Let’s nationalise the railways in London – or maybe not

by Daniel Moylan

A recent survey conducted for City Hall showed considerable passenger dissatisfaction with the national railways serving London, by contrast with the London Overground services operated by Transport for London. The implication was hard to miss: let TfL, a statutory entity, take over the railways from the failing private operators.

Now I have no problem with that. TfL runs a very good London Overground service, but this is not because it has found some magical formula for operating railways that private companies are too dense to see. Nor is it even because it has cut the private sector out. Far from it – all the London Overground services (as well as the buses, the Docklands Light Railway and Tramlink) are operated by the same private companies that run the national railways. It’s just that TfL puts its own logo on the kit.

And that is just what would happen if TfL took over new national rail services. There is a legal reason for this. To operate a franchise, you need two parties: the party granting the franchise (the “franchiser”) and the party successfully bidding for it and ultimately operating it (the “franchisee”). For national rail services, the Department for Transport is the franchiser. But – and here’s the quirk in the law – TfL is legally banned from bidding for national rail franchises. No doubt Parliament thought that allowing a public sector bidder into the fray would distort competition and deter private bidders. (Let’s for a moment rise above the point that several major private operators are wholly owned by foreign states.)

So anyone who fancies that when TfL takes over a national rail operation it is replacing the private sector franchisee misunderstands the legal position. (I am sad to say that our Mayor often sounds as though he makes the same mistake.) What TfL in fact does is to take over the role of the DfT for that service to become the franchiser. It then invites bids for the franchised service and, lo and behold, appoints one of the same old, same old (though occasionally they are not: London is a magnet for foreign transport operators seeking new thrills).

But there are some differences between the franchising model used by the DfT and that used by TfL. First, as mentioned, TfL requires its franchised operators to do their best to disguise their existence. The trains are covered in TfL roundels and only if there is a labour dispute does TfL say that it’s nothing to do with them and it’s all down to the franchisee.

But there is also a more fundamental difference that relates to the commercial terms. When awarding the franchise, TfL takes all the farebox income for itself, relieving the private operator of fares risk. Instead, it has a contract that pays out provided the operator runs the service as specified and meets certain other standards, such as cleanliness of trains and the like. These are all things within the operator’s control, so its risk is essentially on itself – the risk that it doesn’t do its own job properly.

The DfT, by contrast puts the fares risk onto the private operator. This sounds good: if they work hard and carry more passengers, they get to make more money and there are more happy customers. What’s not to like?

The trouble is that railway operators have long since worked out that what drives passenger numbers is not really their own cleverness at marketing and pricing, but the state of the economy. As the economy, and so employment, booms, so people pile onto the trains; and when there’s a downturn, they stay at home or take the bus. The DfT seeks to load onto the private sector a large amount of the risk inherent in the economic cycle – risk that no private company has it in its own power to manage.

The reason for the different approaches is essentially cultural and budgetary. TfL (now, and in its various prior incarnations) has been taking fares risk for over 150 years: it’s in the blood. The DfT, by contrast, is a government department with a fixed annual budget and under the beady eye of the clever young people at the Treasury. Outsourcing risk (every sort of risk) is its first rule of life.

Now how do the operators respond to the DfT model? Being asked to take on so much extra risk that they have no power to manage or mitigate, they naturally ask for a higher payment (or offer to make a lower payment) than they would if the fares risk remained with DfT. And, because they have clever lawyers, they insist on clauses in the agreements that say that if the fares income is seriously less than forecast they can hand the contract back or seek a subsidy from government, thus transferring back to the DfT some of the risk the civil service is trying to get rid of. And why does the DfT agree to these clauses? Because a rigorous insistence on full transfer of fares risk to the private sector would mean even higher payments for the contract, or less income from those franchisees who make a payment to operate a service. Risk is like a balloon with a price tag attached to it: you can move it around and even share it, but it always pops up somewhere in the deal.

Without any doubt, the DfT franchising model is broken: it aims for a transfer of risk but cannot afford the financial cost of doing so. So it ends up every time with a muddle. The latest variation to the franchise for the East Coast Mainline services, that, according to Lord Adonis (but not the DfT), has seen Stagecoach and its junior partner Virgin relieved of large payments they are due to make to the government, will, it is to be hoped, kick off the demise of the DfT approach. But although TfL has a much better model, with risk allocated where it should be – that is, where it is best managed – the idea that giving more services to TfL means the private sector is cut out is plainly wrong.

Daniel Moylan is a senior London Conservative, who held a number of key transport and other posts under the mayoralty of Boris Johnson. Previous articles by Daniel for On London are here and here. Photograph by Max Curwen-Bingley.

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