U.K. Rail-Franchise Chief Says Industry Has Poor Investor Image

Britain’s privatized rail network is undervalued by financial institutions, weighing on the market value of train companies and making it tougher for the industry to fund investment plans, the Department for Transport said.

Enthusiasm for rail in the City, as Britain’s financial district is known, has waned since the award of the West Coast route to FirstGroup Plc was scrapped in 2012 after a probe ruled that the process was flawed, Peter Wilkinson, the DfT’s head of rail franchising, said today at a briefing in London.

Wilkinson spoke after Go-Ahead Group Plc won a seven-year deal to run the enlarged Thameslink, Great Northern, Southern franchise, Britain’s biggest-ever with almost 280 million passenger journeys a year. The contract is the first awarded after a revamp of the bid evaluation system aimed at improving scrutiny and providing long-term certainty to the market.

“We’re conscious of the fact that we have not enjoyed a close relationship with the City,” Wilkinson said at the DfT’s headquarters. “In the price on the markets for listed companies, rail doesn’t carry an awful lot of value and that can be problematic. We’re very keen to change that dynamic.”

While spending most of his career in rail, Wilkinson has himself worked in finance, spending four years at Axa SA, Europe’s second-largest insurer, where he led the group's international procurement strategy.

Risk Capital

The DfT published a franchise timetable spanning the next eight years in 2013 and now meets regularly with potential financial backers “to look at ways in which investors might find a greater ability to get involved,” according to Wilkinson, who said there has been a “sea-shift” in the procurement approach since the West Coast debacle.

Contracts will now be tailored according to the specific requirements of each route, which in the case of the Thameslink network indicated a simple management contract. In most future cases successful bidders will take on both cost and revenue risk, though only for factors under their control, he said.

The DfT has also reduced the amount of risk capital that franchise operators are required to stump up by matching it more directly to the risk they’re directly taking on.

“It’s on a scale that is manageable both in terms of their own balance sheets and what we believe the bond market can readily come up with,” he said.

Skepticism about franchising can be traced as far back as the sell-off of the U.K. rail industry in the 1990s, Wilkinson said, when the mechanism was chosen to provide competition in preference to having multiple operators on the same route.

“Ever since privatization there’s been always that sort of tension in the relationships,” he said, adding that the aim now is to “get investors back on the same page.”

The next franchise award later this year will involve the East Coast route from London to Scotland, which has been run by state-backed Directly Operated Railways since 2009 after National Express Group Plc invoked a clause allowing it to withdraw from a contract after revenue fell in the recession.

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