The West Coast Main Line fiasco and the responses to it have once again highlighted the limitations of the government’s current franchising model, emphasising a broader malaise in its relationship with the private sector. As a result, the government is taking stock and spending time getting its house in order, recently publishing a revised strategy for managing franchise bidding and delaying many of its scheduled tenders.

The issues surrounding the franchising process have reignited the debate around ‘which is better’ for our railways – franchising or public sector management? However, this structural and politicised way of looking at the issue will not lead us to the right answers.

We need to begin by asking more fundamental questions that have been ignored since the 1970s – focusing instead on what investment and management expertise is required to create a world-class transport infrastructure for consumers and how this can be provided.

Looking more closely at the West Coast bid, the blame for its failure was laid at the door of the overstretched civil servants, who lacked the technical skills to correctly assess the bids, as well as an overarching lack of leadership.

Sam Laidlaw’s enquiry into the bid pointed out that: ‘Embarking on an ambitious, perhaps unachievable, reform of franchising, in haste, on the UK’s most complex piece of railway was irresponsible and involved such an element of risk that greater senior executive oversight and relevant technical expertise was required.’

West Coast isn’t the only example of long-term deals between the public and private sectors in rail to have collapsed – the failure of the East Coast Main Line, which is still under direct government control after the franchise collapsed in 2009, is another well-known example of a similar type of mismanagement.

Current process designed for failure

However, the real issues at the heart of the franchising process are more deep-seated than the ones outlined in Laidlaw’s review. I would argue that, regardless of execution, the current process is designed for failure: the parameters under which contracts come to market are flawed, the operational and financial risks transferred onto bidders are crippling, and wider social goals are not addressed at all.

Although ensuring that the public purse gets a good deal is important, there is far too great a focus on trying to squeeze every last pip out of companies at the bidding stage – in essence, trying to get as high a guaranteed revenue stream as possible rather than thinking more strategically about what the public needs from a railway. The long-term economic objectives of building a world-class infrastructure for consumers and creating better connectivity to drive economic growth are not set as specific aims for bidding companies, meaning that the whole process is defined by financial requirements.

Despite this seemingly quantitative approach, however, the margin for error for calculating unit costs and passenger numbers is extremely high. Rather than working with the bidders to come up with their underlying business cases, the Department for Transport leaves them to gamble on long-term trends. This does not represent real ‘risk transfer’, since as the operator of last resort any franchise that goes under will end up being run by the public sector anyway at great cost.

Similarly, social aspects such as ridership and economic development should be set as a key indicator of success. Encouraging more people to use rail should be one of the ultimate aims of any contract.

Alliance approach allows for innovation

Although there is no one template for public sector contracting that I would urge the government to follow, there are a number of lessons that can be learned both from similar processes in the UK and from other countries in creating successful partnerships between the public and private sectors, in contrast to more traditional attritional models.

The ‘Alliance’ approach used in rail public private partnerships in Australia, such as the one currently being tendered for Sydney’s North West Rail project, appears to offer an example of how risk and reward can be more sensibly shared. Rather than tendering on unknowns, a procurement process lasting over a year where shortlisted bidders and the state government develop bids based on an ‘open book’ approach to costs, means that more innovative solutions can be designed.

Once the contract is signed, the winning franchisee will work to a detailed outcome-based specification based on previously agreed unit costs. If it outperforms, it will have a better margin; if it doesn’t, it will still have its costs covered. This approach also means that both the public and private sectors can focus on what they’re really good at – the public sector keeping its role managing the ongoing policy of the railway including fare-setting, while leaving the private sector to operate complex assets efficiently.

Criteria addressing societal goals

Rewarding bids on a specific set of success criteria that goes beyond financial goals into more societal goals is also becoming more widespread in other parts of the UK’s public sector. Although these sorts of contracts have grown more rapidly in sectors where goals can be more easily measured, like in the reform of the prison service for instance, there are similar measurable goals that could be applied to rail franchise operators. Increasing the number of low-income riders, growing the number of tourists that visit regional destinations and reducing anti-social behaviour on trains are just three potential goals that could be accounted for by a franchising agreement.

It is absurd that a strategic asset so vital to the nation’s economic wellbeing as the rail network is being managed entirely for yield. Our rail fares are among the highest in Europe – and still, franchise-owners are going bust. While it is clear that the franchising model we have today is not perfect, root-and-branch change without an adjustment in underlying attitudes will not deliver the changes we need. There are examples out there of successful and sustainable public private partnerships in the rail sector that work to the benefit of customers, business and government alike. It’s our responsibility to find a solution that will ensure we create a world-class rail system that will serve the economy and is fit for purpose for future generations.

Vivek Madan is a partner at OC&C Strategy Consultants. Vivek works in the company’s B2B services practice and has expertise in advising clients who invest in, operate and serve railways globally www.occstrategy.com