finance

Southeastern mess is a fitting farewell to UK rail franchising


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

The system met a premature end after 23 years when the pandemic emptied trains and the UK government rolled out emergency management contracts in 2020. But it was already moribund, thanks to franchise failures, the withdrawal of operators from the market and the dishing out of contracts without a bidding process to those left standing.

Via recovery contracts and interim agreements, the government is inching its way towards a new rail model, where the public sector takes the revenue risk and train operators get paid a modest fee for (hopefully) making the darn things run on time.

That replaces a hideously complicated set-up whereby risk around revenue and costs was divvied up between government, operator, Network Rail and others in micro-specified contracts that ran to 500-plus pages and involved bidding costs of £10m and upwards per participant.

Enter Go-Ahead. Just as the system is in its death 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 Department for Transport, Go-Ahead, which runs the franchise with junior partner Keolis, has repaid £25m to the government relating to the profit share under the contract over a roughly five-year period from October 2014.

The underlying issue was the costs pre-covered by the taxpayer for Southeastern running high-speed services on the HS1 line. Go-Ahead, through its London and Southeastern Railway (LSER) operating company, was responsible for repaying any excess that was unused. The company concedes that errors were made.

See also  Amazon Black Friday daily deals: get a Denby casserole dish for ONLY £39.99

Financially, the hit looks modest: the money has been repaid and results remain in line with board expectations, the company said. The figure compares with combined revenues of £2.8bn across Go-Ahead’s two, admittedly low-margin franchises (and the other Govia Thameslink Railway, which has been plagued by operational issues, is unaffected). One analyst said he did not even have the Southeastern contract in his valuation given its imminent end.

Yet Go-Ahead shares have plummeted by more than a fifth. First, the fact that the group’s finance chief has resigned with immediate effect and the company has delayed its full-year results for a second time have rattled the market. Second, with an independent review of the company under way there remains a question of what else might turn up: the figure involved in this dispute has already more than doubled from the £8m flagged in last year’s results to June.

The government, which knows that private rail operators do not tend to win any popularity contests, is stoking the idea that this could go further. The issue was “concealed” in financial reporting, said transport secretary Grant Shapps, adding “we’re not prepared to be ripped off”.

This suggests there may well be a financial penalty to come, beyond the repayment and the loss of the franchise. The government is launching an investigation: it ominously will look at the dividends paid to the two groups that own LSER over the course of the franchise, which has been repeatedly tweaked and extended. It will also consider whether the groups can compete for contracts in the new world, leaving a threat hanging over their ability to win future business.

See also  Strictly to stately: Chancellor Rishi Sunak can learn from late replacements

That should not affect the buses, which account for about 85 per cent of Go-Ahead’s forecast operating profit based on UBS numbers. But it means Go-Ahead will be operating under a cloud until both it and the government can provide more answers.

Southeastern, which had been a rare example of a franchise that functioned moderately well, joins Northern Rail and the former East Coast Mainline under government control — run by the Operator of Last Resort. These will, in theory, be brought back to private operation through competitive tendering, but who knows when.

Investors, rightly, are betting that they cannot yet judge the worst of what might come out of this with much certainty. At best, this is another franchising failure that ends in national ownership thanks to a contract so complex that an experienced operator made mistakes and it took several years for the government to notice.

helen.thomas@ft.com
@helentbiz





READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.  Learn more