Great Western Coffee Shop

I don't understand franchising railways.

I get the impression that railways in most cases don't make a profit, especially commuter and Regional rail. So why are companies like Northern or Southern expected to pay the government? Why would a private company both with the hassle and potential brand damage to pay the government? What's in it for them?

For InterCity franchises that can actually make a profit, how much can they make. And again, what is in it for them if they pay the government? Do profit making franchises get subsidy? If so - how bonkers is a system that pays money both ways.

My main gripe is that I assume the private companies must pocket a lot of profit. This is scandalous - any profit should be invested straight back into the system. If money is allowed to "escape" from the railway, with investment having to be topped up by tax payers then surely it would be better for the government to run the railways? Better for the tax payer, and more money for the railways = cheaper fares and/or more investment.
In fact, why on earth was it privatised?

Sorry if I have my facts wrong, but I'm confused.

If TOCs have done there sums right then the premium paid to government will be the operating surplus, minus an amount taken out as profit. If the franchise receives a subsidy then it should cover the operating deficit plus cover an amount for the TOC to take as profit. Of course if TOCs have got the sums wrong they might have a larger premium to pay than the profit made, in which case the TOC won't make a profit. NXEC had to hand back there franchise because the predicted revenue growth didn't materialise, and National Express Group were unwilling to fund the franchise, paying the difference between money the franchise made and the money they owed to government as premium. NXEC would have eventually become eligibile for revenue support and the government would have covered much of the lack of revenue and National Express probably could have afforded to cover the loss, which would have been small, or have made a profit. National Express were unwilling to cover the losses until NXEC became eligible for revenue support. It is quite a complicated system, especially when a TOC is receiving revenue support. Network Rails funding adds even further complication to the system.

Why is it scandelous for private companies to make profits?  They invest their shareholders money in the business and wish some recomeponse for this, otherwise they would just put it in the bank and take interest.  Company profits go partly to paying sharehodler dividend, in effect the interest on their money. We all recognise that a rail franchise is a big risk and as usual a riskier loan requires higher interest payments or no one would lend. So it is with rail franchise company shareholders. After all if the railway company fails they will loose all their money. Much safer to put it in the bank.  

Of course if the government set up the contracts in such a way as to make them deliberately risky for the bidders, then of course they companies will have to factor in higher profits to pay the shareholder for taking the risk.  I am concerned that sometimes government's obsession with transferring risk to the private sector actually goes beyond tarnsfer into creating totally new unecessary risk for the private sector and therefore unreasonably inflates the costs of the venture.

When looking at profitability you also have to note that the companies do not pay the full cost of the track.  The government pays Network Rail a direct grant for some of the track costs, so this has to be considered in the mix.  

It doesn't

Something must be working.

Record numbers travelling by train. No passenger deaths due to fault of the industry for over 5 years. Record investment. Stations and whole lines re-opening.

More to do and more to look forward to but I think the industry is in pretty good shape. We could try a contract tender process instead of specified franchise tender but otherwise I think things are going well.

Not sure things would be so rosy today if the railways were still state owned.

That's why I asked really. The whole thing doesn't make sense.

I agree with BNM that the industry is in good shape, certainly better than in any time in recent history.  I also share his doubts that it would be in such a good state if we still had BR.

But the answer to BTline's question is that the whole thing is kept working by huge amounts of cash from both the tax payer and fare-payer.

I am not advocating re-nationalisation, but the franchise system is aweful.  Bidding is expensive and disruptive, the government micro-manages more than it did in the days of BR (and it probably has to to prevent abuse by the TOCS) and the whole thing burns huge amounts of cash.   

If franchising is a sensible way to do it I have to ask why has no other country copied us?

We can all be critical of franchising (I am just as critical too about certain aspects), and of running a nationalised system too.   The practical problem in theory and in the longer term is to come up with constructive inputs which come up with a better alternative. 

I despair at 600 staff across the industry engaged in blame attribution - that's one for every 2 staffed stations.  I despair at diesel trains running diagrams which are entirely on electric lines on some franchises, when other franchises don't have enough trains to meet demand.   And I despair at a system that supresses trying out something new around an existing sevice by passing around 80% of any extra income to the treasury - essential a 400% tax on innovation.  The cost of bidding, and the quadruppling of work at the stage (4 bidders for once contract) has also been mentioned. But what would be better - what would fix issues like these - be four steps forward - without there being five other steps backwards?

I think the number of franchises should be reduced severely.

The map should be redrawn, mainly into regions - but having competing routes run by neighbouring TOCs. e.g. services to Canterbury East run by A and services to Canterbury West run by B. Also Brum to London run by two different TOCs.

