BBC BLOGS - Peston's Picks
IN ASSOCIATION WITH
« Previous | Main | Next »

Express exit

Robert Peston | 16:34 UK time, Wednesday, 1 July 2009

There are two ways of looking at the price paid by National Express for walking away from its the East Coast rail franchise.

There's the relatively contained financial cost - a maximum of £72m.

National Express East Coast line trainAnd then there's the difficult-to-quantify but substantial blow to its reputation - and to its ability to win future business from government.

The transport secretary has made it clear that he's not prepared to award any further rail franchises to National Express - and if he can, he'll probably do what he can to frustrate its bus operations.

For National Express that was a price worth paying.

The £1.4bn it had agreed to pay to the government for the seven years of its franchise was predicated on revenues growing by 9% a year.

But since the contract was signed in 2007, there's been an economic event called a global recession.

Revenues on the East Coast line are this year growing at 1%. Which means National Express would have faced crippling losses if it didn't walk away from the contract.

That said, National Express would rather have secured the public consent of Lord Adonis and the Department for Transport for handing back the franchise - so it offered more than £100m by way of compensation, above its contractual liabilitiy.

But alienating Lord Adonis and the government turns out to be less of a concern for National Express than the burden of the East Coast payments.

Which implies that National Express is reconciled to becoming a rather smaller business - and possibly either dismantling itself or selling itself to another transport company.

That said, the newly appointed acting executive chairman, John Devaney, loves a bumpy ride - and he has something of a talent for extracting a decent price for shareholders when the world looks pretty bleak.

Comments

  • Comment number 1.

    Robert,

    What about the social cost to to those who live in the region who will no doubt face disruption and reduced services (despite the promises)?

    What is the cost of that? Is it included in your calculation - or do the people that this line served not matter?

    Please can this be the final nail in the coffin of privatisation.

  • Comment number 2.

    Does all this imply that the (at least, the East Coast line)train services are being run efficiently ??

  • Comment number 3.

    We endured the Cambridge Express last week: Expensive ticket, no air-conditioning in the first-class cabin for which we paid the expensive ticket, back-breaking rough railbed, having the departure gate posted only five minutes before departure(which meant hundreds of people had to sprint to the train), etc., etc.

    Someone, somewhere is bound to do a better job than National Express!

    We hired a car for the return trip.

    How/why do you dear people tolerate this? You deserve so much better!

    Ditto for BA and Terminal 5...

  • Comment number 4.

    From what you (RP) have to say about the contractual liabilities for National Express it appears that they (NE) ensured that the risks and walk away terms, if events did not turn out as they planned, were very much in their favour.

    There is no doubting that NE believed that in offering the government and additional £25M expected to walk away with their reputation and integrity intact. And if that had happened they would have seen it as money well spent. That is why I for one am pleased the government did not allow that to happen.

    Under these circumstances it will be interesting to see if John Devaney is the when he tries to extract a decent share price for the shareholders, "sharp cookie" you make him out to be.

  • Comment number 5.

    Robert, there is another angle here that you really should cover - and that is why National Express (and the other franchise owners) commit to pay these huge sums of money to the taxpayer in the first place. Every few years, the government holds an auction of franchises. They let bidders know the price they expect to receive, and in return indicate where and to what extent fare rises would be acceptable. In order to get a very high price, they encourage bidders to put unregulated fares up as much as possible. This is nothing but another stealth tax, but no one ever mentions that. If, for sake of example, the franchises were simply given away, then the bidders would have no need to earn a return on the capital they commit to pay to the government. That would obviously look very generous, as bidders would be earning profits for no outlay, so you would then need a different regulatory system, in which bidders were incentivised to improve operating efficiency and service levels while maintaining or reducing fares rather than putting them up.

    To sum up: National Express has committed to pay the government £1.4 bn over its franchise term. Depending on how that payment is phased, it could easily represent a total cost to the traveller of £2 billion or more once NE's return on this capital is taken into account.

