Lucy Tobin: Brexit on track to derail train franchises

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If you’re a train commuter, and are feeling lucky to have found a prickly upholstered seat, on a train that’s left in the same hour it was supposed to, which might actually get you home several hours before you have to leave for work again: bad news.

Obviously, you’re not a Southern Rail commuter, because you wouldn’t actually be on a train, and certainly not sitting down.

But even so. The Government’s new franchising system binds the finances of train travel to the robustness of the economy. And though the City is clutching at buoyant surveys, and the FTSE soars like a blind bird, economic slowdown looks inevitable as Brexit’s implications unwind.

Then any train operators who have got their franchising sums wrong — and that’s quite a few, according to worried analysts — will find their services aren’t sustainable.

Even after the humiliating West Coast fiasco, which saw Virgin Trains stripped of its contract, then reinstated after the Government admitted it had screwed up the bidding process, ministers still whipped up a frenzy about the new franchise awards.

Train operators responded by pledging big numbers and lucrative deals to the Government. They wooed passengers with Wi-fi, posh coffee — some even stretched to the wildly generous idea of more seats.

You’d assume that the train giants — who easily chuck £10 million at a new franchise bid — carefully work out every possible scenario for the economy and its impact on passenger demand.  National Express’s East Coast experience, when it had to give up the line over crazily optimistic passenger growth forecasts, showed us they don’t. 

The sharper transport minds in the City reckon that few lessons have been learned.

Just before incumbent Dutch firm Abellio was announced as the winner of the nine-year £1.4 billion East Anglia franchise this summer, Jefferies’ analysts put out a note headlined “Missing Out on East Anglia May Now Be Best”. The gist was: train operators concocted their bids before the Brexit vote, but will run the line in what is likely to be a softer post-Brexit economy. This isn’t adding up.

When National Express and FirstGroup did then miss out, their share prices avoided the usual train crash. Post-Brexit train maths means that operators are seen to be winning by losing.

What will happen if the new operators can’t afford to run ludicrously-priced franchises?

The Government could squeeze them harder than a train’s chassis — but then it won’t have anyone to run the railways. It could take them back into state hands. But in a year’s time, with the Government focused on Brexit negotiations, and navigating through likely economic turmoil, the railways won’t be a priority.

So investors will be hurt: even if operators are allowed to cut back on investment, a badly-performing route will see the state slash its franchise payments. Southern’s majority owner Go-Ahead has missed out on millions this year. 

But it will be passengers who inevitably suffer the most.

From the doghouse to the portfolio: outsourcers are a raging buy

Somewhere among the sprawling divisions run by outsourcing octopuses Serco and G4S, one of them probably has a business cleaning out kennels. But from an investment perspective, it’s time to yank the two scandal-struck companies out of the doghouse.

They were in there with good reason: multi-million-pound scandals ripping off the Government over tagging dead or non-existent criminals. The shares are still being punished. 

But their new chief executives — the ebullient Rupert Soames at Serco, the dour Ashley Almanza at G4S — have turnaround plans well under way. What makes the stocks a raging Buy, though, is Brexit. The Government is draining key departments of their brightest civil service brains to work on extricating Britain from the EU. 

It’s only a matter of time before the phones at G4S, Serco and, to a lesser extent, Mitie (where the shares are at present a bargain thanks to last week’s profit warning — though their healthcare contract issues look ride-out-able) and Capita begin ringing with contracts in justice, health, and education. 

The state no longer has the resources to handle them all. The doghoused-outsourcers will imminently be back in favour.

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September 27, 2016 |
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