Tuesday, 3 July 2007

The franchising farce

The nature of the franchising system is probably the primary barrier to the growth of the rail network. The central issue with franchises is the short time periods for which they are granted: the majority of franchises are given to Train Operating Companies for periods of 7 to 10 years, with the final years usually being conditional on meeting certain performance criteria.

Clearly, no company can make significant levels of capital investment over such period as there is an insufficient window of time in which they can generate a realistic return. The result is that most TOCs can only commit to relatively minor levels of capital expenditure. This stifles investment in the rail network and means that government is still the only real investment vehicle for most major capital projects.

This situation is exacerbated by the long gestation period for many development initiatives. For a ten year franchise, it is not unrealistic that the development of new trains, stations or track – even were these things to be under the purview of Train Operating Companies – could take up at least half, if not more, of the franchise period. This is an unattractive option which, again, stifles development.

As well as stifling investment, the franchise system also means that the network is run on a short term basis. Franchisees have little concern for what happens after their period of operation is over because there is no guarantee that they will win the next franchise agreement. While this approach is understandable, it means there is virtually no incentive for long term strategic planning and necessary structural adjustments are simply overlooked.

The franchising system, as currently configured, is also hugely wasteful. Companies spend millions and millions putting together franchise bids and devote significant management time and attention to the activity with only the winner of the franchise race having any chance of recouping this expenditure. The government itself also faces significant expenditure in assessing the various bids and managing the franchising system. While such efforts are, to a degree, necessary in any tendering process, the fact that the franchises come up for renewal so regularly makes the system excessively expensive. This is money that could, and probably should, be invested in the rail network.

Changing the franchising system is not an overnight task, but until and unless it is addressed the rail system will not deliver as much as it should for all of its stakeholders. As such, when it comes to railway policy, it is an issue that should be high on the agenda of the new Secretary of State.

1 comment:

Martin Callingham said...

All very well to say that short franchises make it unattractive to invest. While this is true, long franchises have their own problems: like PFI contracts they bind public services into a particular shape although in a few years time as a result of political or economic change the services actually needed by the public may be quite different.