There should be standard liveries/uniforms/branding where only a small company logo changes.

Fares should be set centrally, with no TOC specific (only route specific) fares (apart from Advances, obviously). One website to buy tickets and find info. All rules and regs standardised: from whether you can buy a First upgrade on the train, to the meaing of off peak.

This would save a lot of money and make more of a National Network.

Sound positively Victorian - would you give them fancy names like "South Eastern Railway" and "London Chatham and Dover"  ... run the former out of Charing Cross and Cannon Street, and the latter out of Victoria and Ludgate Hill Holborn Viaduct Blackfriars.   ;D

Something like that.
Not for nostalgia. But to encourage the "profit making" companies to grow both routes by speeding up the service.
Unlike the situation at the moment when SE can make one route the fast route and the other the slow.

If Virgin and LM were merged - say goodbye to all the semi fasts and cheap fares from Crewe/Brum to London.

In most cases, that wouldn't be scandelous. However, Britain's railways require significant taxpayer subsidy, more than if TOCs didn't take a profit (but of course that is impossible unless the TOC is nationalised). In other words, part of the TOC's profit (in some cases all of it) for the subsidised operators is being paid for by the taxpayer, this could be considered scandelous. It is however perhaps not as scandelous as ROSCO profits and other aspects of the current structure of the railways.

Me too. One of the things I have tried to get across in my responces to at least one of the recent consultations is that any reduction in the number station staff and staffed stations (providing important facilities like waiting rooms and toliets) is unacceptable while the delay attribution bods that exist solely because of the botched privatisation still have their jobs.

So is it also wrong for a construction company to make profits out of building a school or a motorway. After all they are wholly funded by tax payers money not even partly?

If my company were not permitted to make a profit out of a government contract we would simply not bid. We would just work for the private sector where we could make a profit. 

If it was nationalised then the government would have had to put up the capital (which in the old BR days just did not happen) and pay interest on it. Instead the privvate companies shareholders put up the capital and they are paid out of profit.  What is the difference?

BR managers were brilliant at make do and mend - because that is all they had opportunity to do.  The private companies have put capital in and even Btline admits many aspcts of the railway are working better than under BR.  In many cases its the same managers!

The obscene bit was when BR managers did buyouts on privatisation for next to nothing then sold out at a vast profit a couple of years later. That was not good.  On the other hand others tried to make a fast buck out of Railtrack shares and ended up with nothing.

I agree with you on this.  Huge amounts of money must be spent on new branding, uniforms and repainting trains when franchises change hands.

Look at National Express Coaches.  No-one knows or really cares which subcontractor is operating their coach, they see it as one company operating hundreds of coaches.  And this generally leads to consistency across the country.

Absolutely: this will create British jobs for British workers - to quote a slogan from ... er, Gordon Brown.  ::)

Not that I look for conspiracies or hidden agendas.

Franchising allows the government of the day and the Whitehall Dafties to claim the successes, and to blame the industry for failure to deliver it.  It was also a cute way of avoiding the payment of any compensation to the shareholders of Railtrack.

This is one of the more interesting threads on the blog.

Many of those who speak of nationalisation seem to forget the many many failings of BR.  I was a commuter in 1991 and recall the poor service, dirty trains and lack of attention to detail.  There was no incentive to get better apart from professional pride and no capital for modern trains or other improvements.

Although NSE had inspirational leadership by C Green Esq even he could not deliver the investment needed.  Although the trains are expensive we have probably the lowest average age train fleet in europe provided by private capital.  The infrastructure has been a mess but that goes back to Railtrack and PUG2 and instead of leaving the company to sort itself out HMG decided to step in when then sensed a political opportunity.  This caused years of chaos - if Railtrack had been left alone the system would have been sorted much more quickly.

Finally - I have just travelled to N America via Gatwick - Both outward and return journeys were fantastic.  Despite a wait to get on the stand our bags (including non standard items) were in the hall in a few mins and we were on the platform waiting for a train within 40 mins of leaving the plane.  The new managment at Gatwick has got a grip of what was a shoddy operation and the result is impressive.  This is very different from Heathrow where the new managment has failed to clear out the old BAA culture and we see the consequence.  This failure at LHR is one of the private sector but it is rooted in the former culture.  Now Gatwick is offering stiff competition and Stanstead is to be sold the Heathrow managment will have to shape up or be shipped out. 

I know there are many public servants and organisations which do a good job but in the end organisations tend to look after themselves unless they are shaken out of complacency.  I have worked in public and private organisations over 40 years and I know what works.

