What a waste by Andrew Bowman Ismail Ertürk Julie Froud

Author:Andrew Bowman, Ismail Ertürk, Julie Froud [Andrew Bowman, Ismail Ertürk, Julie Froud]
Language: eng
Format: epub
Tags: Business & Economics, Outsourcing, Political Science, Political Economy, Economics, Theory, Public Policy, General
ISBN: 9781784992408
Google: RXW5DwAAQBAJ
Publisher: Manchester University Press
Published: 2015-09-01T00:34:51+00:00

Exhibit 3.3 Great North Eastern Railways subsidy, premium payments, profit and dividends 1996–2007

Source: Company records, Great North Eastern Railways, various years

NXEC won an eight-year franchise in 2007 with another back-loaded offer so only 4% of premiums were due in the first two years, with 65% due in the final three years (Bowman et al. 2013b, p. 97). NXEC’s bid assumed strong increases in passenger numbers, but the recession dragged revenues down and when the franchise was abandoned in 2009, National Express lost some £72m, comprising a £32m performance bond and a £40m subordinated loan (Peston 2009). No profits were made but losses were capped and commitments to premium payments of over £1bn were avoided.

In effect, risks on rail franchises are capped by the option to walk away with modest direct penalties. To make matters worse, there are no consequences for parent groups which break promises. FirstGroup, for example, has been given back the Greater Western main line franchise, even though it had earlier walked away, and meanwhile had put in another back-loaded bid for the West Coast main line.

In 2007 the incumbent First Greater Western (FGW) subsidiary of FirstGroup won a new ten-year franchise with a bid combining back-loaded premiums and optimistic revenue projections. As illustrated in exhibit 3.4, according to the franchise agreement, FGW would pay no premiums for the first three years, before commencing premiums during the middle four, with the bulk due in the final three years, before which a break clause could be invoked (Bowman et al.. 2013b, pp. 99–101). The bid predicted 8% annual revenue growth, but recession made this impossible and FGW walked away. FirstGroup paid a small penalty, reportedly £59.9m invested in the SPV, but avoided a reported £826m of premium payments promised over the life of the franchise (Plimmer and Wembridge 2011; Milmo 2011). There were subsequently no consequences for the way in which FirstGroup had abruptly stopped its losses on a franchise from which it had, since 2005, taken out £50 million of profits as dividends (Bowman et al., 2013b, p. 59). Without any competitive tender, in October 2014 the government gave FirstGroup a direct award of the Great Western franchise for a further 3.5 years (Thomas 2014). As FirstGroup had lost other franchise bids in 2014, the Financial Times reported analysts’ views that these revenues would ‘keep the company going nicely until 2019’ (Lewin and Burgess 2014).

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