To Re-Nationalise or Not

A very pertinent piece in last Sunday’s Observer caught my eye. Its business leader made the point that profit isn’t seen as a natural bedfellow with the railway as there are a ‘carriageload’ of other considerations that need to be dealt with first – safety, punctuality and affordability to name but three.

Only after running safe, punctual and affordable services will passengers sit comfortably with the operator making profit. And since the government and Network Rail, its nationalised infraco, tie operators’ hands on the ability to run punctual trains or to offer fares that are very subjectively affordable, there are few scenarios when passengers will see an operator worthy of profit.

The Observer suggested that an operator shunning its financial risk would frustrate this delicate balancing act further; and with Virgin Trains East Coast (VTEC) set to ‘hand back the keys’ during 2018, government should understand the reasons for the latest default on the East Coast Main Line (ECML) franchise.

The latest edition of the LEYTR has a piece in which a little sympathy is afforded to VTEC. The Stagecoach/Virgin bid was based on certain infrastructure improvements along the route of the Flying Scotsman during the franchise tenure, which will now happen at a later date. Since Network Rail is responsible for improving track and signals, the government ultimately moved the goal posts and VTEC felt it had to renegotiate the franchise specification.

Yet closer scrutiny of the East Coast Main Line franchise document makes it clear that these infrastructure improvements – including a grade-seperated junction at Werrington and the doubling of track between Peterborough and Huntingdon – were only assumed to be undertaken during the tenure of the franchise.

The government bares some blame here since it was happy to allow Stagecoach/Virgin to bid on these assumptions. In fact, Transport Secretary Chris Grayling has admitted there was a culture of overbidding for franchises, which his department tacitly encouraged. Not any more they don't.

Regardless, VTEC’s bid for the ECML franchise can no longer be delivered under the specification that it was awarded. This is failure. By being allowed to effectively walk away from its contractual obligations – and with franchise bids costing in excess of £5 million to put together they are legally water-tight – a private firm is shunning its financial risk, thus shoving two fingers up at the industry and ergo its passengers.

Reading between the lines, however, would suggest that the government is aware that it is partially culpable, hence the announcement of its awarding a second direct award to the incumbent Virgin/Stagecoach partnership to operate the West Coast Main Line franchise on the same day that it announced the East Coast equivalent’s winding up. And allowing Stagecoach to reach the final round in bidding for the East Midlands franchise.

VTEC has agreed to pay the government £3.3 billion over the life of its franchise and terminating early with the government’s blessing means that around £2 billion won’t now be received (after considering the cash VTEC has paid the government to date). Fining Stagecoach Group and Virgin would be the obvious choice, though, again, since the government is aware of its culpability in this sorry story would no doubt see it end up in court. These private firms have a habit of defending their financial interests and their ‘experts’ tend to be more competent than the government’s - something which Virgin has shown it has become quite eloquent at.

So there will be no fine just lots of statements confirming that VTEC has paid every penny is has been obliged to. Yet while around £2 billion is outstanding, this hasn’t been ‘lost’. If a new franchisee is awarded, their contract would see immediate repayments to the government. If the government chooses to release its nationalised option – Directly Operated Railways – to operate the ECML franchise for the second time in under 5 years, this too would see a financial gain in the form of a not-for-profit franchise the government would be propping up, where all/any profit would be retained. 

The problem is that VTEC’s repayments were ‘end-loaded’, so the level of growth was estimated as peaking towards the end of the franchise and so too were their repayments. Any new franchisee would play it much safer and would not offer such a large sum of money from the first two years or so of its franchise.

I’ll end with an observation that seems to have passed by the specialist railway media. They cannot fathom how the educated and informed passenger at large can be hoodwinked by this urge to nationalise. They cite statistic after statistic aiming to show how much better the privatised railway is when compared with the nationalised British Railways. 

The answer is, I believe, straightforward.

Similar to how large areas of the UK voted for Brexit when it could be demonstrated that they’d benefitted the most from EU-funded schemes, passengers are simply fed up and do not care anymore. They want to take control of their services, even though they know that this is a relatively meaningless statement. Passengers are now so repulsed at their train operator making a profit – a view only enhanced by the VTEC saga – that they would be happy for the government to run the trains on their behalf, happier that any profitability would likely be ploughed back into the industry.

Yes, their service may not operate with the same level of finesse as now and yes, their train may become painted in ‘dealership white’. They do not care. Not in the slightest.

Much was made of Michael Gove’s comments during the Brexit referendum campaign when he suggested people do not trust experts any more. I fear the privatised railway is now at a point where passengers just don’t trust their franchised operator at all and feel impotent and so have no option other than to turn to re-nationalisation as the best option.

Yes the sandwiches may deteriorate in quality and punctuality may flat-line, but at least no-one would be making any profit at the same time.