Now it’s formal. Stagecoach will be off the rails in November. The company won’t bid for new UK rail franchises because it thinks the Department for Transport is unfairly trying to load “unquantifiable and unmanageable” pension risks on to operators. The group’s wholly owned operation on the east Midlands line ends in August and its joint venture with Virgin on the west coast mainline expires in November. At that point, Stagecoach’s rail department will comprise a crew of lawyers suing the DfT over three bids that were disqualified in the same row over pension liabilities.
Not every customer will mourn, of course, and a few DfT officials may say good riddance after last year’s forced exit on the east coast. For their part, Stagecoach’s shareholders may sleep more soundly. The top-performing UK transport stock of recent years is the bus and coach operator National Express, whose chief executive, Dean Finch, says his board should sack him if he ever proposes getting back into rail franchising.
The rest of us, though, should despair – not directly for Stagecoach’s exit but for what it says about the rotten state of rail franchising in the UK. The transport secretary Chris Grayling’s current approach can be summed up as “waiting for Williams”. That is Keith Williams, the former British Airways chief executive who is leading a review of rail franchising. He has already described the current set-up as not fit for purpose, which is indisputable, but has offered few clues about how a “customer focused railway” should be structured. Until Williams’ report arrives in November, paralysis reigns.
Alternatively, on a good day, the DfT manages a fudge. The east Midlands franchise was awarded to Abellio in April, with Grayling declaring the Dutch state-backed firm to have offered the “strongest” bid. On closer inspection, Abellio made the only bid that remained upright. The other two runners – Arriva and Stagecoach – refused to accept the DfT’s view of pension risks and were disqualified.
Now comes the competition for the west coast franchise, the most prestigious of the lot since it will include HS2 (assuming prime minister Boris Johnson doesn’t cancel the high-speed line). From an original field of three, Stagecoach is out, obviously. Then there’s FirstGroup, but it suddenly looks less than reliable. Its chairman has just resigned after a 30% shareholder revolt led by a hedge fund that doesn’t like UK rail operations; and FirstGroup’s chief executive himself has belatedly started to fret about “the current balance of risk and reward” on the railways.
The third bidder is a Hong Kong-Chinese consortium, which was previously regarded as the rank outsider on the grounds that the UK would surely want a UK-controlled operator running the trains on its shiny new railway.
Franchising, according to the theory, was meant to deliver competitive bidding which, in turn, would produce better services for passengers and savings for the Treasury. Instead, these competitions have become contests in which one unsatisfactory bidder is left standing and limps over the line. The current quarrel over pension risks makes the process even more opaque.
One could take the optimistic view that Williams’ white paper will find a way to create order, but it’s probably not the way to bet. Without Brexit, the franchising shambles would already be a higher priority in Westminster, yet the political fog may yet get thicker.
The Stagecoach chief executive, Martin Griffiths, left the door open to a return to rail in time but thought a U-turn “highly unlikely”. For the company, escaping the chaos looks the right decision. But the implied message for the poor punters is not encouraging.
H2O – a liquidity problem
Mark Carney is right. It’s absurd that investment funds that hold illiquid assets can offer investors instant access to their cash. “These funds are built on a lie, which is you can have daily liquidity,” says the governor of the Bank of England.
Exhibit A would be Neil Woodford’s Equity Income Fund, which was overloaded with unquoted stocks and had to halt redemptions when too many investors headed for the exit. But Carney may also have thinking about asset manager H2O, a less high-profile example involving illiquid bonds.
If the rules of redemption terms need to be changed, financial regulators need get on with it. A sudden evaporation of liquidity has a role in most financial crises, and this flaw with illiquid assets has not been hidden from view. Outsiders could fairly ask why nothing has been done already.
