Franchising is a ‘half-way house’ model that combines the public and private sector. But roles and risks must be carefully considered

 

The East Coast franchise tells us that the infinite suppressed demand actually isn’t there

 

It was the high-watermark of the Thatcher government that brought deregulation and privatisation into common usage – terms which today have far less positive connotations than they did then. But that government really did touch the nation when the prime minister stated that in giving the ordinary public the chance to own shares in the main utilities – starting with British Telecom in 1984.  It was they who were giving widespread public ownership to ‘the people’ catching the socialists on their own ground.

And looking back it really is now impossible to consider British Airways now ever returning to public ownership. Likewise the power providers.

Yet transport never quite escaped the clasp of ‘utility’ and never became the fully-fledged retailers that others managed.

And somewhere in the middle of that road to pure retail – the brutal world that the supermarkets, and others, live in – is franchising.

Franchising appeals because it is a beautifully British half-way house. State (including local authority) control, maintaining order, quality etc is retained whilst offloading the risk of labour, operating costs, energy, etc onto the private sector. And accountable. But offloading risk is a risk in itself.

The London bus tendering system – right back in 1985 – demonstrated that you can use franchising do what you want, if you are clear about what it is you want. Also if you are clever you might even design a system that will endure the changes that will occur and do other things for you.

It was designed to introduce the private sector into the market, and prepare the state-owned operator (London Transport) for privatisation. Costs were lowered, quality standards were raised, accountability thoroughly revolutionised and some pride restored. Trade union power was constrained. The secretary of state, Nicholas Ridley, was prepared to concede on the emotional thorny subject of red buses, but Thatcher was having none of it. She insisted individual liveries were allowed because she knew there would be trouble and she wanted it to be obvious to the public who was striking.

Preparing British Rail for privatisation was a much longer process although Sealink and British Transport Hotels had gone by 1984, followed by the much-criticised catering organisation and the engineering/manufacturing arm.

Thatcher held back from the mainstream passenger services and it was John Major – widely believed to have a twinkle in his eye for the glory days of the pre-nationalisation railways – who separated out the operations, rolling stock companies, infrastructure and freight.

Like London’s buses, franchising arrived to take control of a gently declining network. A long period of postwar decline worsened by powerful trade unions where the efficiencies and cost-savings needed to protect the network were impossible to deliver.

Both systems were built to manage down costs, usher efficiency, and hold in check the public subsidies which were in danger of infinite escalation.

Luckily, the London product – invented by the excellent Nick Newton – turned out to be a model which could be refined to meet totally different requirements to that envisaged. It started out introducing the private sector into a totally public sector market and reducing costs. The London Buses companies had to shape up ready for privatisation. Inevitably, the laws of economics prevailing, many did and one completely collapsed.

In time, having superbly reduced the London Bus operating subsidy to zero despite declining demand, the model was able to cope with other demands on it.

Under transport minister Steve Norris it abandoned its gross cost roots and changed to a net cost model where it was the subsidy/premium which was bid for. And when demand, for the first time since 1958, started to rise, the system was used to ADD volume, with the attendant cost even when the policies of (by now) the mayor Ken Livingstone were to provide cheap fares, high volume, 24-hour a day services where (eventually) 33% of the morning peak ridership were travelling at no cost to themselves.

Having been raked over by the big accountancy firms, consultants and the top people from major cities internationally, it continues to deliver in a very different world 30 years later.

Too often, in my experience, someone is trying to do someone else’s job

Its success must partly stem from trying to adhere to some basic principles where the public and private sector must mix. Too often, in my experience, someone is trying to do someone else’s job.

I would venture the private sector is best placed to employ the labour, own the assets, hold the property and deliver the service. In complex urban environments, and whenever public money is in play, then some local government authority has to be involved in the planning and setting the standards.

Any model which attempts to complicate this will generate unforeseen difficulties. Of course those with front-line experience should have a say in the planning; and of course in order to maintain a healthy market the authority involved may, for example, need to influence property issues, perhaps through planning decisions. But – in general – the sectors should do their own job.

