25 Years On, Britain Clings to Privatized Railway

(Bloomberg) --

Britain’s decision this week to water down its ambitious experiment in privatized train travel risks leaving no one content.

While the move to scrap the current high risk, high-return franchising system after a quarter of a century has been generally welcomed, plans to replace it with a simpler concessionary model have raised concerns among unions, passenger groups and companies alike.

Campaigners for re-nationalization say that the proposals, announced Monday by Prime Minister Boris Johnson’s Conservative government, fall short of the customer-focused railway they’d like to see. Train operating companies are in turn concerned that margins may become too thin to remain attractive.

Go-Ahead Group Plc Chief Executive Officer David Brown said he’s reserving judgment until final details of the plan are made clear following the delayed publication of the so-called Williams Review into the future of Britain’s railway.

“The franchising system has served us well for 25 years and led to a huge increase in passenger numbers, but it has run its course,” said Brown, who has led Britain’s biggest commuter train operator for almost a decade. “I do think that we’ll still be in rail in five or 10 years, though that does depend on the outcome of the Williams report.”

Less Hostile

The new system my use as a template so-called emergency recovery management agreements imposed to help the railway ride out a collapse in traffic during the coronavirus crisis. The contracts, which are due to run for another 18 months, cap management fees at 1.5% of the cost base of a franchise prior to the pandemic.

The RMT union said the U.K. government should “cut out the middleman and bring all rail franchises into public ownership once and for all,” describing the anticipated switch to management contracts like those used on the London Overground network as “reanimating the corpse.” Profits and dividends would continue to flow out of the industry rather than be reinvested, it said.

The Aslef train-drivers union was less hostile, saying that a model under which a firm is paid a fixed fee for running a route -- with the U.K. Treasury, rather than the company, collecting fare revenue -- represents a “pragmatic” solution. At the same time it said re-nationalization is “a long-term strategic goal.”

Rail campaign group Railfuture backs an end to franchising but is concerned that Britain’s Department for Transport lacks the expertise to act as an “informed customer” in awarding concessions. That risks creating potential for “some very bad contracts,” spokesman Bruce Williamson said.

The railway will also remain a “tangled web” of companies and interests, perhaps more so with train operators less deeply involved, he said. that means the government may need to create a “Son of BR” -- as the former British Rail was known -- to coordinate operations.

The franchise regime was introduced with privatization in the mid-1990s. It sought to encourage competition at the point of bidding as an alternative to floating BR as a single entity or allowing firms to compete on the same routes, which was viewed as inefficient and likely to discourage investors.

Bus Competition

The model initially attracted mainly U.K. bus operators which saw the railway as an extension of their existing activities. But as companies became more adept at evaluating routes the gap between rival bids became narrower, with the difference increasingly coming down to the cost of borrowing.

That in turn attracted interest from continental players able to tap lower capital costs because of their public ownership. The state rail companies of France, Germany, Italy and the Netherlands all won franchises, stirring concern that the railway had effectively been re-nationalized under overseas control.

At the same time, companies struggled to keep pace with surging demand as crowded roads prompted millions of Briton’s to desert their cars. That lead to a shortage of rolling stock that spelled delayed arrivals and standing room only for passengers who had paid some of the highest fares in the world -- reaching 11,000 pounds ($14,000) for an annual London-to-Birmingham season ticket.

The franchise model was also plagued by high-profile failures as firms that had made low-ball bids were hit by losses when economic setbacks interrupted growth, something Brown said has been a major failing of the system.

Meltdown Review

“If the Treasury can’t predict what will happen to the economy, why are you asking train companies to?” he said.

Neither was a 2018 meltdown of the system that triggered the Williams Review the fault of train operators, Brown said, having resulted from a botched timetable change in which the state regulator and government-backed track owner Network Rail were also culpable.

Go-Ahead has experience of management contracts through its GTR franchise and will weigh the reduced risk and volatility against potentially more limited returns, its CEO said, adding that a nationalized railway isn’t the way forward.

“I think the role of the private operator should survive,” he said. “I’ve lived in the public sector too, and if you want innovation and customer focus you’ll get more of that from private companies.”

©2020 Bloomberg L.P.