National Express reeling as East Coast mainline nationalised

Poor old National Express has lost its flagship East Coast rail route - and its CEO Richard Bowker...

Last Updated: 31 Aug 2010

A torrid 24 hours for National Express: the Government has stripped it of the prestigious East Coast service, while its CEO Richard Bowker has quit for sunnier climes. The debt-laden bus and train operator has been struggling to make the London-to-Edinburgh route pay (although it runs two other profitable rail routes) - it said today that it expects the service to lose £20m this year, and can no longer afford to keep supporting it.

Transport minister Lord Adonis responded quickly, saying that the route would be taken back into government hands for ‘about a year’ to protect services to the travelling public. He was also extremely keen to emphasise that this was not another government bail-out (one rule for banks it seems, another for everyone else). This division of National Express, says the Government, is in effect being allowed to fail ‘pour encourager les autres’ – i.e. to stop any of the other 15 rail franchise holders getting any sneaky ideas about going cap-in-hand to the Treasury for a hefty sub.  

However, the advantage of re-nationalising the route rather than bailing out National Express may be hard to spot for those less well-versed in the nuances of public finance than Adonis. The taxpayer picks up the bill either way – neatly exposing the great ‘risk transfer’ fallacy of private operation of public infrastructure generally. Operating companies can either go bust (as in the case of MetroNet on the London Underground) or simply walk away, leaving the government to carry the can. Not much transfer of risk there, as far as we can see (the BBC reckons National Express can jettison this subsidiary with a maximum loss of £72m, without any impact on its other two franchises - although the Government may beg to differ on that).

So how did it manage to get in such a pickle? The simple truth is that it paid too much for the right to run the East Coast route, agreeing to give the Government £1.4bn over seven-and-a-half years. That was more than previous (equally ill-fated) operator GNER had agreed to pay for the full 10-year period, which should probably have set emergency alarms ringing somewhere.

Had passenger numbers kept growing at pre-recessionary record levels, it might have been doable, but when traffic started to slacken, the firm was left with no room for manoeuvre (particularly because it’s struggling with debts of £1.2bn). You could argue that the Government should have agreed to renegotiate the deal, if only to maintain continuity and to avoid the expense of re-nationalisation. But Lord Adonis and co clearly feared that this could result in an avalanche of similar claims.

Bowker’s departure (which emerged last night) could hardly have come at a worse time for the firm, but it’s not totally unexpected – in a previous life he was chairman of the Strategic Rail Authority and, as such, a principal architect of the franchise process. The irony of National Express coming a cropper at the hands of the system that its own CEO created has not been lost on increasingly irate shareholders. As for Bowker, he's seemingly so fed up that he’s leaving the UK altogether, to run Union Railways in the United Arab Emirates. He’ll need more than his gold staff railcard to get that far away from it all.

In today's bulletin:

National Express reeling as East Coast mainline nationalised
Tesco to bid for Northern Rock?
Rose lives to fight another day as M&S shows signs of life
Industry recovering - but Diageo cuts 900 jobs
'35 Under 35' in focus: The engineers are coming

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