It’s tempting to blame Chris Grayling for the news that the Virgin East Coast rail franchise is likely to fall over within a matter of weeks. As transport secretary, he is the man with whom the buck must stop, and even by the standards of this government, he has been cursed with a sort of reverse Midas touch. His political career is such a litany of gaffs and incompetence that it’s a mystery to me why he isn’t better known for it; quite apart from anything else, we could all do with a laugh.
The truth, though, is that the problems on this line are much greater than anything Grayling has had the chance to cook up. For one thing, the franchise (owned 90 per cent by Stagecoach, 10 per cent by Virgin) took over the line in 2015, before Grayling even got the transport job. For another, this has happened before: today’s Financial Times notes that three of the four operators of the East Coast line – from Kings Cross to Leeds, Newcastle and Edinburgh – have been forced to give up their franchise early. They simply haven’t been able to make enough money from it.
Why, given the frankly hilarious ticket prices? Geography may be a factor: unlike the West Coast line out of the Euston, the East Coast line serves some pretty sparsely populated areas like Lincolnshire. The state of the economy is a big one, too: growth in rail passenger numbers has tended to correlate pretty closely with growth in the wider economy. Franchise bids which shared the Treasury’s cheery assumption that productivity and wages would rise are likely to have proved too optimistic.
But it strikes me that there’s a bigger problem with the franchise system: that is, it’s incredibly difficult to work out what success would look like. Make overly pessimistic assumptions about growth in passenger numbers, and an operator will end up raking in profits for running unexpectedly over-crowded trains. It’d end up getting pilloried.
That is, were it not for the fact that such pessimistic forecasts are relatively unlikely to win franchise bids at all. In most cases, the Department for Transport seems likely to award a franchise to whichever operator is making the most aggressive financial assumptions. (No one ever got fired for picking the cheaper option.) So the companies which end up running our railways are, by definition, those which made the most optimistic assumptions about how easy they’d find it to make money – and those which are most likely to run into trouble if those growth forecasts aren’t met.
I said at the start of this that this mess wasn’t Grayling’s fault, and it isn’t – but that doesn’t mean he can’t make things worse, and he very probably will. If the franchise folds, as it seems likely to do, he will face a choice. To quote the FT:
“He can renationalise the franchise or reward Virgin Trains for failure by offering it a new, not-for-profit contract for the next two years with the government taking on all the risk.”
The latter seems more likely: the operator is already in place, and attempting to create a new, nationalised rail company from scratch in a matter of weeks is a recipe for disaster, even if the man at the helm were not Chris Grayling. But the alternative is literally paying a company that screwed up for not screwing things up even more. It’s corporate welfare.
There’s another reason Grayling won’t go for nationalisation: his ideological belief that the state should butt out whenever possible. But in this, as in so many things, he’s misunderstood the way the world works. The case for outsourcing, such as it is, was never that the private sector was just better at stuff: it’s that competition and contestability would lower costs and raise standards.
Whether you buy that argument at all, it’s extremely difficult to make it stack up in an environment where there simply aren’t enough bidders to go round. Grayling’s reluctance to bar Stagecoach from future franchises is said to stem in part from a terror that it’d lessen competitive pressure even further.
The East Coast mess highlights one last, more profound problem with the current franchise system. So long as the state is not willing to let a railway line close altogether, it will always have to step in when times are bad. The taxpayer will always share the risk. By refusing to countance a state-owned operator, the Tory government haven’t just reduced their beloved competition: they’re preventing us from sharing in the revenues, too.
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