Last week the first three service franchises were put out to tender. Private sector companies are being invited to bid to run train services on the south west region, the great western region and a Southend commuter line.
This being the railways, prospective bidders are not being asked to pay money to run these franchises. Instead they are competing to accept the smallest subsidy to run them. Bidders have to meet a basic Passenger Service Requirement, which sets out service frequencies. There is discretion to offer extra services, but in general the lowest bid will win each franchise.
The man in charge of awarding franchises is Roger Salmon, formerly a merchant banker with N M Rothschild. There he helped privatise gas, water and the Docklands Light Railway. Now he heads the Office of Passenger Rail Franchising or Opraf. [Everything has an acronym: Tesco is not a shop but a Train Engineering Service Company.]
When I asked Salmon last week why on earth he quit the comfortable world of merchant banking to chivvy through one of the most unpopular proposals in post-war history, he said he'd always wanted to run his own large complex project, rather than just advise others. "And this is the mummy and daddy of large complex projects." That is undeniable. However, passengers fearful about standards in the privatised railway will hardly be encouraged by the fact that Salmon, once a regular commuter on the Dulwich to Blackfriars line, now chooses to go to work in an official car.
Rail privatisation has been structured in an absurdly convoluted way. It is a lawyers' paradise and taxpayers' nightmare. But given the constraints, Salmon seems to have set out the franchising side pretty sensibly.
First of all, he has left no one in any doubt that running a franchise is risky and could be lossmaking. The train operating companies or TOCs - the units the winning franchisees will run - have little track record and what little they have is not much of a guide to the future. Franchisees are helplessly reliant on other parts of the broken-up British Rail. Fares are capped and mostly outside their control. The safety regime is tough. And the disruption caused by a single accident could wipe out profits. Don't say you weren't warned, Salmon is saying.
Second, he seems to have created something close to a level playing field. The prospective bidders are whingeing of course, but they all seem to be whingeing at the same decibel level. The management buy-out teams complain that the external bidders have the advantage because they have deeper pockets and better access to capital, which is going to be crucial. The outside bidders complain that the buy-out teams have inside information plus the advantage of having negotiated many of the operating contracts with Railtrack and other organisations in the broken-up British Rail.
Third, Salmon has reduced (though not eliminated) the possibility of a franchisee that finds it cannot make money, from throwing in the towel midway through its seven-year licence period, leaving passengers stranded. Franchisees will have to put up bonds equivalent to 15 per cent of the revenues of a franchise. For Great Western, say, that means pounds 23m. These will be forgone if the franchisee pulls out.
Fourth, he has removed some of the political and regulatory risks. Franchisees will be compensated should VAT be slapped on rail fares. They are also protected against unforeseen regulatory changes. Offering such sweeteners makes sense. The immediate gain from higher bids (strictly lower ones because franchises are bidding for subsidies) should more than offset the possible future loss to the Exchequer.
Inevitably there is a forest of red tape. The scope for private sector enterprise to flourish looks limited when franchisees have no control over infrastructure, fares or track access charges. There is even a complex "sardine formula" spelling out how much franchisees can overload their trains. But Salmon has done enough to attract decent bids.
Meanwhile, on another part of the railway, a key decision is looming. In the next fortnight the Government is due to shortlist the preferred bidder or two from four applicants to build and operate the Channel Tunnel Rail Link. The two favourites are London & Continental, a consortium put together by Virgin, Warburg, National Express and Bechtel, and EuroRail, a joint venture between BICC and Trafalgar House, chaired by Lord Parkinson. The dark horse is Green Arrow, headed by the former Bank of England governor, Robin Leigh Pemberton, now Lord Kingsdown.
The successful construction of a high-speed link joining the mouth of the tunnel to London and the rest of the inter-city network is crucial. The entire network then has the chance to compete against airlines and cars. Without it the railways are crippled. Getting it built quickly and run properly is just as important to the future of the railways as the deliberations of Opraf.
Stand by for son of Barings
HOW much have companies learnt from the Barings affair? Not much, I fear. Neil Record, of Record Treasury Management, one of the longest established and highest regarded derivatives specialists, wrote to 200 blue chip chiefs soon after the collapse. He was offering a transaction tracking service, which logs and evaluates every derivatives deal a client makes as it happens - a sort of continuous external derivatives audit.
Record got more than 100 polite letters back, saying thanks but no thanks. The general tenor was that the finance director was satisfied sufficient controls were in place. Only eight of the 200 companies showed any interest at all and just one is close to signing up.
Properly controlling derivatives trading means totally segregating the traders from the back office, and having people who understand their horrendous complexity in both. For most corporate treasury departments, that is not feasible. Anyone who fully understands derivatives wants to trade them, not run the dull settlements side. Hence the importance of Record's service.
Of course finance directors and treasurers will not want a beady eye overseeing their territory; they will claim such a service is unnecessary. Until chief executives appreciate this and act, another Barings is just a few trades away.Reuse content