Bidders await arrival of rail franchises with bated breath

Listen to this article

00:00
00:00

Transport groups are about to discover who has won the first two UK rail franchises to be awarded since the West Coast debacle of 2012. For the industry, the outcome will be significant in gauging whether the government has fixed the flaws in its assessment of competing bids.

Contracts for the Thameslink and Essex Thameside services – covering busy commuter routes into London – are to be awarded in coming days, with a Thameslink decision possible as early as Friday, say people familiar with the process.

Transport officials – and bidders – will be hoping that the process stands up to scrutiny, following the criticism they received for the collapse of the West Coast deal.

Almost two years ago, the incumbent operator of the West Coast franchise, Virgin Rail, brought legal action against the government after the contract was awarded to FirstGroup, in a process that Virgin boss Sir Richard Branson claimed was riddled with errors.

Subsequent reviews confirmed Sir Richard’s assertions and exposed a lack of expertise in bid assessments at the Department for Transport, as a result of internal staff cuts.

The Thameslink line, which runs from Brighton through London to Bedford, is the biggest prize on offer in the latest round of franchising, as it will have about £1.2bn of annual revenues when it merges with the Southern franchise next summer. The bidders are FirstGroup, Stagecoach, Dutch-owned Abellio, Hong-Kong listed MTR, and Govia, the joint venture between Go-Ahead Group and Keolis of France.

However, a £6.5bn upgrade to provide new trains, renew track and rebuild London Bridge station has made the franchise complex to negotiate.

As well as Thameslink, and the smaller Essex Thameside franchise that runs from London’s Fenchurch Street station to Southend, the Department for Transport must also oversee five extensions to existing franchises this year.

Extensions became a stopgap solution after the collapse of the West Coast process. Officials redrew the franchising timetable – to allow more time to conduct contests, and hold fewer concurrent competitions.

But they have not been without controversy. In March, opposition Labour party politicians complained that FirstGroup was granted an extension on its Great Western franchise from London to Devon and South Wales on overly lenient terms.

Even more politically sensitive is the East Coast franchise. The mainline from London King’s Cross to Edinburgh and Glasgow was taken over by the state body Directly Operated Railways in 2009, after its private sector operator National Express failed to make a success of running it.

The coalition government has brought forward the retendering for East Coast to before the 2015 general election but transport unions have filed a legal case to keep the line in public hands. Labour has suggested greater state involvement in the railways despite fierce opposition from train companies – the most vocal of which has been Stagecoach, a bidder for East Coast, Thameslink, and London’s Docklands Light Railway. Other East Coast bidders include FirstGroup and SNCF, the French state-owned rail operator,

Both the Essex Thameside and Thameslink franchising timetables have already slipped by a few weeks, adding to pressure on officials.

“It’s starting to cut it a little bit fine,” says Gerald Khoo, transport analyst at Liberum. “What slack the DfT had in their schedule is being largely eroded. Clearly, there is an imperative to make absolutely sure that all of the processes are followed correctly.”

But time pressure could prompt conservatism, warns Mark Manduca, analyst at Bank of America Merrill Lynch. He suggests that the government may now be unlikely to favour unproved foreign bidders with a sway towards incumbents.

When the decisions come, they will have the potential to change the bidders’ business mix and, in some cases, revenue streams. If National Express loses Essex Thameside, for example, it will be out of the UK rail market.

For Go-Ahead, which has suggested that bus contracts will drive its earnings, winning Thameslink would be a “game-changer”, according to Mr Manduca. It has already been tipped by some analysts as the winner. But if it fails, David Brown, the group’s chief executive, has said it will “keep bidding”.

After Thameslink and Essex Thameside, the next franchise awards on the Department of Transport’s timetable include East Coast and Scotrail.

Transport for London is also due to select a winning bidder to run the Docklands Light Railway and Crossrail – the new route linking east and west London.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.