    I have no problem with privatisation, and no problem with any private company earning a return on capital it invests into a business. I have a fundamental objection to the government taking huge sums of money from franchisees and then pretending to object when they put up fares in line with the encouragement they have received from government.

  • Comment number 6.

    rail should all be nationalized along with omnibus and coach companies.
    most of them work on profit before all else.
    sadly its the public that suffers and will continue to under these money grabbing companies.

  • Comment number 7.

    Where have I heard this before? I worked for commercial television for more years than I should have done.(someone has to). Companies overbid, staff lose jobs, company doesn't make programmes or money, more takeovers, more job losses, bosses make a pile when they leave, ITV is a worse state than China and so was National Express. It's everybodys fault but their own. The government absolve themselves of any blame when in reality the franchise system is fatally flawed and encourages these unnecessary stupid bids.
    I was charged for booking a seat the other day and by altering the fare structures and timings they've put the fares up by 25% in some cases over the last year. No wonder their passenger numbers are not growing at 9%/year. Oh and, as RP says, there's a recession. Haven't they noticed?
    I won't lose any sleep, bring back GNER

  • Comment number 8.

    Good news for shareholders - thats the first priority for any Company.


  • Comment number 9.

    The idea that Mussolini made the trains run on time may be a myth but I can see his point. We passengers for the most part don't care who owns the train network or runs it. Most don't have strong philosophical views for or against privatisation. We just want to get to our destination with as little fuss as possible, ideally without paying the highest fares in Europe. The whole franchise process stinks but I personally don't care if the East Coast mainline is run by the government, the Church of England or a selection of highly intelligent koi carp - I just want to be able to get to work next week!

  • Comment number 10.

    I hope the National Express lawyers have got it right .That the east coast route is a stand alone franchise ,otherwise it could end up losing the other 2 franchises will potential losses thrown in for breach of contract.It could turn out to be an expensive decision...

  • Comment number 11.

    Part of the responsibility for this travesty belongs to the government bureaucrats who allow the parent company to walk away from unwanted obligations that are parked in a subsidiary. Sack the government incompetent who let National Express walk away from a phantom bid lacking substance and recourse.

  • Comment number 12.

    Is something like a 7 year franchise not inherently too risky anyway? While any company's business plan might have a long term component looking 7 years ahead or even more, how many companies will commit to a plan that involves such a high fixed overhead cost (in this case £1.4Bn) with no absolute certainty that the income stream will rise to meet it? The assumption of a 9% year on year growth in income over a 7 year period looks to have been based on undiluted optimism rather than a hard - headed assessment of economic reality, which really ought to include the possibility of "unknown unknowns".

    How many businesses commit themselves to long term plans that are wholly incapable of being adapted in the light of changed circumstances? This is not so much a failure of privatisation as a complete lapse of common sense.

  • Comment number 13.

    There's a lot of ignorance masquerading as knowledge. You, dear reader, may be persuaded by the confident tone, in some of these comments, to suppose that the poster has some inside knowledge. Nothing could be further from the truth.

    I have been involved in almost every rail franchise bid for the last 6 years, and do have this knowledge to which they pretend. To put it bluntly, it is the government, and specifically the DfT, which has created this situation. It was they who decided that they wanted (in more recent franchises):

    1. To base the winning of franchises solely (or almost solely) on the amount of money paid, leading arguably to the dumbest bidder winning;
    2. To require an ever increasing amount of the rail costs to be borne by passengers - which inevitably (if you have any understanding of the industry) leads to those on the most popular (and therefore profitable) services being milked for all they're worth;
    3. To not require (in recent franchises) improvements to stations, track, or other infrastructure; indeed given point 1, to actively discourage such investment;
    4. To incentivise the wrong things for both TOCs, and tellingly, Network Rail;
    5. To require such detail in making a bid that the costs of such have soared, requiring payback for the winner, and even putting off prospective bidders; and, most importantly
    6. To take away as much freedom to actually run the franchise as possible by specifying everything from when the trains are run to how many times they have to be checked whether they're clean.

