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Monday essay: has franchising finished? Yes, it has.

All the franchises in England were transferred to Emergency Measures Agreements in March this year, to coincide with the start of lockdown. The EMAs essentially removed commercial risk for the operators, who neither pay the bills nor keep the revenue but simply receive a management fee. At the time, the EMAs were set to last until 20 September, but when that deadline arrived the Government replaced them with ERMAs – Emergency Recovery Measures Agreements, which are set to last 18 months.  In the conclusion of a two-part special Sim Harris considers the future now.

A VIRUS has done it. Covid-19 has finally pushed the tottering franchising system over, and changed the course of railway history.

Transport secretary Grant Shapps has unveiled his new Emergency Recovery Measures Agreements, which replaced the EMAs today and are intended to continue until early 2022. The deal is much the same – the operators keep the wheels going round at virtually no commercial risk to themselves while the Department for Transport pays the bills and collects the revenue.

The fee for their trouble has been reduced by 25 per cent – 1.5 per cent of each franchise’s ‘cost base’ before the pandemic began rather than 2 per cent as before. The DfT says its ERMAs are a ‘transitional stage to the new system, the biggest change to the railways in a quarter of a century’.

But what lies at the far side of that transition? 

The former franchises will not be coming back. Intriguingly, Grant Shapps said: ‘The model of privatisation adopted 25 years ago has seen significant rises in passenger numbers, but this pandemic has proven that it is no longer working.’

This remark deserves a little dissection. We can pause for one brief cheer: for the first time in quite a while a transport secretary has resisted the temptation to claim that passenger numbers have risen since the 1990s because of privatisation, although there is no doubt that numbers have risen – more than doubled, in fact, since franchises began. However, they were not necessarily cause and effect, indeed, almost certainly were not.

For one thing, the totals had started to rise in the last couple of years of British Rail, and went on rising in the second half of the 1990s – before privatisation had been able to make any difference worth noting. Something else was happening. Roads were becoming more congested. Young drivers were faced with very sharp increases in motoring costs, particularly for insurance. And the glamour of the car was receding. It wasn’t green, and that fact was also becoming more of a factor.

These are little more than guesses. But it is surely beyond belief to seriously suggest that passenger figures rose from 589,499 million in 1995 to 755,077 million in 2000 because there were different logos on the side of the same trains?

Mr Shapps has also claimed that ‘this pandemic has proven’ that privatisation ‘is no longer working’. No, Mr Shapps. It might have been the last straw, but there had been plenty of messages to that effect long before most people had ever heard of Wuhan.

The beginning of the collapse in commercial confidence can perhaps be dated back to 2012, when the award of the new Intercity West Coast franchise was disastrously managed – or mismanaged – by the DfT. The new transport secretary Patrick McLoughlin was unlucky enough to inherit the unappetising dog’s dinner bequeathed to him by his predecessor Justine Greening, who had been reshuffled away from the DfT in September 2012.

As a result, it fell to Mr McLoughlin to admit on 3 October that: ‘I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process.

‘A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held.’

From then on we can trace a slow but steady disillusionment in board rooms over rail franchising. National Express Group had once held more franchises than any other company, but after it had failed on East Coast it seems to have decided that enough was enough. The end came in early 2017, when it sold c2c (which it had only just won again and was set to keep until 2029) to Trenitalia.

After that, another worrying sign for the DfT should have been that fewer bidders were coming forward. For example, only two companies stayed the course in the competition for West Midlands (Abellio and Govia) after MTR had been shortlisted but withdrew in June 2016. In addition, of those bidders which did try their luck, fewer were standalone entities than before. For example, in the West Midlands contest Abellio had a 70.1 per cent stake in the bid it was leading. It was accompanied by JREM Train, which was itself a 50/50 consortium of  Japan East Railway Corporation and Mitsui & Co. Ltd. Lower profits, true, but lower liabilities as well if things went wrong.

Another headline-grabbing dispute flared up in the spring of 2019, when various franchise bids from Virgin, Stagecoach and Arriva were all rejected as ‘non-compliant’, apparently because they attempted to modify increasingly onerous liabilities for railway pensions. Virgin and Stagecoach have turned their backs, with only Arriva still willing to talk to the DfT these days. Indeed, Arriva has been one of the first firms to confirm today that it has accepted the DfT’s new ERMA for the Chiltern Railways franchise (if franchise is still the right word).

So Covid-19 may have been the final straw, but the DfT’s franchising house of cards had been looking perilously unstable for years, and sooner or later the end had to come.

So that is it for franchising. The result in the longer term appears to be concessions, which we know Keith Williams is recommending in his still-unpublished Review.

Even concessions are commercial relationships, and the DfT may have some work to do if it is to regain the confidence of the private sector.

That assumes that it is still the responsible body for awarding passenger rail contracts in a year or two from now. But that, to coin a phrase, is another story.

The October print edition of Railnews, RN284, will be published on 1 October. The new edition and some previous issues can be obtained by calling 01438 281200 from UK numbers or +44 1438 281200 internationally, and selecting Option 2.

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