Franchising is Dead

A Conversation with Gareth Dennis

In March 2020 the UK Government suspended rail franchise agreements, instead putting in place Emergency Measures Agreements (EMAs), paying franchisees a 2 percent management fee to run trains, due to a collapse in passenger numbers as a result of the coronavirus pandemic. These EMAs due to expire for the majority of TOCs on 20 September 2020. Railway engineer Gareth Dennis is a lecturer at the Birmingham Centre for Rail Research and Education (BCRRE) leads the York branch of the Permanent Way Institution. He believes franchising was always a bad idea and this current crisis is the nail in its coffin. Our editor-in-chief, Josephine Cordero Sapién, spoke with him to find out what should come next, in a conversation that paints a broad picture of the structural problems with the British rail network. Abolishing franchising is merely the first step in what should be a comprehensive overhaul to the railways to increase capacity, drive modal shift and address the mega-trend, which is climate change.

Gareth Dennis interview

Gareth Dennis spoke to our editor Josephine Cordero Sapién

Josephine Cordero Sapién: Franchising – it’s not just been a problem during lockdown. You’ve not liked it from beforehand. Could you say a little bit about what your gripes with it are?

Gareth Dennis: There are a range of different problems that I have with franchising. Key among them is that nobody can tell me what franchising is for when it comes to the railways. The railways are not just a geographic monopoly but also a highly complex system that’s totally interdependent on a load of factors that the franchisee is never going to have control over. I can never understand why franchising was chosen over a concession model. The idea was that franchisees could drive growth. But the reality is that franchises were let with the idea that the railways were going to be managed decline. A couple of franchises were let on a not-for-growth basis. So number one issue is, they didn’t really know what they were for. Second issue with that is, on a system that is so interconnected, so complicated, they didn’t have the ability to do anything particularly radical. There’s only really one example of a successful franchise, when it comes to growth and driving new passenger growth and also a collaboration with the infrastructure manager to create new services and that’s Chiltern Railways. And the reason why that works is because Chiltern Railways almost has its own little segregated network that it runs on. It was being run almost as a concession. All the other franchises are much more complicated. They’re interacting with different networks being used heavily by different operators. The other challenge is risk management. Government has been pushing more risk on to franchise holders to the point where none of them are particularly interested. And as the railways got busier, the only area really where profits could be derived for the franchise holder was in staffing, so drivers and guards. As a result of that squeeze we’ve seen a lot more industrial action. In quite a few of the cases the franchisees went to reduce the number of drivers required, muck around with the contract for guards, and for better or worse that’s resulted in degraded industrial relationships. All these combined factors come together to illustrate the fact that franchising just wasn’t a good system to start with because it has no real objectives and purpose. Franchising fragmented the industry far too much, without an idea for a reorganisation for growth.

Train operating companies in Great Britain (December 2019)

Train operating companies in Great Britain (December 2019)

JCS: Under British Rail it was structurally much more like the model you’ve actually proposed before, where you have an intercity network and then you have regional operators that do the commuter and near-distance services.

GD: The challenge with the railways being absolutely at capacity is that there is no ability for any kind of commercial cleverness when it comes to running trains. The different franchises are screaming out to run as many services as they can and they can’t run any more because the infrastructure is full and that’s totally out of their control. One of the challenges with franchising is that actually you have far more centralised control than the railways have been under, potentially ever. That level of control means that there is very little regional accountability or regional knowledge. So, an understanding of what services people wanted. The franchises started out as quite thin documents but in the last five years these documents for the bids were huge!

JCS: They’re about 800 pages long!

GD: Yes, boxes worth of binders. It’s insane. A franchise is supposed to be a business model that is quite free to allow a commercial edge. It’s supposed to allow commercial innovation. And putting aside the fact that commercial innovation is a bit of a silly idea on the railways, because innovation is very constrained in a system where safety is so important and capacity is so constrained. These two key things mean innovation is not stifled but it doesn’t happen in quite the way that it does perhaps in the open business market. With railways you’ve got complicated signalling, you’ve got rolling stock that’s very expensive, takes a long time to build and procure, and all these variables, the DfT, centralised in government, was controlling and so even under British Rail you had more regional control, you had more input from the regions and that has been undermined over the last 25–30 years. My model that I talked about was really about taking a lot of the day-to-day running away from the Department for Transport and giving it to the regions, giving it to the subnational transport bodies whether those are regional bodies like Transport for the North at city/urban level, or Transport for the West Midlands.