    Faced with these constraints the TOCs haven't done a bad job, and really can't be blamed for trying to make sure that their constrained profits couldn't become unconstrained losses.

    This isn't Adonis's fault - he seems a decent enough chap. It was the idiots preceding him.

  • Comment number 14.

    Yes, National Express is a truly, truly dreadful awful company and we had to put up with their trains (Central and Centro) for years. Rolling stock looking absolutely shambolic, compared to Chiltern, and using roughly the same aged rolling stock. And driver contracts which only included voluntary Sunday working?? Absolutely stupid and ridiculous, half the trains never ran on Sunday, so we always had to put up with a 3.5 hour journey from Leicester, through Derby(!) to Birmingham, or suffer the rigours of, yep you guessed it, a rail-replacement bus service. Now LondonMidland are in charge, the trains are clean, most are air-conditioned, and even the old cross-city commuter trains look and feel nicer to ride in. I hope National Express NEVER receives another franchise again. EVER!

  • Comment number 15.

    1. At 5:00pm on 01 Jul 2009, writingsonthewall wrote:
    Robert,

    What about the social cost to to those who live in the region who will no doubt face disruption and reduced services (despite the promises)?

    What is the cost of that? Is it included in your calculation - or do the people that this line served not matter?

    Please can this be the final nail in the coffin of privatisation.

    _________________________________________________________________________

    No it will not as by September 2010 we could have a Tories government who set this whole system of rail franchises up



  • Comment number 16.

    11. At 7:42pm on 01 Jul 2009, pondbridge wrote:
    Part of the responsibility for this travesty belongs to the government bureaucrats who allow the parent company to walk away from unwanted obligations that are parked in a subsidiary. Sack the government incompetent who let National Express walk away from a phantom bid lacking substance and recourse.

    _________________________________________________________________________

    Well big business all ways uses the law to protect it's self and sets up stand alone companies when the risk of losses to them are high that way they can dump the loss maker without the main company been dragged down with it as the main company is only a shareholder in the subsidiary hence there liability is limited to there shearholding

  • Comment number 17.

    This is not the first time that National Express has walked away from its rail franchise commitments. It did this with its 3 rail franchises in Victoria, Australia, in December 2002.

  • Comment number 18.

    It does not cost as much as many may think to run public services, it is the way it is all accounted which makes things appear more expensive than they actually are, for example I may have to account in my running costs the expence of paying lease and rent at so called market value on property that the nation already owns, It appears to me that if an essential public service is for the benefit of all it ought to be run in such a manner. Not for profit and facilitated in such a way as to keep price of rail travel down and service up. Shame so much rail property was sold off to people in the know in the 1980's.

    Business, contracts, government? Peas in a pod.

  • Comment number 19.

    Lord Adonis has dropped the ball. The higher figure should have been taken and we, the taxpayer should be better off (have slightly lower losses) to the tune of £30million.

    Thats hardly pocket money as any MP caught claiming variously for a moat, Duck pond chalet etc will tell you.

    The government were aware of the SPV at the time it was established, how can they now turn around and criticise National Express for relying upon the protection such a vehicle affords. Please correct me if i'm wrong but did the government not gain from additional taxes as a result of the SPV being established as a separate entity in the first place?

    Lord Addonis has now merely compounded the problem.

    National Express is a separate legal entity- and again, the express implication in what RP says is that there may be discrimination against National Express regarding government business. That is potentially again harmful to the taxpayer- if National Express offer the best deal to taxpayers which can be justified and substantiated I want us to take it!

    What this is actually all about is a complete cop out by government, a complete failure in oversight and and a regaultory surrender to the market.

    This is not rocket science. The company, National Express, wanted the rail franchise business and sought to limit their liability. The government either failed to notice the bidding weakness, agreed with the analysis for growth, or simply didn't want to rock the boat. The government accepted their bid.

    To now seek to lay blame at the door of National Express is insulting to the tax payer.

    Due diligence has been briefly mentioned previously. It entirely failed in this instance and Adonis has compounded the problem by failing to mitigate our, the taxpayers loss.

