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- Happold Consulting
The ongoing debacle over the WCML railway franchise competition raises many questions about the whole rail franchising process. The WCML is the busiest mixed traffic railway route in Britain; in terms of population served it’s the country’s most important rail route connecting London, Birmingham, Manchester, Glasgow and Edinburgh, and a host of other places along the way.
Following a series of bids and the very public announcement of a competition winner the decision to award the WCML rail franchise to FirstGroup was scrapped because of "technical flaws" in the bidding process, and in particular, the evaluation of risk around the long term forecasts of revenues, and hence the value that should be placed on them. The planned review of the franchise process by the UK’s Department for Transport (DfT) as a consequence of these problems is to be welcomed, although to provide genuine reassurance it will be important for the DfT to reach out beyond the usual narrow list of those who have advised them, as a genuinely fresh look and new ideas are needed.
However, the incident also raises much wider questions about how the rail sector in general, and the DfT in particular, addresses risk and uncertainty around future forecasts of passengers and revenue. If the financial crisis of 2008/2009 has taught us anything, it’s that economic forecasts are far from foolproof, even over relatively short periods. I recall looking at the consensus forecasts for the US economy in 2009, as defined by percentage growth in Real Gross Domestic Product. What I saw was a spectacular reversal in predictions over an 18 month period. In January 2008 the forecast for 2009 was 2.7% growth. By December 2008 that had reversed to a 1.1% decline. It didn’t stop there either; in February 2009 the forecast for the year had reduced further to a decline of 1.9% and by the April it was a decline of 2.6%. In the end, overall, the US economy for 2009 actually saw a decline of 3.5%.
If the DfT is to genuinely review the lessons to be learnt from the WCML franchise competition then it must surely now revisit the business case for all its major investments with a more risk-focused perspective. For example, the planned High Speed Two (HS2) rail line link between London, the English Midlands, Northern England and potentially the central belt of Scotland is a project which involves an estimated investment of £36bn but which, according to the DfT, could deliver a Cost Benefit Ratio (CBR) of 2.5. That all might sound fine, until one realises that the CBR is underpinned by model forecasts of passengers and revenues for the years 2026 and 2037 (and with benefit streams going even further forward into the future) and a low discount rate of just 3.5%. What’s clear is that the scheme’s apparently attractive CBR is extremely vulnerable under even marginally less optimistic assumptions of either future revenues or discount rates.
Surely now is the time to ask some hard questions about exactly what benefits HS2 will deliver to the UK if the forecasts do turn out to be optimistic, especially as it’s now clear HS2 will not solve the UK’s aviation sector problems and will have little impact on the country’s congested highway networks.