The privatisation of Britain’s railways in the early 1990s was meant to end the inefficiencies that had characterised the former monopolist, British Rail. Unfortunately, results have not matched expectations. Costs remain well above the European average and taxpayers still foot a significant share of the bill in the form of public subsidies.
This may explain why the decision to award the West Coast mainline franchise to the rail group FirstGroup over the incumbent, Virgin Rail Group, was greeted with scepticism. True, FirstGroup’s bid was more lucrative for the exchequer. But there are concerns it will not be able to fulfil its promises and government will have to come to the rescue.
It is impossible to say whether FirstGroup’s bid is financially sustainable. Richard Branson’s comment that the decision was an “insanity” may just be sour grapes from a losing bidder. But aspects of the FirstGroup’s bid should ring alarm bells. In particular, the growth forecasts both for passengers and revenues look optimistic.
The Department for Transport looks at the financial sustainability of a bid when awarding a franchise. But until it is more open about the priorities allocated to different criteria, it will be hard to dispel the fear that this was just a dash for cash. If FirstGroup is unable to deliver on its commitments, there will be higher penalties than in the past. But the costs of a fiasco should not be underestimated. When National Express walked away from its contract on the East Cost mainline, the rail service was nationalised at significant cost to the taxpayer.
Finally, there are questions over the costs savings that the bid expects to achieve. FirstGroup says it will cut costs by 3 per cent, which is only a tenth of what the government would like to achieve throughout the network. This raises doubts about how achievable the 30 per cent target really is. Only last week the government held out the prospect that those savings would allow it eventually to reverse its policy of mandating inflation-busting rises in annual ticket prices in a bid to placate angry commuters.
Under the current structure, the infrastructure is run by Network Rail, a quasi-privatised owner, while train services are operated by separate companies. Both sides are looking at how some of the savings might come from greater co-operation. If that co-operation is ever to work on West Coast, it needs to identify big savings to conform to the government’s vision of a sustainable railway.