The second failure in three years of what is supposedly Britain’s highest-earning rail franchise suggests that there may be a serious flaw at the centre of the rail industry’s complex privatised structure.

GNER promised to pay the Government £1.3 billion for the East Coast franchise but the company collapsed in December 2006. A year later, National Express promised to pay £1.4 billion. Lord Adonis, the Transport Secretary, claims that he will find a third company to take on the franchise in about a year’s time, conveniently postponing the announcement until after the general election.

He is trotting out the same line that the Government used when GNER collapsed: that the failure of National Express East Coast is simply a little local difficulty with no wider implications for rail franchising. Yet there are strong similarities between the failures: in each case a company was encouraged by the franchising system to make an over-ambitious bid and threw in the towel as soon as the going got tough. The Government’s system of funding the railways is based on what have repeatedly turned out to be empty promises by private companies.

When the Department for Transport boasts that a company has agreed to pay £1 billion or more over the life of a franchise, it neglects to point out that only a tiny fraction of that amount is guaranteed in the small print. Companies can walk away from their franchises and only have to surrender a “performance bond”, which in National Express’s case is £32 million.

Expert View

The Government’s whole system of funding the railways is based on empty promises by private companies

Ben Webster

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Bidders for franchises can make wildly optimistic assumptions about revenue growth, and therefore how much they can “promise” to pay the Government, knowing they will not have to keep that promise if the recession bites.

The big loser from this system is not the passenger, whose services are guaranteed, but the taxpayer. The key question that the Government has failed to answer since it inherited, and then perpetuated, the rail franchising system 12 years ago is why the rail network costs the taxpayer three times what it did under British Rail.

The whole point of privatisation was not to improve punctuality, which was actually very good in BR’s last years, but to make the railways more self-financing.

Lord Adonis has already admitted that he may have to sacrifice the Government’s plan, set out in a White Paper in 2007, to reduce the taxpayer’s share of the total costs of the railway from 50 per cent to 25 per cent by 2014. What he should do is address the underlying problem by asking whether franchising is really the most efficient way of running the railway.

The companies spend an average of £5 million each simply on preparing bids, and each franchise tends to attract about four bids. This means that £40 million has been spent on bids for East Coast in the past three years, with the prospect of another £20 million as the franchise is re-let for a third time.

Of course the companies factor in all these costs in what they are willing to pay. Ultimately, the taxpayer funds the whole process.

The Liberal Democrats have made the sensible suggestion that East Coast should remain under public control to provide a comparator with the privatised franchises.

Network Rail, which maintains the tracks and signalling and is already effectively under public control, could also operate the trains and reunite wheel and rail for the first time since privatisation. Within a couple of years it would become clearer which was the cheaper way of running our railway.

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