Leading article: This is no way to run the nation's railways

The privatisation of profits and socialisation of losses is unacceptable

Thursday, 2 July 2009

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Does the return of the East Coast Main Line to public ownership prove that the privatisation of the railways was a mistake and ought to be reversed? No, but it does demonstrate that the system of awarding franchises to private train operators needs to be comprehensively overhauled.

At the moment, we have the worst of both worlds. Shareholders and managements of private franchise holders have a licence to reap the profits of running services in the good times, but when economic conditions deteriorate, the costs fall in the lap of taxpayers – moral hazard on rails. And those costs look set to be substantial. The public purse will pay for the running of the line over the coming months, and the rent the Government raises when it re-auctions the franchise is unlikely to match what National Express was paying.

The primary blame for this debacle lies with National Express. The company bid more than it could afford for the franchise in 2007, using unrealistic projections of passenger growth and profit margins. Now it proposes to walk away from its liabilities, which it is able to do since it was running the line through a standalone subsidiary. A company which has broken its contract in such a fashion should be barred from bidding for future franchises. The Government also has a strong case for taking over National Express's other profitable franchises, the Stansted Express and CC. A firm which fails to honour its liabilities in one corner of the network should not be allowed to continue doing business in another.

The new Transport Secretary, Lord Adonis, has played a bad hand as well as he could. He was right to refuse to renegotiate the terms of the East Coast franchise, even though this might have been cheaper than putting the contract up for auction again. This would have been an invitation to other franchise holders, who are also experiencing financial pressure in the downturn, to demand similar renegotiations. Allowing National Express to buy out its contract would have set an equally undesirable precedent.

Despite the yearnings of the rail workers' unions and some backbench Labour MPs, there is no case for resurrecting the inefficient British Rail. There are some patches of bad service and incompetent management, but the railways have generally improved in private hands over the past 15 years. Passenger numbers are at their highest levels since the Second World War and the quality of rolling stock is much higher.

But while public ownership is a dead end, a franchising system which privatises profits and socialises losses is plainly unsatisfactory. So, as well as dealing with the particular problem of running the Edinburgh to London route, Lord Adonis needs to set his mind to reforming the terms on which these contracts are awarded and policed.

First, it is essential that lines should not be run by subsidiaries of larger companies that can be easily cut loose if managers get their sums wrong. This ability to walk away with minimal costs is an incentive for firms to overbid for contracts. The penalties for default must be considerable. The contracts should also be drawn up to prevent managers from taking colossal bonuses for meeting paltry performance targets.

What this bailout confirms is that railway franchises are not normal private businesses, but public utilities like water and electricity. Ministers must be prepared to regulate those who run them in a similarly robust fashion.

Comments

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UK Railways; an asset too important to be left to politicians

sdchamp wrote:

Thursday, 2 July 2009 at 08:40 am (UTC)

One wonders how frequently the author of this article uses our rail systam to get around. It is one of the crop of current offerings along the lines of 'no matter how bad it gets BR was worse'. As someone who uses rail frequently to get around the country, via Arriva Trains Wales, Virgin, Cross Country, Nat Express Anglia, FGW and others, I see a wide variation in service levels and facilities. What has improved generally is the level of customer service training of staff, with a few notable exceptions. I contest the authors assertion that all the new rolling stock is an improvement. For me, given a choice between a 'Voyager' unit with its noisy underfloor engines and claustrophobic toast-rack seating layout, specified by corporate bean-counters, and a 30 yr old, BR-engineering- built High Speed Train, or one of the Mk3 or Mk4 carriages with four seats round a table, opposite a window and with leg room, is no contest. What is galling is that as a taxpayer, I have already paid once over for the latter asset, only for it to have been flogged off at privatisation, and resold to a bank who are leasing it back for me to use at an enormous mark-up! The one success story in the saga of privatisation of our railways, is Network Rail which, as a non-profit distributing company, focussed on its mission and separated from DfT interference, has substantially reduced costs and improved performance: why? because it is arguably the UK's largest social enterprise. A similar legal structure for rescuing private franchises as they fail, has to be the only sustainable outcome as direct re-nationalisation would just abandon our railways to the obstruction of the road-obsessed DfT and mendacious mandarins at the Treasury.

Sdchamp.

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Re: UK Railways; an asset too important to be left to politicians

jinglebunny wrote:

Thursday, 2 July 2009 at 09:13 am (UTC)

sdchamp

Hear!! Hear!!

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joebeekenobi wrote:

Thursday, 2 July 2009 at 10:53 am (UTC)

Good comments by sdchamp.. the 'toast rack'seating gave me a chuckle. As an occasional train user I don't have day-to-day experience of the services but a large company getting into trouble by fault of poor management and the government running to the rescue of it using our hard earned cash seems like a familiar story of certain financial institutions last year! I do agree though that there should be much better contracts with harder penalties for the companies if they manage their franchise poorly.

Joe

Visit Franchises for Sale for information on franchise opportunities across the UK.

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This is no way to run the nation's railways

rb484 wrote:

Thursday, 2 July 2009 at 12:26 pm (UTC)

I dispute your assertion that British Rail was inefficient. From getting rid of the steam locos in the 60s to confronting the unions in the 80s, BR gradually made better use of its resources, to the extent that when it was broken up in the mid-90s, several of its private sector successors found that anticipated efficiency savings simply weren't there. Stagecoach through its South West Trains franchise came a particular cropper through this.

Secondly, the huge investment in rolling stock since privatisation has been made on behalf of the operators by rolling stock leasing companies which are all owned by banks. There is no reason why this could not have happened under state ownership and indeed this did happen on a small scale in the 60s when BR leased the Class 50 locomotives from English Electric. But perhaps in concentrating on the trees here I'm losing sight of the wood, because after all, what was the replacement of steam by diesel and electric locos in the 60s other than a massive investment in new trains?

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ourmaninferney wrote:

Thursday, 2 July 2009 at 12:55 pm (UTC)

British Rail was frequently, if not constantly, hampered by the mandarins at the Treasury. This is very clear, as I have written elsewhere, by the fact that they used the word "investment" when talking about paying for roads, but "subsidy" when talking about railways. They were as efficient as they could be given the few means they were allowed.

Britain's railways are a joke and I feel very sorry for those who have to put up with them on a daily basis. I took a ride earlier this year in Southern's "First Class", thinking it would be a comfortable way to travel (as it is on this side of the Channel), only to discover that I had *less* legroom than on the flight over. It was impossible to read a newspaper, either, thanks to the poor state of the track.

If Ministers and newspaper leader writers travelled a bit by train in Germany, Holland or Switzerland, they might have their eyes opened to what railway travel should be like. And they might also note that it is mostly state-run, with high levels of *investment*.

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Laughable conclusion

robertclondon wrote:

Thursday, 2 July 2009 at 01:36 pm (UTC)

Whoever wrote this leader needs to answer this question: how is it that most of the best rail systems in Europe (Switzerland, Germany, France etc.) have left them in public hands and not followed our example?

To say that privatisation would function if only we give it a bit of tweaking is plain barmy. Even Margaret Thatcher, never the biggest fan of the public sector to say the least, left the railways well alone. Private companies will never accept running railways at a loss and will always walk away if they can't make a fat, juicy, guaranteed profit, whatever the contract says in writing.

British Rail had been starved of investment for decades, yet was actually remarkably efficient in terms of subsidy and, whatever its faults, was actually affordable to use.

Basically, this article is plain wrong. Rather than denying the glaring and obvious truth that private railways have failed, would it not have been better to write one looking at what kind of public ownership structure could be put in place that would work?

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