West Coast shows need for the ‘intelligent client’

The débâcle over the refranchising of the West Coast main line railway is a bit disappointing, to say the least. Personally I feel sorry for the staff of the various organizations who are getting mucked about. From their perspective (or at least the majority of those involved in running the services) their jobs are tolerably secure. What they have to put up with is another load of new managers passing through (or that was the plan) with their various ‘deliverables’ and new ideas, and almost certain reorganization. There may be an up side to this upheaval, but  what to them seems unnecessary change is bad enough without all the additional uncertainties this flawed process delivers (and which is likely to service hit performance, even if only temporarily).

What will emerge from the inquiries is anybody’s guess. I would venture that if one is going to have an inquiry (let alone the two now in hand) then stuff will be unearthed that would more conveniently have been left alone, but I won’t anticipate events. Whatever emerges probably won’t dampen the view that the process itself has got out of control and has developed complexity quite out of proportion to whatever the government is seeking to obtain from it (about which I am not clear). I warmed to the observations made by Chris Stokes (formerly of Opraf, which let the original franchises in record time and at low cost) about the explosion of costs and complexity of late; this warmth was tempered as I recalled some of the dismal operators in the first wave of franchises who were utterly incompetent and are thankfully no longer with us (especially those who thought running a railway was just like running a bus service and refused to listen, learn or just observe); the Opraf model was not flawless either. To that extent, things have got better, but not so much that the costs of bidding and running the bidding process ought to have reached the present ridiculous levels, which present a huge barrier to entry for anyone new.

One of the problems, pertinent to the present fiasco, is that rail franchises have gradually shifted from being a service that is ‘procured’, to a specification and at a price the government is willing to pay, into a rather different kind of contract. Now, I happen to know something about these because I used to develop and run contracts of this sort and of this magnitude myself. They are ‘money-in’ contracts and need very different treatment to those that involve money going out: they therefore confound some of the more important procurement principles and strange to say there are not that many people around with a lot of experience in setting these up. The reason they differ is that nobody, nobody at all, can possibly say with the slightest degree of certainty, how much money is going to be generated throughout the contract. A former LU boss of mine used to refer to anything that was not guaranteed as ‘maybe money’, and I spent enough time with these very large contracts to demonstrate that there was, in the final analysis, no such thing as a guarantee either (I’m slightly simplifying, but only slightly). Moreover, the further one looked ahead, the more the uncertainty increased. Income over the next year or so was probably going to be on track, but in seven years, ten years, twenty years?

From a contractual point of view, one could be absolutely certain that in many years’ time, the actual revenue generated would not (except by complete accident) be the number discussed during negotiation and anticipated by the contract. If it exceeded expectation, how would the surplus be dealt with equitably? If it fell short, what happened then? It is obvious (or maybe not) that if one attempted to hold a contractor to terms that were infeasibly arduous then, ultimately, they could not fulfil their side of the bargain and it was irrelevant what the contract said. So the contract must anticipate these eventualities and deal with them; this is harder said than done if perverse incentives are not to be created. Ultimately, I found there was only one way of running contracts like this, and that was to be as smart as the contractor. We called the term being an ‘intelligent’ client, the word being used in terms representing business intelligence, not just smart (the term ‘informed client’ is sometimes used in this context, but I think ‘intelligent client’ suggests that success also hinges on how that information is then used). That way, one could have meaningful conversations with contractors and second-guess proposals from a position of strength. My field included commercial advertising, even then worth tens of millions a year of income to the public purse, and I became an expert in the subject because I had to (not bad for a railway operator!). The contractors were not stupid but were inclined to back-end contracts and put in extraordinarily generous bids because they wanted to win (advertising contractors were particularly good at painting brilliant, though dubious, pictures of future nirvana). All we had to do was to read the spreadsheets, marvel at their generosity and sign the contract. I don’t think so.

Despite contractor protestations we had already grasped that future money was worth less than immediate income and so went to great lengths to discount future revenue (and the likelihood of getting it) and put precautions in place to ensure that we extracted as much value as possible earlier on. This usually put things on a more even footing, though advertising revenue did not grow at normal economic rates so we had fun getting everything to a common base. The ‘intelligent client’ approach saved an enormous amount of time all round as we could query the feasibility of ideas at an early stage. I later worked for train operators and we often saw proposals to deliver vast amounts of revenue from railway property that could not conceivably have been delivered by anybody. In several cases the proposers were decent people with substantial backing, but I discovered I knew more about the subject than they did and saved each of us from embarking on ludicrous schemes. Some schemes (but not ones I was involved with, though in one case I recommended against it) were taken up by main line rail companies who just took contractors at their word. In all the cases I am aware of it ended in tears: I hope they learnt from this. Believe me, money-in contracts need a whole different philosophy and a client intimately connected with the real world. It is far more about trust and confidence in the contractor and its methods than how fancy the beguiling spreadsheet might look.

