West Coast rail franchise analysis: Economics bound to run out of steam

SIR Richard Branson built his business empire placing big stakes on sometimes unlikely runners.

But despite his public optimism, it’s unlikely that even Mr Branson thought Virgin Trains would beat the odds to have the Intercity West Coast franchise competition declared null and void.

The UK government was in maximum damage-limitation mode when it chose to make an announcement at 1am yesterday stating that “technical flaws” had been discovered in the award of the franchise to rival FirstGroup.

But the fallout goes much further than alleged incompetence in Whitehall and the £40 million it will cost 
to reimburse the bidders involved.

It’s not just that relatively small miscalculations in the forecasts for passenger numbers and the inflation rate can create substantial implications for firms making a franchise bid.

Even if the sums are right, the uncertainties involved in predicting the state of the economy and the demand for travel 15 years hence mean the figures on which franchise decisions are made represent little more than informed guesswork.

Train companies have been calling for longer franchises to reduce the “risk” involved to them; but this has prompted a culture of promising the earth in terms of premium payments to government at the end of very long contracts, a form of It’ll be Alright on the Night economics that should have perished in the financial crisis.

So where next? In the short term, 15 franchises due for renewal over the next two to three years are to be “paused”. Two of these stand out: Intercity East Coast, which has been publicly-operated since National Express bailed out of its contract in 2009; and ScotRail, which is due for refranchising in 2014.

The longer East Coast remains in public ownership, the greater the case to bring other franchises in-house to recreate a nationalised railway.

ScotRail is in an even more curious position – the Scottish Government is responsible for letting the franchise, but not the decision to have a franchise in the first place.

Earlier this year, Westminster told Holyrood no further rail devolution was possible because it wanted to retain an integrated GB-wide system of franchising. With the West Coast debacle, this position looks increasingly intransigent.

Ironically, there must be a good chance First will be asked to keep running ScotRail while both governments work out what to do next.

• Iain Docherty is professor of public policy and governance at Glasgow University.