Philip Haigh: Debacle raises questions for franchise system

There are hard questions to be asked about rail franchising. The decision by Lord Adonis to take back the East Coast franchise will trigger questions about whether it is worth letting private companies run franchises, taking profits in the good times before walking away as trouble arrives. It has surprised many that National Express financing for East Coast was just £72m. For a seven-year deal promising the Government £1.4bn, the liability is tiny.

When first privatised back in the 1990s, rail was not expected to be the success it is today. The modest expectations were soon replaced by aggressive bidding from multinational transport groups with heroic predictions of passenger growth. But now the private railway is seeing its first recession. National Express East Coast is the first victim of that slowdown, as good as dumped by its parent company.

Other operators are protected from economic changes by a "cap and collar" arrangement, ensuring that excess revenue is handed to the Government, while lending support if income drops below target. But these arrangements usually only kick in after four years, exposing both sides to some risk. That, at least, was the theory before NXEC's downfall.

Two schools of thought are now left. One is that longer franchises are the answer, giving operators sufficient flexibility to change timetables and fares to cope with booms and busts. Deals of up to 20 years would give operators an incentive to stay the course, grow their businesses and serve their passengers.

The other view is that government should run the railways – perhaps not directly, but through an agency operating a nationalised network. It is then clear who shoulders the risk and reaps the reward. Rail becomes a public service for the country's benefit and not today's strange mix of private greed and public rescue. A public railway removes the profit margin, as the Government has done with track owner Network Rail, but does run the risk of short-term, political spending decisions.

The worst of both worlds is the current crop of short-term, seven-year deals that transfer risk to private companies and pander to the greed of government for premium payments and stock markets for profits. Until NXEC went under, that was the DfT's favoured model.

We've still to find the balance where private delivery of public services really works to the satisfaction of both sides.

Philip Haigh is the business editor of Rail magazine