Having made the general observation about revenue-earning contracts, you will immediately see how it relates to rail, and the present nature of contracts that generate premiums. It is perfectly obvious to anybody with the slightest interest in the subject that the number of people using one’s railway services is influenced hugely by factors external to the network and only partly by the efforts of the incumbent operator. So, the railway companies have only a certain amount of control over future income; the rest is governed by macro-economic factors, varying government policy, technical changes and so on. The government was a bit slow comprehending that the private sector was not well positioned to accept all this risk. As premium income became larger, so a problem began to emerge (though not as much as it might of done, because contract lengths had been shortened). For long contracts the economic risk to a private company was unacceptable. You cannot expect people to take on risk that they cannot control. If you force them to, then either bids will be unrealistically expensive as they try and hedge the risk, or there will be mechanisms to disengage from the contract if the worst happens (this bit won’t necessarily be written into the contract, but the rail operator will know when it is cheaper to pull the plug rather than soldier on). As this was finally recognized, so the cap-and-collar arrangements arrived. Surprise, surprise. This took away some of the risk (a good thing), but perhaps it took too much away and encouraged unrealistic bidding in consequence. This is one reason why cap-and-collar was to be replaced by a system that protected operators who were genuinely affected by macro-economic effects but would not protect them from any in-house incompetence. But it is complicated as it alters the risk profile of the bids that are submitted and makes comparison difficult. This seems to have been the area in which the present hiatus developed. It comes down to having realistic models and using them correctly. The more complicated the process, the more complicated the models. Back to the idea about keeping things simple, and certainly no more complicated than is absolutely essential.

Whatever mistakes might or might not have been made by officials, the present and previous government must surely be seriously contaminated by all this. Over time it is the ministers that influence franchising direction and complexity and the resources needed to manage it all. I noted a particularly hollow defence of the DfT’s position amongst the vast press coverage of this matter that suggested the West Coast problem was not typical of the high quality output the DfT has produced of late, citing the Olympics and Crossrail as examples. Now, I would not one to sound picky here. Unless I am mistaken, the DfT’s involvement in these two areas is primarily one of policy, oversight and maybe funding. All the detail associated with project delivery, management and procurement were in the hand of special purpose bodies populated with experts chosen for their knowledge and experience (ie Crossrail Ltd, the Olympic Delivery Authority and LOCOG)? Main line rail transport, on the other hand, is entirely delivered by the minister’s own team (you may recall we had Opraf, and later the SRA, both with specialist teams but the minister at the time decided to do it all in house). I wonder if the minister having executive command over Britain’s railways (for the first time ever) is what either the minister or the civil service is geared up to do? I wonder if thinning down the staff numbers (as I understand is happening) and being unable to recruit the most suitable high level staff for policy reasons is the optimal way? I gather there are now very few ex SRA (ie ex railway) people at the DfT, and wonder what they would make of the idea of being an ‘intelligent client’. I know the people in the higher levels of the service are very, very bright, but what experience do they have of actually running something or understanding the businesses they are commissioning others to provide? I do hope that the present inquiries cover this.

Options for the future are being discussed endlessly, but the least risky option that falls short of major reorganization (which would be slow and very disruptive) would perhaps be simpler and shorter franchise bids simply to get us through and to buy thinking time. Short contracts, of course, suffer from the obvious shortcoming that it is difficult to attract private investment at a time when a lot needs doing, passenger numbers are rising and government funding is in limited supply. It is counter to the whole point of rail privatization. Maybe it is all that can be hoped for if we have a department that is not conspicuously fit for purpose run by ministers whose talents might perhaps lie in other areas and led by a government team devoted more to managing their presentation than the well intentioned issues that they keep going on about (and it isn’t as though fixing the economy as a whole is going very well). In the longer term, something radical must surely be unavoidable for the present approach is at best dubious? Concessions have been mooted (where the revenue risk stays with the government). This vastly reduces operator risks, and maybe profits, but suffers from the obvious difficulty that the government would then be managing fares, revenue, marketing and promotion of services. Hmm, that must surely be asking too much? So, we bring back a people’s railway authority to do it? Why stop there? If we must have more upheaval, let us just do it once.

In the meantime, lessons will doubtlessly be learned, or a few at any rate, but if rail policy carries on in the present chaotic way and continues to be managed by generalist teams led by constantly changing ministers (and departmental heads, so it now seems) then in all probability something else will go wrong, in due course. We don’t know the cost of the present issue, but it seems likely, greatly, to exceed the immediate repayments of £40 million and allowing for delays to other franchises could reach £100m or a great deal more if litigation follows. An expensive mistake, one might suppose? I really cannot help thinking that central government control of railways is the last thing we deserve but however things lurch forward we must surely create the ‘intelligent client’ to oversee the procurement process and look at a set of figures and say ‘this doesn’t look right’ because they know what they are talking about.

Update on 15 October
Looks like the intention is indeed to sit back and reflect on how to move forward on rail franchising, presumably something that can only be done once the reports are back towards year end. In meantime it has been announced that on West Coast an ‘interim’ franchise will be let (for a small number of years), by competition. This process requires Virgin to carry on with West Coast until that can be arranged, apparently on a management contract basis. Management contracts are also mooted on the other franchises for which the tendering process was suspended.


About machorne

I have always lived in London and taken a great interest in its history and ongoing development. This extended into the history of its transport services, about which I have written a number of books - I have spent most of my working life working in the industry and observing changes from within, mostly to the good, but not always so. I continue to write, and have a website with half finished stuff in it so that it is at least available, if not complete. Several new books are in hand. I have many 'works in progress' and some of these can be found on my website; the we address is http://www.metadyne.co.uk
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