First presses ejector button


FirstGroup will hand back its flagship rail franchise in 2013, after seven years. In turning down its option for a further three years, it will avoid paying the government £800m. Paul Clifton suggests everyone should have seen it coming


overcrowded trains in the country are in the Thames Valley. But the numbers are not growing


A PAGE 14 JUNE 2011


fast enough. Let’s look at the figures. In the first three


years of the franchise, First received £203.3m in subsidies. That largely covered the cost of refurbishing the HST fleet. Then followed four years of steadily increasing premium payments. To make the numbers add up, First


needed revenue growth of nine per cent a year across the length of its franchise, coming from a combination of above-inflation fare increases and more passengers. Back in 2005, it was calculated that the franchise would end up handing the government £2 from each £10 fare.


The recession killed that target long ago.


If the growth projections looked heroic at the start of the contract, by the half-way mark they were simply unattainable. Instead, First was getting large payments


from the government under the ‘cap and collar’ clause in its contract. Last year’s premium payment under that contract was £249.9m. But it received £141.3m from the taxpayer to compensate for revenues falling


fter a rocky start, First Great Western’s services have run well. They make good money and passenger numbers are growing: several of the most


short. So the net premium was only £108.6m. Most of the risk in this contract has been


borne by the government. Broadly, it picks up 80 per cent of any shortfall. The formula is that First takes the whole risk of the first two per cent shortfall, then half the risk of the next four per cent, and only 20 per cent of all the rest. So even in the bad times, First Great Western has been able to turn in a respectable profit. When it signed the deal, the Department


for Transport called it a triumph for the taxpayer, because First committed to pay £1.13bn to run the trains. But the overwhelming bulk of that money – £826.6m – was due in the optional three-year extension to its seven-year contract. Those of us who watch the rail industry


for a living spotted this ‘get out of jail free’ deal a mile off, and said so loudly at the time. First could take the good years and bail out before those staggeringly large invoices dropped through the letter box. Tim O’Toole, FirstGroup’s chief


executive, called it a ‘tactical decision’ but he could have called it a no-brainer. Even with further cap and collar payments, the train operator faced eye-watering losses. Some have suggested this bears


similarities with National Express’s seven- and-a-half year £1.4bn deal for the East Coast. That deal collapsed after two years and the recriminations rumble on even now. But that’s not fair. FirstGroup is fulfilling its


contract on Great Western. It signed a very clever deal that is allowing it to escape from an impossible situation with its reputation intact. Yet because First pressed the escape button, the government loses more than £800m of revenue that it had expected to help run the railway. In First Great Western’s defence, the


route has changed in ways it could not have anticipated back in 2005. The redevelopment of Reading station


was, back then, just an aspiration; today the disruptive work is well under way. Crossrail, which will take many train paths on the congested area east of Maidenhead, is under construction. The route will be electrified to Cardiff, Oxford and Newbury. A new generation of InterCity trains will appear, though later than anticipated and to a very different design. The Thames Turbo fleet of diesel commuter trains will be exchanged for cascaded electric suburban stock run from a new depot. All this will transform the railway. But


it will bring years of severe disruption that will mess up passenger timetables and tear through railway finances. No wonder First wanted out of a contract that took none of this into account. ‘We are committed to fulfilling the


contract,’ insists managing director Mark Hopwood. ‘We are taking it to the end of our primary franchise which is in March 2013. There was an option – just an option – to extend the franchise to 2016. And we’re saying that economically, that doesn’t work for us. It’s just not sensible for us to do that.’ ‘One has to admire First’s commercial


negotiating skills,’ comments Chris Irwin, the well-informed leader of TravelWatch SouthWest. ‘It is a very clever company. When it did the deal, it put in the lowest price. But then got an option that allowed it


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