    Again, astonishing incompetence and a clear case of political meddling.

  • Comment number 20.

    My guesses are as follows:-
    1. The East Coast Franchise is viable, just not as profitable as once thought.
    2. The problem is simply the amount of money National Express promised to pay the government out of the forecasted profits for the business. The promise was based presumably on the economic forecasts made in the good times. So now there are not enough profits to meet that promise, presumably, by a very long margin. I.e. National Express said, when the times are good, we will give you, the government, lots of money - how can they be critised for that?
    3. Private companies are there to make a profit and minimise their risk, so they cannot be critised for this. If the government (or the people) do not want that for the railways, then you know what to do (vote). Moaning about it is just naieve and selfish.
    4. The profit of private companies is what pays your pension, because your pension is likely to be invested in, among other things, the shares of National Express. So paradoxically, the "taxpayer" also wants private companies to be profitable, as well as paying vast (potentially business breaking) sums to the government : you cannot have it both ways.
    5. National Express also pays taxes, so if you want to accuse it of "profiteering", just remember that the more National Express makes, the government gets in taxes the end, so the government wins either way.
    6. Private companies have to ensure that they protect their investors (including your pension). As a result, it is right and proper that they should limit their risk when bidding for business which itself is inherantly risky.
    7. The government picked National Express becaused presumably it made the best overall offer, in terms of potential pay-back, and in terms of *risk* compared to the other operators. If the National Express offer contained limits on liability, then just imagine the limits other operators must have asked for in their bid.
    8. Lord Adonis is being economical with the truth if he critises NX for going back on a promise. Lord Adonis mus have known the tender (and limits on risk) NX put forward, and accepted it at the time. The NX bid would presumably have been (a) in the good times we will share lots of money with you, and (b) in the bad times, we will take the risk up to £72 million, and then hand back the franchise. If this was not good enough for Lord Adonis, then he should not have accepted it. As noted above, NX does not owe a public duty, when making a tender, to turn itself into a sacrifice to the taxpayer.
    9. If you want to complain about loss of jobs, don't forget jobs at National Express as well.

  • Comment number 21.

    The main problem with transport in this country is that there is no real strategy for the future implementation of new(old) technology and combining rail, air and road routes to suit passenger & freight needs. All we see are contracts set to deliver massive profits to the Government coffers and whatever Group who chooses to gamble with public transport delivery. Reality plays little part in all of this; we are in a crisis situation which we are in no position to work our way out of it. We no longer have sufficient manufacturing in this country and the only successful sector under Gordon Browns leadership was the finance sector (oh dear!). We need to bring in Mag Lev technology to connect the regions with London in a reasonable time to replace those regional flights into London and spread the weight of international long haul from London to the regions. This is needed to prepare this Country for the future and hopefully give our kids and regions a chance to recover from the miss-handling management of the last 40 years.

  • Comment number 22.

    9% year on year growth in passenger numbers over a 7 year period equates to an 82% increase in passengers at the end of year 7.

    Did NE really think this was achieveable?

    I live near the East Coast line some 90 mmins from London and most trains are packed. You'd have to virtually double the rolling stock capacity to accommodate an 82% growth in passengers. And as for the line capacity...

    They (NE & Govt) are clueless!!

  • Comment number 23.

    Probably somebody has already mentioned this in previous blogs on subject but just in case they have not:

    Alistair Darling was Transport Secretary when the East Coast Franchise was awarded to GNER in 2005 with a payment premium of 1.2bn GBP. They then lost it in late 2006 cos the parent company -Sea Containers- got into financial trouble elsewhere, and NE won the bidding.