JCS: On a concessions-based model – there are two questions really: what will happen next? And do you think that what will happen next is also what should happen next?

GD: For fear of going ‘no, of course they won’t do the right thing, this is Britain and we just don’t know anything about public transport’, no that’s not going to be my answer. To answer the first question, what I think will happen next is that we’re going to have concession models and they’re probably going to map broadly on to the franchise map so the franchises will transfer into being concessions, sort of as they have. That’s happened.

JCS: Yes, so just extending the EMAs, because they’re running out in September.

GD: In terms of the immediate future I think they’re going to be extended. I don’t think Government’s going to want to go through the process of bidding. Given that we’ve also got a catastrophic Brexit inbound, I don’t think the civil service is going to have enough time on its hands. So I think we’ll just see a transfer of a direct-award concession. If not, you might see an expansion of operator of last resort, so similar to what’s running LNER. But in the medium-term I think we’re just going to see franchising not re-surface. It’s gone. I think there’s an acknowledgement that it isn’t working.

JCS: The original competition element hasn’t worked either, because the franchises were meant to be much shorter, about three years or so and train operating companies didn’t really think that was great so you don’t have one of the stated goals of franchising.

GD: Franchising was broken to start with. They were never going to fix the issues with the fact that we haven’t built any new infrastructure on any great scale, despite the fact that we’ve got triple the number of passengers travelling. To turn to whether the right thing will happen, funnily enough I think Government is being left with less and less choice about doing the wrong thing because they’re running out of bad options to do when it comes to how to run the railways. It’s probably going to be a concession model, we’re going to see more parity between the boundaries of infrastructure manager and train operator, which is only a good thing. But I think because of the very nature of the environment that we’re in now, we need to grow rail ridership very quickly, we’re going to have to look at fare changes, reductions in fares to drive growth again, and I think the only way you can get that kind of responsiveness is through a concession where Government – local, regional, or probably Westminster Government – can pull the strings very quickly to change and manage fares to deal with demand.

JCS: At the moment is that people are more spooked about taking public transport. I worry that even though from a climate emergency perspective we absolutely need to shift people on to the railways and away from their cars, people currently feel more comfortable driving because you’re in your own little self-contained bubble. Getting passenger numbers back up again is a challenge.

GD: It’s a major challenge. And we just have to look to our friends and colleagues in mainland Europe, who have been reducing fares massively, who have been using the opportunity of people’s reduced travelling to make massive shifts to domestic flights for example. The urgency is there, and the mega-trend remains climate change. That’s the key driver for transport in general and we can’t lose sight of that.

JCS: When I talk with anyone who is against HS2, the cynicism around it is that Government’s not going to push modal shift to reduce overall passenger numbers. They’re supporting all types of transport and therefore, if some people take the train the roads are clearer, I can still take the plane, I can still do all of those things, I’ve just added to transport demand, rather than cutting it down.

GD: The previous transport secretary, when he was asked about modal shift…

JCS: Grayling?

GD: Grayling, yes, when he was asked about modal shift, he said ‘that’s not the business of the Department for Transport’, which is mind-blowing because modal shift to my eyes very much is. The trouble is, there’s always pressure from Treasury because Treasury sees Vehicle Excise Duty, what people often call ‘road tax’, as a major source of revenue at the moment, but it isn’t for long. As the number of electric cars shoots up that pay zero Vehicle Excise Duty, Treasury is going to get very unhappy and they’re going to have to introduce road pricing, which totally changes the equation. If you fast-forward to Shapps, he did talk positively about modal shift, so I think there has been a bit of a change. I think that there is an understanding that there is an increasing importance for us to move people and things away from more polluting modes, and that’s been a fairly quick change. I think there’s cause for very light, if not optimism then for a raised eyebrow with a slight curling of the mouth at the potential that Government is slightly shifting its position on modal shift. Because the Department for Transport’s key responsibility should be driving modal shift away from roads. And this is a key thing that’s a benefit of the concession model – London Overground is a concession. TfL hold the reins, TfL are a very well-informed client, they understand their region very well or the city, Greater London, they understand it very well and they work to drive modal shift. By loosening the DfT and national control over the railways, actually we have the potential to tighten control regionally, which is a good thing because regionally we have a much better chance of driving modal shift than we do nationally because regionally there is an understanding of where people travel, what’s important to local people and businesses in terms of freight as well of course. The DfT have a huge amount of control and very little understanding of the needs of the passenger. When it comes to can you run a clockface service between here and here and that requires some level of input from the DfT, they don’t want to know, they’re not interested. The Department for Transport haven’t invested the right money in infrastructure, so franchising was always doomed because the intransigence of central government’s ability to invest. The trains, track and also who’s running the trains and putting staff on them – these are totally disconnected with different periods of return. The fact that they all need to be working together but they have totally different individual commercial drivers was never going to work.

