Why does franchising work?

[whole diary]

[Btline]

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.

[Southern Stag]

If TOCs^▸ (Train Operating Company) 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^▸ (National Express East Coast) 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.

[ellendune]

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.  

[Tim]

Why does franchising work?

It doesn't

[JayMac]

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.

[Btline]

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.

[Tim]

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^▸ (British Rail(ways)).

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?

[grahame]

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?

[Btline]

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^▸ (Train Operating Company). 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.

[grahame]

The map should be redrawn, mainly into regions - but having competing routes run by neighbouring TOCs^▸ (Train Operating Company). e.g. services to Canterbury East run by A and services to Canterbury West run by B.

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.   

[Btline]

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^▸ (London Midland - recent franchise) were merged - say goodbye to all the semi fasts and cheap fares from Crewe/Brum to London.

[Rhydgaled]

Why is it scandelous for private companies to make profits?

In most cases, that wouldn't be scandelous. However, Britain's railways require significant taxpayer subsidy, more than if TOCs^▸ (Train Operating Company) 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^» (Rolling Stock Owning Company - about) profits and other aspects of the current structure of the railways.

I despair at 600 staff across the industry engaged in blame attribution - that's one for every 2 staffed stations.

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.

[ellendune]

Why is it scandelous for private companies to make profits?

In most cases, that wouldn't be scandelous. However, Britain's railways require significant taxpayer subsidy, more than if TOCs^▸ (Train Operating Company) 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^» (Rolling Stock Owning Company - about) profits and other aspects of the current structure of the railways.

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^▸ (British Rail(ways)) 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.

[Brucey]

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

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.

[Chris from Nailsea]

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

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