FEATURE: CHRISTIAN WOLMAR
Words: Christian Wolmar Sub-editor: Deborah Maby
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n a decision that surprised many industry watchers in August, the Department for Transport awarded the franchise for the West Coast to FirstGroup, which would have put an end to Virgin’s operation of the line that began at privatisation in 1997. Rather than accepting the outcome, Richard Branson, the boss of Virgin, decided to go to court to seek a judicial review, a move that quickly led to the scrapping of the whole franchise process for the line at a cost of £40 million to taxpayers and with the railway remaining in Virgin’s hands for the time being. Indeed, effectively Virgin has been given up to 13 months more to show why it should be retained as the franchisee on Britain’s most important Intercity route. There will then be a process to let an interim franchise, before the long term deal is finally let.
The whole issue has led to the spotlight being put on franchising and questions being asked about its purpose. Two reviews resulted from Patrick McLoughlin’s decision to pull the franchise, which he made just a couple of weeks after taking over as Transport Secretary from Justine Greening. One will look at what went wrong on this occasion, while the other, led by the experienced railwayman Richard Brown, the chairman of Eurostar, will examine whether changes need to be made to the whole franchising procurement process.
When Virgin launched its bid for a judicial review, which ministers clearly thought would be successful since they halted the process, it was the first time in the 15-year history of privatisation that such a challenge had been made and carried through. In a way, it is not surprising that it is Virgin that has picked up the cudgels since it has no other franchise to lose, whereas other defeated bidders in the past have generally run other lines and therefore not wanted to get on the wrong side of the DfT.
The row has put the spotlight on the nature of the bids and shown how competitive the process has become. Although precise information has not been released, all four bidders reckoned there would be huge and sustained growth on the line, with their estimates ranging from 7 per cent (the two losing bids, Abellio and Keolis), 8 per cent (Virgin) and 10.4 per cent (FirstGroup).
While the details are not in the public domain, the sharp difference of opinion between Virgin and FirstGroup was made all too
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apparent when top representatives of the company appeared at a special hearing of the Commons Transport Committee in September. The fact that Branson himself appeared at the committee shows the eagerness of Virgin to remain in the rail industry. Branson pointed out that this was “the fourth time that Virgin had been outbid for a franchise” and that on the other occasions the company awarded it had either thrown in the towel – as with the two East Coast bids – or had got into financial difficulties.
Branson emphasised that he was unhappy with the whole process. “What we recommend is that the current rules and regulations for franchising are completely
Steve Norris, a junior transport minister at the time of privatisation, has suggested that concessions which take out the revenue risk and are used, for example, for London Overground and Merseyrail, would be a sensible way forward.
reviewed and that the West Coast franchise competition is delayed until this has been completed,” he said. There is even speculation that Virgin will not bid for the long term franchise unless changes are made to the procurement process.
The committee hearings gave a rare insight into the thinking behind these bids, which are normally kept largely secret on the basis of “commercial confidentiality”. In the blue corner, Tim O’Toole, the boss of FirstGroup, is equally bullish. He told the committee: “Our belief is that the growth that you have seen over the last 10 years can and should be continued if the Government are going to get the advantage of the extraordinary investment they made in this line.” Virgin questioned this, arguing that the high rate of growth of the past few years, which reached 10 per
cent, was a result of the new trains, increase in train frequency and upgrade of the track, whereas no similar step change is envisaged over the next decade. Indeed, there is going to be considerable disruption at Euston if it is decided to give the go-ahead to HS2, though it is still not known the extent to which this will affect services.
O’Toole countered the point about growth by saying that his company had achieved similar numbers on the Great Western where there had been no such investment and that it is FirstGroup’s optimism about the past three years of the franchise that swung it for them. He explained that: “The reason we would make that assumption is that, even in a railway that hasn’t been rebuilt and that is stuffed to the gills like First Great Western, we are seeing growth rates at 8 per cent in the past year.”
Whatever the outcome of the reviews, the franchise process will never be the same again. The argument that all the details of the bids have to be kept secret in order to protect commercial confidentiality no longer holds water if bidders can selectively release information about their bid in order to try to get the public on their side.
It is therefore highly likely that the process in future will be more open. But the row may also lead to wider changes, although the Government has been careful not to suggest this. The creation of a new rail agency to let franchises, taking the job away from the Department, is a likely outcome.
Nationalisation still remains off the agenda, despite pressure from the unions and widespread support from the public as shown by opinion polls.
Nevertheless, there is talk of change, even in Tory circles. Steve Norris, a junior transport minister at the time of privatisation, has suggested that concessions which take out the revenue risk and are used, for example, for London Overground and Merseyrail, would be a sensible way forward. He told the Financial Times that the current operators are mere “ticket collectors . . . because very few have a franchise that lasts long enough for them to invest properly”. Perversely, this is precisely what Virgin, which has been pushing for change, does not want as the current system in which they pocket all the fares offers far more scope for making profits. It would be ironic indeed if Virgin’s challenge resulted in changes that Branson would not welcome.
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