Railway franchises – the need for reform


altThe effective re-nationalisation of the East Coast Main Line (ECML) is yet another setback for the railways privatisation policy of the mid-1990s.

National Express submitted a heroically optimistic bid for the ECML franchise, which was based on a £1.4 billion payment to the Government between 2007 and 2014.

This figure assumed annual revenue growth of over 9% - in the first half of 2009, growth was a meagre 1%.

Not surprisingly, National Express has now thrown in the towel. It remains unclear whether it will be allowed to retain its two other railway franchises.

Given the previous railway franchise setbacks, including the removal of Connex from the South Eastern network in 2003 and the enforced departure of GNER from the ECML, it is clear that reform is needed.

Assuming that the next Government retains the railways franchise system, two obvious improvements could be made.

First, some of the uncertainty relating to future revenues – the key financial driver – could be removed. Imposing a guaranteed minimum and maximum revenue figure within each franchise repayment contract could deter over-optimistic bids.

Secondly, correlating more closely franchise lengths with rolling-stock contracts would be beneficial. In particular, those franchises that compete directly with air services, such as the ECML, should be of much longer duration,

Whilst some argue that shorter franchises promote efficiency, the water sector operates with near-permanent licensees – and without undue problems.     

In time, and once the large Network Rail capital expenditure programme begins to wind down, the Government should allow some vertical integration - initially in rural areas or where the network operation is reasonably straightforward.

Eventually, there is no reason why integrated regional railway operators cannot be treated like regional water companies. With a substantial ongoing capital expenditure programme and decent operating revenues, they could also be price-regulated according to their Regulated Asset Valuation (RAV).