THE announcement that the franchise to run the West Coast passenger services between London, Birmingham, Manchester and Glasgow for the next 13 years and four months has been awarded to FirstGroup on the basis of a bid of £5.5 billion will arouse misgivings among those who recall the recent history of the East Coast Mainline, where two successful winners of franchise competitions (Great North Eastern Railways and National Express) won on the basis of ambitious bids and then withdrew early in the life of the franchise on finding they were making heavy losses.
Will this franchise go the same way?
The runner-up in the competition, Sir Richard Branson of Virgin, certainly thinks so. He has branded the decision "insanity".
Against this, it should be remembered there are significant differences between this competition and the earlier East Coast ones. At that time, franchises were shorter and less flexible, giving less room to react to, and recover from, unexpected events. The National Express franchise, in particular, was severely affected by recession, and at that time franchise agreements left the company bearing the whole risk of a revenue shortfall in the early years of the franchise. There is now at least some protection in the event of gross domestic product falling significantly short of the expected level, in that the franchise payments are adjusted so that the Government bears most of the risk.
It has often been argued the penalty for putting in an unrealistic bid and then withdrawing when it fails is too small. In fact, there have always been penalties in the form of a bond which has to be surrendered, and the National Express East Coast franchise agreement included financial guarantees of support from the parent company. It is understood that both the level of the bond and the financial guarantees have been greatly increased this time, to make it more difficult financially for the winner to subsequently withdraw. But there are further penalties in terms of the loss of credibility of the company in future franchise bids (National Express has not won a franchise since it withdrew from the East Coast).
Over the last 10 years, revenue on the West Coast has grown by 10.2% per year. While Virgin bid on the basis that growth would slow down to 8.5% per year, FirstGroup actually expects to raise it to 10.4%. We can only hope FirstGroup has got it right.
l Chris Nash is research professor at the Institute for Transport Studies, University of Leeds
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