News analysis


Is British franchising no longer fit for purpose?


The abrupt cancellation on October 3 of the West Coast franchise contract, which had been awarded to First Group on August 15, was deeply embarrassing for the British government. But as David Briginshaw observes, it has thrown the whole franchising system into turmoil and cast serious doubts over its future.


RITAIN’s secretary of state for transport, Mr Patrick McLoughlin, surprised everyone when he announced in the early hours of October 3 his decision to cancel the West Coast franchise, due to flaws discovered the previous day in the franchising process. Sir Richard Branson, founder of Virgin Group, and the runner- up in bidding for the West Coast franchise, was due to take the Department for Transport (DfT) to court on October 4 to pursue his own claim that the bidding process was flawed, particularly in its assessment of risk and the level of financial guarantee First Group was being asked to make.


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The two franchise bids by First and Virgin were remarkably similar, with steadily rising premium payments to the DfT until the last two years of the franchise when First was offering substantially more than Virgin. Branson had lost out twice in bidding for the East Coast Main Line franchise, first to GNER and later National Express, under what he claimed were similar circumstances. On both occasions the franchises failed, and he feared a similar situation on the West Coast. Naturally First Group strongly defended its bid and stood by its passenger and revenue forecasts.


Up to September 12, both McLoughlin and his predecessor Ms Justine Greening, said that the franchising process was robust and that the DfT would defend its decision to award the 13-year four-month franchise worth £5.5bn (net


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present value) to First Group. However, flaws concerning the level of risk in the franchise bids, together with mistakes in assessing passenger numbers and inflation particularly towards the end of the franchise, and the financial guarantees requested, resulted in First Group’s bid appearing more attractive than it should. This meant that McLoughlin had no choice but to cancel the whole 15-month competition and reimburse the four bidders, expected to be around £40m. He also announced that the DfT will no longer contest the judicial review of the franchise bought by Virgin. On top of this, the DfT has wasted several million pounds


of taxpayers’ money in assessing the bids, and could face claims for damages from bidders, especially First Group which suffered a £230m drop in its share value following the announcement that it will no longer take over the franchise from Virgin.


McLoughlin has also halted the bidding process for three more franchises currently underway, and suspended three DfT officials, while an enquiry into what went wrong is conducted, with an initial report expected by the end of October. However, the government has been criticised in parliament for appointing two non-executive directors of the DfT to head the enquiry.


Lord Adonis, a former Labour transport secretary, said the findings of the enquiry would be tainted until it was conducted independently. In addition McLoughlin has asked Mr Richard Brown, currently chairman of Eurostar and a career railwayman with experience as a manager with both British Rail and a franchise, to report by the end of the year on more


fundamental issues concerned with franchising, namely the assessment of risk, the whole bidding and evaluation process, and how to resume franchising. If Brown recommends changes, these will inevitably take time to implement and translate into new invitations to tender for West Coast and the three franchises on hold. This could force the DfT to negotiate extensions to these franchises, as well as other franchises in the pipeline.


The hiatus has forced McLoughlin into a convoluted plan to keep the trains after December 9. Virgin will be asked to run the trains for between nine and 13 months while a two-year interim franchise is offered to bidders. This should provide sufficient time to draw up a new long- term franchise for the West Coast in the light of findings of the Brown inquiry.


Virgin Trains is likely to be running services on the West Coast Main Line for several more months until a new operator can be found.


The DfT has a stark warning on its website to franchise bidders: “Franchisees must build resilience into both their operational and financial plans to deal with the changes in the economic environment to which a passenger rail operation may be subject.” The DfT also warns that will it not


IRJ November 2012


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