'FirstGroup admits ^140m taxpayer subsidy', from the Guardian (04/11/2009)

[whole diary]

[Chris from Nailsea]

From the Guardian:

First Great Western, which runs from London Paddington to the West Country and Swansea, will be subsidised with about ^120m this year

The cost to taxpayers of underwriting struggling rail franchises was laid bare by FirstGroup today after one of Britain's biggest franchise owners said it expected to receive ^140m in government subsidies this year.

The owner of four of Britain's largest rail contracts said its First Capital Connect (FCC^▸ (First Capital Connect)) and First Great Western (FGW^▸ (First Great Western)) businesses would collect multimillion-pound payments after falling short of revenue targets. FirstGroup also ruled out a new takeover approach for the rival train and bus operator National Express, which has been the subject of several buyout proposals since the summer after defaulting on the ^1.4bn east coast franchise.

FGW, which runs from London Paddington to the West Country and Swansea, will be the biggest beneficiary with a subsidy of about ^120m this year, despite pledging to pay the government ^1.1bn over the 10-year contract.

FirstGroup qualifies for revenue support because the government is contractually obliged to cover 80% of any revenue shortfall that is greater than 6% on those contracts. The company confirmed in first-half results today that its FGW and FCC franchises were receiving maximum revenue support because they had missed revenue targets by such a wide margin due to the recession. Jeff Carr, FirstGroup's finance director, said both franchises still made "significant" premium payments to the government.

However, the RMT^▸ (National Union of Rail, Maritime & Transport Workers) rail workers' union said the scale of the payments exposed serious flaws in the rail franchise system. Bob Crow, RMT general secretary, said: "This is a massive taxpayer bailout, which makes a mockery of the rail franchising system. These figures show that companies are being propped up by taxpayers' money and it reinforces the RMT's argument that the whole system has been an expensive disaster."

Sir Moir Lockhead, FirstGroup chief executive, ruled out a further bid for National Express, saying that the company had "moved on" after a tentative approach was rejected this summer. National Express East Coast will be taken over by a government-backed company next month and will not be re-let to the private sector until mid-2011. The move is seen by industry watchers as an admission that no rail company can afford the ^1bn franchise bids that marked the pre-credit crunch boom in rail travel.

Lockhead also backed government plans, announced today, to put no more taxpayer cash into the much-criticised bus pass scheme for the elderly. The concessionary fares scheme is disliked by many local authorities and bus operators in England, which claim that it leaves both sides out of pocket. The Department for Transport said today that the annual subsidy would stay at ^1bn but it would consider changes to how the funds are distributed, amid warnings from some authorities that other local services might have to be cut due to the financial consequences of compensating bus companies for free bus travel. Some bus operators have cut services after warning that inadequate compensation was making some routes unprofitable. "I don't think any expansion [in the subsidy] could be expected," said Lockhead.

[grahame]

FirstGroup qualifies for revenue support because the government is contractually obliged to cover 80% of any revenue shortfall that is greater than 6% on those contracts. The company confirmed in first-half results today that its FGW^▸ (First Great Western) and FCC^▸ (First Capital Connect) franchises were receiving maximum revenue support because they had missed revenue targets by such a wide margin due to the recession.

"Cap and Collar" - the collar bit.  And practically applied, it can be a huge dis-centive the the train operating company from trying anything new with the odd spare carriage or two that's not needed because the trains are quieter than they had allowed for.

Under a normal commercial setup ...

A train costs 300,000 pounds per year to hire
Staff and other costs - say 500,000.
Farebox income for 250,000 journeys at 4 pounds per journey = 1,000,000
Profit to TOC^▸ (Train Operating Company) = 200,000 pounds

Under collar ...

A train costs 300,000 pounds per year to hire
Staff and other costs - say 500,000.
Farebox income for 250,000 journeys at 4 pounds per journey = 1,000,000
Of which 80% just goes to reduce reveue support so income is actually 200,000
Loss to TOC = 600,000 pounds

So what would be a good commercial proposition to use spare resources to grow the railway is discouraged under the arrangements in place, and what was supposed to be a system to encourage enterpreneurial companies to take business risks appears to make them umwilling to even contemplate anything innovative.

Then - ironically - when the franchise gets back on track and just at a time it can make use of any spare carriages for restrengthening services, the financial arrangements start to make it worthwhile for them to experiment a bit ...

I note the article says "revenue shortfall". So presumably any grants such as the Bristol City one for the Severn Beach line are kept by First and it's not a case of them effectively loosing 80%?


Edit to correct my typos (which were ever worse than usual!)

[devon_metro]

I do quite agree with what you say Graham, i'm under the impression that a truly privatised railway would work much better, so long as minimum service levels were adhered to. It is without doubt that the railways can sustain themselves financially.