the railways and its wider commitment to cut the deficit.
Speaking after it was published, McNulty said: “There is a clear imperative to give both farepayers and taxpayers a better deal. This industry has a serious cost deficiency issue to address. Everyone concerned must be aware that passengers are paying above the odds.”
As his reference to both the state and the passenger suggests, however, any reduction in fares must be achieved alongside a cut in the subsidy. The multibillion-pound figure attached to the west coast deal could be viewed as a watershed in a drive, launched by Labour in 2007, to tilt the funding burden of the railways away from the taxpayer to the farepayer. Currently, passengers pump £6.6bn into the railways per year compared with £4bn from the government. But once passenger revenues are subtracted from costs, the industry has an operating deficit of £4.3bn. A gap that big is not sustainable if the industry wants to grow further, says McNulty.
McNulty’s original thesis was that Britain’s railways cost 40% more than they do in France, the Netherlands, Sweden and Switzerland, and that £1bn a year could be shaved from industry expenditure by the end of the decade – an ambition Greening tripled.
In the list of causes for this apparent profligacy, McNulty includes “a franchising system that does not encourage cost reduction sufficiently”. All bidders for the west coast franchise were expected to show some awareness of McNulty’s conclusions, although there was no explicit call for mega bids like FirstGroup’s. With repeated references to excessive costs, perhaps there was no need to state the obvious.
And certainly not to O’Toole, who leads industry body the Rail Delivery Group, which was set up to find ways to implement McNulty’s vision.
O’Toole said cost-cutting was only a small proportion of his west coast bid – a less brutal approach, he believed, than rivals. Despite dark warnings from the RMT union, O’Toole maintains that services will be enhanced, from smart ticketing and free Wi-Fi to the onboard catering – even pledging comfier seats.
Yet few commuters in Friday morning’s rush hour at London’s Paddington station had encouraging words for those about to experience the FirstGroup effect. Artist Richard Learoyd, 45, who regularly travels to Bristol on FirstGroup’s trains, said: “Kicking Mr Branson out is an appalling waste of time and a folly. First Great Western are a poor service.”
Waiting for a delayed train, Stephen Ellis, 29, from Brixton, said: “All these companies are out to make as much profit as they can. The service on First Great Western is pretty appalling. They don’t seem to care very much about their passengers and trains are always cancelled.”
Over at Euston, the London terminus for the west coast main line, Sarah Kingsley, 37, from Manchester, was “shocked”. “I travel with Virgin fairly often and think it’s a really good service. It seems crazy that someone can run it for 12 to 15 years and then it moves on to another business.”
The internal workings of the rail industry – the circuitous flows of obligations, contracts, operators, profits and costs – can seem as complex as a Pendolino power car. The real changes this deal brings about will not emerge as Virgin’s red livery disappears on 9 December, nor will they ever be as obvious. If FirstGroup does deliver a service to equal or better Virgin’s, while sending the best part of a billion pounds more than its competitor promised back to the Treasury, it will prove to have been the right choice. But it will be years before anyone can be sure if the growth that FirstGroup and the government are banking on will materialise.
And while the franchise mill slowly grinds, passengers around the country are digesting news of a 6.2% fare price hike, making Greening’s promise to end the “era of inflation-busting fares” look a long way off.
Back at Euston, Ken Adams, 66, heading north from his home in Wanstead, questioned the whole point of the bidding process: “Civil service bullshit, isn’t it? They know the cost of everything and the value of nothing. Five years down the line the franchise will go bust, and we’ll be like we were on the east coast.”