The problem with the investment however is that despite the network being imporved and the age of rolling stock decreasing, it does not mean things have improved. The most popular and suitable intercity stock seems to be the hst as it can go almost anywhere with a large amount of capacity and a buffet, essential for intercity services. Post privatisation has seen the introduction of voyagers for example which seem to be the equivelant of the old alphaline services in regards to service provision and comfort as opposed to intercity levels despite being intercity services. Then you have the infrastructure investment which seems very short term focussed as can be seen with the Ebbw Vale line re-opening were everything was done to a price, but now required even more investment to increase frequency which would have been cheaper if a little bit more investment took place in the first place.

I'm not saying that BR would be better as there were clearly problems, but the privatised mess we currently have is just as bad, if not worse. Maybe instead of regional franchises, it would have been better to have a UK railway franchise that allows investment and cross subsidy of the whole network with a clear partnership between a franchise holder and network rail with long term planning and investment with suitable investment in rolling stock and infrastructure whilst reducing the needless duplication of staff amongst other things that have greatly increased costs.

At the end of the day, it seems neither the government nor private companies are any good at running the railways, what it requires is to be similair to the Royal Mail set up, free to run itself without input from civil servants or politicans but still owned by the government.

The WCML debacle proves once and for all that franchising doesn't work. Shame its cost the UK tax payers upwards of ^40 million to find that out but there you go.

London Overground is still Franchising and people seem to think that works

No it isn't franchising. LOROL is a concession let by TfL, who take the revenue risk. The train operator merely provides the trains, the crews and the expertise to run the service.

Consessions and Franchises are two completely different things. On the basis of LOROL Concessions appear to work. Franchising does not work and has just cost the taxpayers ^40 million pounds to achieve Virgin running the WCML as a management for a further 23 months. DfT could have just as easily rung Virgin up last year and done that, it would have been a whole lot cheaper.

Wrong. Railtrack were a clueless asset stripping organisation. They would have dissappeared anyway once they had run out of 'surplus' land and other assets to sell off or stations they could build office blocks / shopping malls on top of.

WCML PUG2 was in a Railtrack inspired mess from which they would not have recovered. The Hatfield derailment finished Railtrack off, not HMG.

On that I agree


I am not sure they were failings of BR it was a failing of successive governments.  They were never a nationalised company in the way that our continental neighbours run them.  They were really a branch of the Ministry of Transport.  They did whatever their political masters told them and that was to run down the railway because it was old fashioned and roads were the future.  If it had gone on much longer I am sure they would have hived it off the charity by now like they have done with canals. 

So the failing of the railways under BR and successive governments was to let it run to ruin. Much of the increased costs we have are now paying the price of decades of neglected maintenance of earthworks and structures and restoring capacity that was stripped out.   

Perhaps slightly off topic but just to say that BR was far from the basket case it is being made out to be here.

Yes, there was a lot of stripping out of capacity in an attempt to balance the books and this lasted (sadly) until the mid 1980s but BR did lots of good things too and the investment of the late 80s and early 90s in particular was pretty awesome. 

BR certainly wasn't perfect but neither was it a disaster, or anything like it.

BR in its day did have a policy of planned maintenance, i.e. replacing assets at the end of the planned reliable life. Unfortunately, government financial constraints meant that that the planned maintenance did not always happen and the plans fell years behind.
When Railtrack took over its financial management changed all that. I remember reading an article in Modern Railways by a Railtrack financial director proudly crowing that Railtrack has adopted a policy of "if it ain't broke, don't replace it" and that policy was a more efficent way of running the rail infrastructure, not to mention that this increased the ability of Railtrack to pay its shareholders dividends. Unfortunately this meant than when things went wrong, as they seemed to increasingly to do so, the impact on rail services was greater and, as we all know, disastrous in some incidents, leading to Railtrack's demise.

I agree entirely about Gatwick (disagree very much about Railtrack).  Of course it's anecdotal but our experience was the same.  To give support for your plea for competition (was none for Railtrack), starting from South Devon /Dorset border, we noticed that the fares from Taunton to Gatwick were much cheaper than SWT from Axminster!  However, one had the long car journey to Taunton plus a hefty parking charge for a fortnight.

The above anecdote is told only to illustrate that having alternatives has merit, but in the end, the quality of the service is most important to the relatively wealthy people of Southern England.  SWT has a very high quality of service and this is noticeable when changing to another operator at Clapham Jcn, for instance (Southern not bad actually, just hugely overcrowded).