Jeremy Warner's Outlook: As GNER's experience confirms, the train franchising process is no way to run a railway

WH Smith follows GUS in doing splits; Final closure for Bank on the BCCI débâcle
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The Independent Online

This is no way to run a railway. Christopher Garnett, head of Great North Eastern Railways, is so dismayed at his treatment by the Rail Regulator that he's thinking of quitting for pastures new. Who can blame him after the shabby way in which the Government has dealt with the matter of competition on the east coast main line.

At £1.3bn over 10 years, GNER paid a high price to keep the franchise when it came up for renewal a year ago. If it looked like Mr Garnett was overpaying for the privilege back then, it seems doubly so now that the Office of Rail Regulation (ORR) has decided to allow a rival company to run trains on the line as well.

Mr Garnett had attempted to include a non compete clause in his franchise renewal proposal, but had it removed after he was persuaded it would damage his prospects. At the same time, he was assured there would be no licences for competitors anyway. Mr Garnett claims he was invited to "ignore" the threat of open access.

The business plan was already aggressive enough, but it relied crucially on running extra services from London to Leeds. Under a ruling from the ORR, these slots are now to be occupied by a rival company running trains to Sunderland. Was Mr Garnett misled, or was he just naive? Either way, last year's auction for the franchise seems to have been a sham.

Many believe it should be reopened. Other bidders were "marked down" for including a non compete clause in their bids, while Mr Garnett now believes he's paying at least £100m too much.

After billions of expenditure, the railway is beginning to get back to again running the trains safely and on time. Yet the system will break down afresh if the train operating companies are uneconomic. The present franchise system, under which the highest bidder wins regardless of the plausibility of its business plan, is flawed and open to abuse.

GNER, part of the troubled Sea Containers group, is learning the hard way that it never pays when dealing with government to rely on a nod and a wink. If it is to survive, the franchising system needs to be made more transparent and subject to public scrutiny.

WH Smith follows GUS in doing splits

Doing the splits is becoming infectious. WH Smith is to follow GUS in demerging retail from its other operations - in WH Smith's case a substantial news distribution business.

WH Smith has long accepted that there is no particular purpose in keeping the two businesses together, having tried to sell the distribution arm on at least one occasion in the past. The sale was abandoned only because the private equity buyer tried to negotiate the price down after due diligence. Just as well, with the benefit of hindsight, that the transaction failed because news distribution may today be worth more than double what was being offered back then.

Still, separation can be resisted no longer. Not only is there no logic in keeping the two together, but there may even be some positive disadvantages. The future of news distribution is up in the air following confusion among competition regulators over whether to keep the present system of local monopolies or allow open competition in the distribution of magazines.

As one of the largest distributors, WH Smith might be a net gainer from deregulation, even though it is on record as supporting the present system. However, major supermarket customers are already fractious about the distribution arm's relationship with WH Smith the retailer, which is also a big customer.

The potential for conflict of interest is all too obvious, and in any case, the big supermarket groups are increasingly unhappy with the idea that by subscribing to WH Smith's distribution business they may in effect be subsidising a competitor in the form of the group's retail chain. Demerger will remove the problem and thereby help safeguard news distribution's future.

As for the retail operation, it still struggles to find a purpose amid the turmoil of today's high street, despite the best endeavours of Kate Swann, the chief executive. Like-for-like sales are continuing to slide, and although the bottom line looks better, Ms Swann cannot for ever live on cost cutting alone. Speculation that WH Smith might want to go further into higher margin books by mounting a rival bid for Ottakar's looks more than plausible.

There would appear nothing to stop Ms Swann from entering the fray now that the Competition Commission has provisionally cleared Waterstone's, this despite the fact that Ottakar's acquisition by WH Smith would almost certainly lead to an even greater dumbing down of the range than a Waterstone's takeover.

In any case, Ms Swann could find herself in the interesting position of both demerging and acquiring at the same time. That's quite a challenge given the turnaround yet to be performed in the core retail business. The 5 per cent uplift in the share price yesterday none the less suggests there might be City support for such a strategy.

Final closure for Bank on the BCCI débâcle

It is hard to imagine a more damning catalogue of criticism than that heaped yesterday by Mr Justice Tomlinson on the liquidators of BCCI and their legal team. Their case against the Bank of England was described as "a farce" which bore little relation to the one the Lords had seen fit to bring to trial, while their counsel, Gordon Pollock QC, was accused of inappropriate and distracting behaviour and of "sustained rudeness" not in the normal traditions of the Bar.

The Bank could not have hoped for a more unambiguous judgment on this utterly misconceived legal case, believed to have been the longest and most costly ever to have graced the commercial courts. The liquidators, Deloitte, unconditionally discontinued their action last November, but unwilling to let the matter rest, the Bank of England demanded the full vindication of a written judgment. Yesterday's tirade brings final closure on an action that should never have been brought in the first place and will long serve as a warning to others of the dangers of vexatious litigation.

The Bank could always reasonably be accused of negligence in its supervision of BCCI, which fraudulently collapsed in the early 1990s leaving depositors out of pocket to the tune of billions of pounds.

Unfortunately for the liquidators, the law required them to prove misfeasance, or that the Bank deliberately and dishonestly set out to disadvantage depositors. There was never any evidence of this and indeed it is hard to imagine why a government authority charged with protecting the interests of depositors would conceivably want to do such a thing.

Yet the liquidators proceeded, apparently confident in the belief that the Bank would find it less painful to pay up and settle out of court than have its dirty laundry washed in public. Other targets of the liquidators' legal actions have succeeded in just this purpose, so it is easy to see why they thought it might be possible to repeat the trick with the Bank.

However, the thinking contained a fatal flaw, which was obvious to everyone other than the liquidators themselves. The Bank was not being tried for negligence, but misfeasance, an offense no central bank could even tangentially admit to if it was ever to show its face in the capital markets again. An out of court settlement was therefore impossible. Once the legal juggernaut had started to roll, it proved extraordinarily difficult to stop.

Deloitte has done well on behalf of BCCI creditors, who have already received more than 80 per cent of their money back. But for their misjudgment in bringing this case, it might have been even more.

j.warner@independent.co.uk

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