The bidding rules encourage game-playing and it’s a thoroughly fraudulent way for the Department for Transport to proceed

We need your help. The wisdom of crowds and all that. We want an answer to this question: is the Department for Transport taking the mickey? Let us know, yes or no. Do it now.

I am not talking about whether Virgin or First Group should have won the West Coast Main Line franchise, I am asking what on earth DfT was doing in the first place.

As you listen to Tim O’Toole, chief executive of FirstGroup, explaining his bid to City analysts, you could, just possibly, get seduced by the step-by-step logic. A percentage here and a percentage there and, hey presto, you have 10.4% per annum revenue growth for 13 years. Much was made of the miniscule amount Virgin, in revenue support, has been spending on marketing, £1m in the last seven months. Growth opportunities right now; etc.

But where do these little steps take you? This is where:

A 10.4% growth rate produces, in the year 2025/26, revenue of £2,982m out of which is to be paid premium payments to the government £1,696m – in case that didn’t sink in, that’s ONE POINT SEVEN BILLION POUNDS – and profit to FirstGroup of £149m. Put it this way, in 13 years’ time this fine franchise is to have a profit margin of 62%. Wow! Surreal.

Put it another way, the premium in year 2025/26 is £1,140m in today’s money (the NPV sums quoted by First and the DfT are discounted for inflation and value of money); and this to be paid by a business with passenger revenue last year of just £824m.

Well, if you believe this, you will believe anything. You could be one of these people who buy spells and magic potions on eBay, and then complain when they don’t work.

But, for the life of me, the civil servants in the DfT may be batty, bicycle-riding, Blackheath-living intellectuals, but they live on this planet not the land of Zog and they cannot possibly believe they will get over £1bn, in today’s money, for four years on the trot from FirstGroup. They don’t. It’s a farce.

The problem goes back to Theresa Villiers’ franchise reform white paper of a couple of years’ ago, which she had been scribbling away in opposition. It reminds me of Andrew Lansley’s NHS reform, crackpot ideas in opposition. Theresa’s big idea: franchises should be longer, 15 years the norm, and less prescriptive.

I had hoped that the dead hand of the civil service would kill this off smartish, but no. Our officials, instead of telling her she was a gullible fool who shouldn’t cross the road without a minder, said: “Yes minister, just as you wish minister”. They should have explained very slowly that there was already a range of franchise lengths, from seven years to over 20, and good practical reasons in each case. Besides, much experience shows that if you want long franchises you may need something like cap and collar to limit the risk to operators. But, no, they ploughed on.

The “less prescriptive” bit was not too much of a problem. Add a couple of trivial and obscure bits of flex into a franchise agreement, trumpet it in a press release and, Voila, job done. The minister’s desires have been met.

But the “longer” bit was more tricky. Nothing for it but to announce a 13-year, no break clauses, fixed price – with a GDP tweak – bidding round for the West Coast franchise.

We are talking now about the largest franchise in Britain by revenue, one with the least stable, least predictable revenue stream. And, given that revenue forecasting over a 13-year period is little better than pinning the tail on a donkey, the problem becomes obvious.

So, knowing the farce that the core proposition was, the DfT, to get any bids at all, set the penalty for handing the keys in – which must be a racing certainty – at a very low level: £40m for Virgin, and £190m for First. In this way, at a stroke, it can be presented as a 13-year franchise – we have done as you wished minister – but it is nothing of the sort. It’s an “as long as you like till it starts hurting” franchise.

Unfortunately, it is also a bidding process which directly encourages game-playing and, to come to the point, is a thoroughly fraudulent way for DfT to proceed.

Hence the question: is this a sound franchising policy or is DfT taking the mickey? Vote now.


There is also a special prize for the first plausible explanation in defence of DfT. It would not completely surprise me if money was not the main reason First won the bid. It might just be (a) the franchise plans were better and (b) DfT now does not mind taking franchises back into their control, just like East Coast Trains.



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