Michael Harrison's Outlook: Transport ministers must take the blame for Britain's great rolling stock rip-off

Compass begins to point the right way; Carbon trading comes of age
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The Independent Online

Physician, heal thyself. Or, to use a more modern idiom: Department for Transport, analyse this. In June, the department packed the country's three train leasing companies off to the Rail Regulator Chris Bolt and instructed him to establish whether they were making excessive profits. Five months later, his Office of Rail Regulation has come back with its findings, all 138 pages of them. Its report concludes that the three rolling stock companies, or Roscos, are indeed making too much money and is minded to refer them to the Competition Commission. But here's the rub. The culprit in all this is the Department for Transport itself. The main reason for the lack of competition in the rolling stock market and hence the excess profits is the way the department has drawn up the passenger rail franchises. These are very prescriptive and often stipulate which rolling stock a train operator must use. In other cases, they have no option but to use particular trains because of the type of track. In other instances, even when alternative rolling stock is available, it is owned by the same Rosco.

In its response to the ORR, the department has pretty much ignored all this and gone for the jugular, arguing that at the top end of the scale the excess profits being made by the three companies is £175m a year or £2bn over the lifetime of the leases. Put another way, that is an extra 8 per cent on a typical season ticket.

The three Roscos all happen to be owned by very large banks - HSBC, Royal Bank of Scotland and Banco Santander - which makes them convenient whipping boys for politicians. But to argue that they are making £175m more a year than they deserve to when their total reported profits are only £165m seems absurd.

The department says that this is like comparing apples and pears because the £165m profit recorded by the Roscos is only after they have made interest payments of a similar amount back to their parent banks on the debt provided to finance their operations. Like dividends on equity, some of this represents extra profit.

The ORR now intends to consult for three months before deciding whether to make a reference to the Competition Commission. If it does, then the industry is in for a further investigation lasting up to two years.

Faced with such uncertainty, it seems inconceivable that the Roscos would make any investment in new trains during this time. That is not what passengers want to hear. Only a fortnight ago, the National Audit Office warned of a capacity crisis on the West Coast Mainline if more Pendolinos were not ordered soon.

But a two-year hiatus in rolling stock orders may be precisely what a cash-strapped Department for Transport wants to hear because new trains carry a political price in the shape of higher fares or bigger government subsidies. Or is that being too cynical? Surely not.

Compass begins to point the right way

Richard Cousins swapped plasterboard for the equally racy world of mass sandwich making six months ago and, yes, he can taste the difference. Compass, the contract caterer he took over in May, was still recovering from a United Nations bribery scandal and Jamie Oliver's demolition job on school meals. It must have seemed a world apart from BPB, the sleepy old building materials business he had just sold to the French.

Yesterday was his first opportunity to take stock of his new empire and he has not hung around. Compass is withdrawing from a third of the countries in which it operates and selling off its vending division Selecta. The idea is to make the business more manageable, his predecessors having overstretched themselves and paid the predictable price.

And yet, such is the scale of Compass that it will still employ 400,000 staff - three times as many as Royal Mail - serving up food in 40,000 locations around the world. Axing 30 countries from the menu, mainly in the Middle East and Africa, will simplify the task of management. But the key to unlocking the potential of the business is better control of its costs. The company's wage bill is £4bn a year and it spends almost the same again on food. In schools, where the campaign against unhealthy eating found a perfect symbol in the misshapen form of the Turkey Twizzler, Mr Cousins has taken a gamble by replacing fully staffed kitchens with pre-cooked, steam-heated meals. Mixed bean stroganoff may not be what every school child dreams of for lunch, and some pupils have voted instead for the chippy. But among primary school kids, Compass is winning the war.

Having stabilised the business and tightened up financial controls and governance, the job of Mr Cousins and his chairman, Sir Roy Gardner, is to grow the business. Not through a helter-skelter of acquisitions but with solid organic growth. It also needs to migrate from being a pure service provider to more of a retailer with a keener eye on what its ultimate consumers want. Sir Roy's long experience with Centrica, which had 13 million energy accounts when he left, should stand it in good stead.

Nevertheless, progress could be slower than some investors might like because today Compass is less obsessed with contract retention at all costs and more interested in what makes good, profitable business. Most importantly, however, the rot has been stopped and the business is pointing in the right direction.

Carbon trading comes of age

All markets take time to find their natural equilibrium and so it has proved with the one devised by Brussels to enable Europe to trade carbon permits. The first round of allocations two years ago was far too generous with the result that the price of carbon plunged, reducing the incentive for industry to cut its emissions. Second time around, it looks as if the Commission has done a better job. The carbon allocations announced yesterday for the 2008-12 period are 7 per cent lower than those which had been applied for. The French, sensing that their request would be laughed out of court, didn't even bother to submit one in the end. Remarkably for a country which generates 80 per cent of its electricity from carbon-free nuclear power, it felt it needed a bigger allocation than almost anyone else. The Germans, too, were big losers.

On the other hand, Britain, which made a hash of its application last time by underestimating the number of permits it would need, was the only country to have its plan accepted. This is because it will meet its legally binding Kyoto target on greenhouse gas reductions, if not the more challenging but voluntary one we have set ourselves.

If a low-carbon economy is to become a reality across Europe, then it is important that the emissions trading market, like any market, functions in a way that gives investors confidence. Ultimately, it needs to become a worldwide market. But that will take time. The next step will be to start auctioning permits rather than handing them out for free if Europe really wants to encourage carbon reduction and avoid the looming energy gap which could leave it short of power.