In my view THIS is the biggest risk facing Manchester and other cities contemplating a franchising model. The risk is worse if you have no money. Of course Manchester is starting from a different place. There has been deregulation and the assets are held in the private sector. It is tempting to convince yourself that confiscating the assets, somehow, could address the difficulties with this as a starting point. Also that somehow the garages are themselves a unit of control. This misses a fundamental point. Buses are for the passengers. So are the services. The billeting arrangements are secondary – not primary.

Which brings us to the near-daily tabloid headlines about rail ‘chaos’ magnified through franchising. Once again the model is under strain. Designed to hold onto costs in a gently declining market, rail ridership has boomed. But unlike a lowly London bus route this is an entire region – constituencies with politicians, stakeholders and the press.

Here the model has buckled under the strain – no longer managing decline, it is coping with growth. Huge sums at stake, multi-million pound bidding costs, revenue projections with eye-watering numbers, and big performance bonds in place. Astute observers cannot fail to notice the ever-vigilant National Express moving from being the country’s largest rail franchise operator to none.

Rail has lost the elegant simplicity which the first rounds produced and has developed into a bidding industry where – perhaps – the worst news for investors to hear is a successful bid. What a choice! To lose millions in bidding costs or to win, on an anticipation of growth yet to be substantiated.

A weakened Department for Transport has sought – and failed – to evaluate the risk against the cost savings/promised income. Even with sophisticated modelling techniques and ‘big five’ support, we now see this again with East Coast a failure. The upside promise was too alluring in the short term financial world.

And with the ending of this franchise comes the real kernel of the bidding/franchising model which civil engineering and construction companies have known for many years. You really do not ever transfer risk entirely to the private sector. There are areas where only a government can take the risk. Unknown ground conditions, war, failure of the banking system, buried assets of unknown condition etc. Of course the private sector will give you a price for it, but actually it’s a bet. An uninsurable bet. If the costs do not materialise you bank the premium. If they do you liquidate.

So for a successful franchising model both sides need to do their part. Risk has to be shared – again each sector bearing the right thing for itself. We need to know what it is designed to achieve – risk shift, passenger growth, revenue growth (not necessarily the same), labour cost containment, stimulate demand or suppress it.

In the DfT, the rail franchising department has been seduced by premiums delivered thanks to huge growth projections

In the DfT, the rail franchising department has been seduced by premiums delivered thanks to huge growth projections. A logical argument which says that there is infinite suppressed demand held back by inadequate frequencies and short trains. Bidders promise new, shiny trains and more of them. All to be paid for by those unseen passengers.

East Coast tells us that the infinite suppressed demand actually isn’t there. Neither is it on South Western by the look of it. A whole host of factors are softening demand – anything you like from Brexit to home-working. The lesson is it is dangerous to be seduced by fictional upside growth which, when it doesn’t materialise, will damage the operator, the bidding process, and the government.

Thus hangs the issue as to whether in a franchising model the gross revenue is a private sector gamble or a public sector one. London’s buses, and indeed its rail franchises, have forever now taken that risk inside the agency. So its successful operators are on quality upside alert, not revenue.

Rail, in an effort to go around this, offer fantastic upsides, debates endlessly ‘cap and collar’ devises, compensation methods, and, inevitably points out that growth projections are based on the government’s own statistics.

It seems to produce bids that promise short-term huge upsides with the gamble is that if they don’t, the operator gives back the keys. None of this doesn’t do the industry any credit in the big wide world and moreover repeatedly makes it look bad in front of its customer base, and acts like a magnet for blame when customers get a bad service.

This is not bidding – it is gambling. In my view our public transport franchising system, if we have to have one to deal with the population’s desire to retain some ‘public control’ of a network, must adopt reforms which make the wild choices from super-profits to liquidation redundant. We need a lower risk, lower cost bidding process which puts the risks squarely where they should be.

There is then the simple choice: reasonable upside/downside risk or total public sector revenue risk.

 

About the author:

Leon Daniels was MD Surface Transport at Transport for London between April 2011 and December 2017. He was previously Commercial Director UK Bus at FirstGroup plc.

www.leondaniels.co.uk

 

This article appears inside the latest issue of Passenger Transport.

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