JCS: ETCS signalling for example is a Network Rail issue but obviously it has huge implications for train operating companies as to how punctual their services can be because how quickly drivers can respond in poor weather conditions.

GD: Yes, there are key examples like that, you’ll find key disconnects between those three key areas – infrastructure, train, and then operator. In several instances you’ll find there are incentives against collaboration. You need to do a huge amount of staff training for this new signalling system, but under the franchise system what incentive was there for a franchise to do that?

JCS: And that has to take place during the weekday, not at the weekends because of reduced labour relations and then you haven’t go the drivers to run the other services and then passengers are unhappy, and then the Department for Transport says, you’re doing a rubbish job, we’re going to take the franchise away from you…

GD: Exactly, and it’s just this feedback loop of disruption, but then when the train operators came up with a good idea it was stymied by one of those interfaces as well. For example, Northern, in the run-up to getting gobbled up, but even when it was still a franchise, they were looking at doing this thing called digital train, where you retrofit things like passenger counters, various diagnostics, a huge amount of wiring, new wifi as well, on the existing fleet. The train operating company paid for it and did all the design work, but the rolling stock operating company said, okay, you can fit that to my 25-year-old Class 150 diesel train but as soon as I get that train back, you have to strip it all out. How does that make any sense? There are lots of those. Those interfaces, the breakdown, the gaps between those organisations are a real issue. And franchising built on the worst of those gaps, it created new gaps and then it also threw in all the worst of centralised control as well.

JCS: So under a concession model, because of course there are a few examples already – you mentioned the London Overground, the problems that currently exist with franchising – to what extent are those same problems going to persist?

GD: Well the key one is that you stop – for me it essentially means Government has to take responsibility. The main benefit of the concession over the franchise is that Government has to take responsibility. With the May 2018 timetable meltdown Government just tried to find everyone to blame. It was blaming train operators left, right and centre. Where actually it was pretty much entirely Government’s fault that that happened. For me, the main benefit of the concession model is that Government cannot hide behind the fake idea that there is a franchise that makes its own autonomous decisions.

JCS: The idea is, they have an incentive to be better, because they become accountable to the public.

GD: Exactly. That is the key thing. For me, the concession model is accountability.

JCS: But then ideally you’d also want to have not necessarily the Department for Transport in charge.

GD: By nature you don’t have the local or regional interest at the DfT – you’re looking at things at a national level. The DfT should be in the business of looking at the big figures like driving modal shift, how quickly do we want to decarbonise – these are the big-hitter bullet-point things the DfT should be responsible for. But they should not be responsible for deciding how many trains run between Adderley Park and Birmingham New Street. The reality is that the best place for that control is at either regional or local level. JCS: Yes, Westminster doesn’t control when my bins get picked up and it would ludicrous if they did. It’s the same kind of thing. GD: Exactly. And this comes from the fact that this really stems to a deep ideological point about that the railways are a public service.

JCS: Which is what we’ve realised during this pandemic. Government realised we must keep them running.

GD: It’s what we’ve realised several times! Yes, we’ve realised it successively over various crises over the last 25 years or longer. When there’s a national railways crisis for whatever reason, timetable meltdown, Hatfield rail disaster, meaning everything has to run slowly – the country grinds to a halt. GDP falters, all these different measures. Look at the strikes on Southern. How many people’s lives were horrendously and irreparably affected by the strikes and the not being able to get to their places of work and not being able to afford an alternative like living closer to London. The railways are a public service and because of that they need to have regional and local control. You need to have people in the right places who understand the needs of the local area.

JCS: So if we now move to concessions and the Department for Transport is the one to point the finger at, they might actually be motivated to have regional bodies so that they have an extra layer of deniability for themselves. Is that cynical?

