Southeastern mess is a becoming farewell to UK rail franchising

29

Rail franchising, in case you had not observed, has not been a roaring success.

The system met a untimely finish after 23 years when the pandemic emptied trains and the UK authorities rolled out emergency administration contracts in 2020. However it was already moribund, because of franchise failures, the withdrawal of operators from the market and the meting out of contracts with out a bidding course of to these left standing.

By way of restoration contracts and interim agreements, the federal government is inching its means in direction of a brand new rail mannequin, the place the general public sector takes the income threat and practice operators receives a commission a modest charge for (hopefully) making the darn issues run on time.

That replaces a hideously sophisticated set-up whereby threat round income and prices was divvied up between authorities, operator, Community Rail and others in micro-specified contracts that ran to 500-plus pages and concerned bidding prices of £10m and upwards per participant.

Enter Go-Forward. Simply because the system is in its demise throes, the bus and rail group has been stripped of its Southeastern franchise with three weeks to run on its contract. After a dispute with the Division for Transport, Go-Forward, which runs the franchise with junior accomplice Keolis, has repaid £25m to the federal government regarding the revenue share underneath the contract over a roughly five-year interval from October 2014.

The underlying challenge was the prices pre-covered by the taxpayer for Southeastern working high-speed providers on the HS1 line. Go-Forward, by its London and Southeastern Railway (LSER) working firm, was chargeable for repaying any extra that was unused. The corporate concedes that errors have been made.

Financially, the hit seems modest: the cash has been repaid and outcomes stay in keeping with board expectations, the corporate mentioned. The determine compares with mixed revenues of £2.8bn throughout Go-Forward’s two, admittedly low-margin franchises (and the opposite Govia Thameslink Railway, which has been tormented by operational points, is unaffected). One analyst mentioned he didn’t even have the Southeastern contract in his valuation given its imminent finish.

But Go-Forward shares have plummeted by greater than a fifth. First, the truth that the group’s finance chief has resigned with quick impact and the corporate has delayed its full-year outcomes for a second time have rattled the market. Second, with an unbiased evaluation of the corporate underneath means there stays a query of what else may flip up: the determine concerned on this dispute has already greater than doubled from the £8m flagged in final yr’s outcomes to June.

The federal government, which is aware of that non-public rail operators don’t are inclined to win any reputation contests, is stoking the concept this might go additional. The problem was “hid” in monetary reporting, mentioned transport secretary Grant Shapps, including “we’re not ready to be ripped off”.

This implies there could be a monetary penalty to come back, past the compensation and the lack of the franchise. The federal government is launching an investigation: it ominously will have a look at the dividends paid to the 2 teams that personal LSER over the course of the franchise, which has been repeatedly tweaked and prolonged. It’s going to additionally contemplate whether or not the teams can compete for contracts within the new world, leaving a risk hanging over their potential to win future enterprise.

That ought to not have an effect on the buses, which account for about 85 per cent of Go-Forward’s forecast working revenue primarily based on UBS numbers. However it means Go-Forward might be working underneath a cloud till each it and the federal government can present extra solutions.

Southeastern, which had been a uncommon instance of a franchise that functioned reasonably properly, joins Northern Rail and the previous East Coast Mainline underneath authorities management — run by the Operator of Final Resort. These will, in principle, be introduced again to personal operation by aggressive tendering, however who is aware of when.

Buyers, rightly, are betting that they can’t but decide the worst of what may come out of this with a lot certainty. At finest, that is one other franchising failure that ends in nationwide possession because of a contract so complicated that an skilled operator made errors and it took a number of years for the federal government to note.

helen.thomas@ft.com
@helentbiz

Comments are closed.