    So, GNER set the scene for overly ambitious payments. They just projected the previous 2/3 year's growth forward for 10 years. Mr Darling's advisors could not see the flaws in the projections; where was the downside, the inevitable dips and dives. Mr Darling needed to impress his 'boss', Mr Brown, so he could ride the coattails into Mr Brown's job when Tony stepped down, so he just went for greed. NE it seems just took this one step further and tried to achieve the same payment but over the remaining 7 years, which was obscene because already we were feeling a tightening of the world economy....

    thanks to Roger Ford at http://www.alycidon.com/ALYCIDON%20RAIL/INFORMED%20SOURCES%20ARCHIVE/INF%20SRCS%202005/Informed%20Sources%2005%202005.htm

  • Comment number 24.

    Sorry, but my time as a railway manager forces to write.

    There is a fundamental flaw, which is that in privatisation train operation was split from infrastructure (track etc). That was operationally bonkers, though undoubtedly profitable for some. There is effectively zero common interest between Network Rail (whose engineers view trains running on their rails with deep suspicion other than to keep the railheads nice'n'shiny and compress the trackbed), and train operators (TOCs) who couldn't give a stuff about track, trains or passengers (listen for the thump of flatted wheels hammering bejaysus out of NR's beloved rails, on those trains which survive TOCs thinning of services done to extract max profit by squeezing most passengers onto fewest trains). Both meanwhile conspire to slacken timetables so that the risk of delayed services is minimised to avoid Performance Regime penalties. Not much focus on passengers needs there.

    Then there's the gruesome farce which is the franchise auction. The Government makes it plain it wants onscene sums for franchises over relatively short terms. Seven years for the East Coast line is barking, but remember it's because this happened once before. GNER was milked dry to the tune of £1.4bn (sounds a familiar number), which ended up putting it's parent, Seacontainers, into bankruptcy protection. Hurrah HMG stepped in and said this is no good, let's have a new auction, entirely failing to realise/care the previous auction was the problem (well that and HMG blocking the proposed services from Leeds that GNER had factored into their bid sums). We can argue till the cows come home who was more daft, HMG for their ludicrous demands, or National Express for bidding so high. However, even the old 11 year GNER franchise cost could never be met from fares, before you take in the costs of acquiring, staffing and running any trains, or the stations and depots, so NE had no chance. This especially when it is Govt policy to reduce subsidies (though it is hit & miss whether this happens) which are also relied upon by TOCs. So up go fares (and car parking charges, and station kiosk rents etc etc), and oddly down go passenger numbers. Sustained 9% year on year increases - impossible. Debacle? I think so.

    Truthfully, while the Tories set up a fundamentally flawed system to suit their friends, Labour has perpetuated and magnified the worst features of it to the aid of those self-same parties whom they now find courting them.

    In all truth, until and unless you have proper full spectrum railway companies, who own the track, engineer and maintain it, and run the trains upon it, you cannot expect a proper service. Furthermore, let's knock the idea of leases or franchises on the head. GWR was set up in the late 1830s. By the 1870s it was moving clear of the cost of building and equipping itself. I am sure the it took at least as long if not longer for the other major railways. Seven or eleven years is nonsense. Only ownership confers the long-term asset based stability necessary.

    so yes, Tocs are self serving fly by nihgts. It is government policy, however, that determines that there is no other sane way for businessmen to contemplate getting into railways.



  • Comment number 25.

    A Train service with One Name which includes the signaling and Rail Network maintenance over the whole of the UK. Trains would be serviced and upgraded as also the rails and signaling by the company or to engineering companies that are UK based.The operations would be integral and controlled by one company. The benefits:-1. Would be its rail and signal servicing would work around its train services. 2 Create more Service and Engineerings Jobs in the UK! that is of course if anybody is a Patriot to think that way these days

  • Comment number 26.

    Debt limited to £72M due to company structure? Why not limit it to £1.30 ? If these arrangements are legal, when was this known ? I'd hate to think the Govt was not aware of this before they gave NatEx the franchise. If not, why not ?

    When was Robert Peston aware of this ?

    I saw him on BBC News only within that last day or two informing us of these facts. I would much prefer Mr Peston in the Civil Service/Govt where he might highlight such matters before it was too late.

    And pigs might fly.

 

BBC iD

Sign in

BBC navigation

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.