‘This hardly inspires confidence,’ Public Accounts Committee chair Meg Hillier said of the state of UK rail franchise system. Interest from the private sector in actually running the rail lines is ‘dwindling’, apparently, with the five franchises that went to tender since 2013 attracting only three bids each, compared to an average of four before.
Big. Surprise. Who would choose to be a rail operator these days? For years, transport companies have been aggressively squeezed by the state as it attempts to cut costs. Where once firms received subsidies to operate the railways, now they typically pay for the privilege (collectively £802m in 2014, and rising) of running a monopoly but without the power to set their own prices or influence their main cost – the right to use Network Rail’s tracks.
These businesses have about as much room to manoeuvre as the trains that they run, but that doesn’t mean they don’t face obstacles, or risks. Losing the franchise after the fixed term involves serious sunk costs for a start. And on top of that, if things go wrong, governments have a nasty habit of blaming their greedy capitalist partners than taking the hit themselves.
In the past, train operators would have had little choice but to acquiesce, but increasingly they are diversified businesses, operating both rail and bus services in different countries.
Take Stagecoach and First Group, the two firms bidding for the South West Trains franchise that the former currently operates. Both have seen margins in the UK rail sector slide over the last few years, from an average of nearly 4% between 2010 and 2013 to 2.3% and 2.7% respectively across 2014 and 2015.
To put that in perspective, the margin on the rest of First Group’s businesses last year was 5.9%. At Stagecoach’s regional bus division it was 13.5%. Is it any wonder companies such as this aren’t jumping at the ‘opportunities’ the state is handing out, when they could make more money elsewhere?
There are several advantages to blending the public and private sector in the railways. While there isn’t market discipline (the firms largely operate regional monopolies), there is cost discipline and an incentive to innovate to get and keep the franchises. The latter is what is being lost - battered franchisees with squeezed margins aren't exactly likely to invest in service or quality (see former TfL boss Sir Peter Hendy's comments to MT on commuter rail quality here). If the government wants to involve private companies, that’s fair enough, but it has to make it worth their while. Otherwise it might have no choice but to do everything itself.
Unhappy rail franchises with squeezed margins aren't likely to be able to invest in quality or services