GD: It’s a difficult one. In an ideal world they start feeling the heat a little bit and so they want to push that heat out. But then you’ve got to think about the fact that certainly when it comes to the urban areas, largely the control is Labour. Okay, Andy Street is in charge of the West Midlands. But for the most part regional and urban government generally finds itself being more left-of-centre. The fear is that you end up with – this is partly why there’s such a battle between TfL, between the mayoral office in London, and central government. When they’re on opposite sides, certainly when the government is Conservative, you’ll find that local / regional government typically flips the other way and so they don’t want to give that control to the other side. There needs to be the right interaction between the regional transport body and the urban body and the conflict in the way those work is something that needs to be understood. There’s maybe not an easy answer as to how that works but the important thing on the railways is that, to quote Roger Ford from Modern Railways magazine, it’s about structure, not ownership. The nationalisation versus privatisation discussion is really a bit of a distraction and a side-show. And certainly under franchising the structure was not right. One of the main challenges with the concession model is that it doesn’t work unless you buy up the rolling stock. It’s an improvement on franchising inasmuch that franchising couldn’t have existed as it is, but until the concession has its own rolling stock, dedicated, that it can decide to buy new stock or it can upgrade existing rolling stock, it can do things to its own stock and it knows that that stock is going to be running on those tracks as long as the stock is functioning or perhaps until that stock gets cascaded elsewhere but until that’s the case, that structure is not right yet.

JCS: So if they’re extended now – the concessions – the next thing you’re saying should happen is Government should over time buy back the rolling stock from the ROSCOs?

GD: Yes, so certainly there should be a moratorium on any new rolling stock being procured through a rolling stock operating company. It just adds cost. It’s not the TOCs or because the manufacturers are over-charging, it’s because the rolling stock operating companies exist and the leasing model that they use to buy new rolling stock.

JCS: So do we think 18 months is going to be the next extension length for the time being or are they going to go for something longer right off the bat?

GD: Yes, that’s a very good question. My instinct would be round about an 18-month or maybe 24-month direct award to transition finally off these emergency measures to a concession model.

JCS: At the same 2 percent for train operating companies?

GD: Yes, probably pretty much the same.

JCS: Because the worry is that they’ll say, ‘I’m not going to do it’, if Government offers less.

GD: Yes, it’s true – I used to think franchising was the worst of all worlds but actually currently it’s not great because Government really is beholden to these private operators. There are serious advantages to not having private operators involved because a company can’t just turn around and say, ‘okay, we’re not going to run the trains then’.

JCS: Which is the same as with franchising initially, where they were to be let on a three-year term to keep competition constantly going so that we have good services, and the potential franchisees said, ‘well, that’s not of interest to us’ and so they had to lengthen and lengthen and lengthen them.

GD: Going into the railways to turn a profit isn’t a good idea. It’s a public service, actually we should be looking at maximising the things that are good about the railways’ role, which is moving more people, moving more things more efficiently, reducing greenhouse gas emissions overall, those are the targets and there’s going to be a collaboration between public and private to deliver that. The railways are no longer a cash cow and they haven’t been for a long time. Ultimately the reason franchising is collapsed is because it doesn’t make any money for the franchise holders. It’s ended itself really.

JCS: Yes, it being on the way out, they’re probably thinking, ‘fine’.

GD: There are so many franchises that were just borderline ready to collapse, the South Western Railway franchise was just about ready to collapse, Northern had already gone of course, there were several others that were very close to just collapsing in on themselves and the reason for that was because of over-promising and not being able to deliver because Government hadn’t delivered on its side of the bargain regarding infrastructure or rolling stock, but broadly because they just weren’t making any money. In several cases the owning groups, Abellio or indeed Deutsche Bahn, were actually haemorrhaging money into the railways from their owning groups.

JCS: Because when they made an initial bid, circumstances changed that they couldn’t foresee and they had to deliver on what they promised five years ago?

GD: Absolutely, yes. It wasn’t even five years, it was only a couple of years into these franchises that LNER / Stagecoach were paying a lot of money into the coffers of Government because it had suggested it would get growth using the Virgin brand that never materialised. Because funnily enough there’s only so much growth you can drive when the trains are full and you can’t run any more trains. The DfT were saying, ‘if you look at these potential growth numbers…’ Yeah but the trains are full and you can’t run any more trains, where is this growth going to come from? There is only so much air you can pump into a tyre before it bursts and the analogy here is, we need a bigger tyre. If we want to pump more air into it, you need a bigger tyre. So fundamentally franchising was just going to disintegrate. Ultimately, people want to travel by train more cheaply and we should have a strategy and structure that allows them to do that.

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