Off the rails: Rethinking Britain's train services

The railways are creaking under the current franchise system. Sir Richard Branson wants a revamp. Sarah Arnott reports

Eniviromentally friendly trains could take on carbon-intensive flights from London to Glasgow in as little as four years if the Government rethinks the rail franchising system, according to Sir Richard Branson.

The current model – under which train operators pay a premium based on projected passenger volumes to be allowed to run services on a given route – is coming under increasingly heavy fire, not just from Sir Richard. National Express's East Coast line has the most high-profile problems. But it is not alone. The majority of the current crop of 17 franchises were signed in the past few years, just before the plunge into recession. With 80 per cent of costs fixed, and bailout clauses unlikely to kick in for the first four years, operators are increasingly exposed (see below).

Sir Richard says the system is to blame. "Negotiations are simply about who promises to pay the taxpayer the most money for the franchise," he said. "Instead we need to create new services and bring private sector investment into rail."

In practice that means a strongly capitalist vision, junking central planning of timetables and rolling stock procurements in favour of much longer franchise agreements – of at least 20 years rather than less than 10.

"Sizeable investment is needed to tackle the issues that will put pressure on the rail network in the future: rising passenger numbers, lack of track capacity, ageing tracks, ageing train fleets, and truly antiquated stations," Sir Richard said. "Competition on the infrastructure side would be healthy and would get more value out."

To some extent, he would say that. Virgin Trains bid unsuccessfully for CrossCountry in 2007, pushed out by a more lucrative rival – although the Government said it turned down an even higher bid. Virgin was also pipped by National Express for the East Coast, and Sir Richard has made no secret of his intention to bid again if the beleaguered franchise comes back on the market. But, vested interests notwithstanding, there is a point to be made. The current phase of contracts are commonly only seven years long, providing operators with little incentive to invest in long-term infrastructure that will almost immediately be handed over to someone else, often before it has even started to pay itself off. Instead, upgrades are left to Network Rail.

There is also some evidence to back up calls for longer deals. The only 20-year franchise that currently exists – Chiltern Railways – has made major infrastructure investments. Virgin Trains itself also talks a good game. With just £1bn of extra investment to upgrade the track on its West Coast Main Line route, the operator reckons it could run trains at 140 miles per hour, enabling a service leaving London for Birmingham every 15 minutes, and a journey of just 3 hours 40 minutes from London to Glasgow. The scheme will even pay for itself, according to Virgin. The company's calculations put passenger numbers up by 25-30 per cent, revenue up by as much as £100m a year, and the railway competing with domestic airlines on the Scotland route. All within four years.

Tony Collins, the chief executive of Virgin Trains, said: "There is a big opportunity to drive passenger growth to fund the investments. The key is to make the rail industry demand-driven, rather than taxpayer funded, by laying the foundations to keep growing passenger volume."

More than anything, Virgin's argument is carefully timed. With so many franchises struggling, the Government faces lower payments than expected, even if no deals are handed back. Network Rail is supposed to be spending £35bn over the next five years, a growing proportion of which is to come from passengers' fares. But contribution levels were based on growth at 3 per cent per year, and passenger numbers are now expected to fall both this year and next.

Even without the dire economic climate, the balance of the franchise system was not working. Christian Wolmar, a transport industry expert, said: "The franchise structure at the moment doesn't make any sense. There is no intellectually coherent reason for it because it doesn't attract investment from private sector operators."

To some extent, the problems are historical. The system was devised by a Conservative government as a way to reduce state subsidy of what was believed to be an obsolete method of transportation. But fuel prices, congestion and the green agenda have breathed new life into it, doubling passenger numbers in 15 years.

What Sir Richard's vision does not include is a response to the unanswerable problem, illustrated so perfectly by the slew of recession-induced franchise problems, which is what to do with revenue risk. With projections of passenger volumes proving so unreliable over just a few years, trying to extend the forecast out over two decades looks laughable. But without risk, the franchise is little more than a management contract. Balancing the two leads back to politics. "Whatever franchise model is used, you get into the intellectual problem about purpose," Mr Wolmar said: "The problem is, what is the role of the private sector here?"

Failing franchises: Recession has exposed the system's flaws

More and more train operators are struggling to meet their payment terms as recession exposes the flaws in the franchise system.

National Express's East Coast Main Line deal, signed in August 2007, agreed to pay £1.4bn by 2015. But passenger numbers have been hammered by the economic downturn, and with another two years before loss-easing subsidies kick in, the company is desperate to renegotiate. The Government says no.

Until recently, threats to walk away – which would also forfeit the profitable East Anglia and c2c networks – carried little weight. But while one operator's departure would be inconvenient, several would threaten the whole system.

And National Express is just one on a growing list. Stagecoach is disputing its £1.2bn South West Trains franchise. FirstGroup has already claimed £50m in subsidies for its Great Western network, and is threatening to walk away after seven years rather than extending to 10 as expected. Arriva is facing heavy losses on CrossCountry. Analysts are speculating that both Arriva and South West could be handed back.

MPs said this week that the Government must have contingency plans for multiple failures, and the rot is also seeping into potential deals. Four companies entered the race for the South Central franchise, which includes the London-to-Brighton route, in February: Govia, the incumbent, Stagecoach, National Express and NedRailways, the Dutch state operator. But NedRailways is understood to have dropped out, while Stagecoach and National Express clearly face problems of their own.