Chris Grayling’s soft-shoe shuffle reveals rotten state of UK rail system | Nils Pratley

January’s howl of outrage over train fares carries extra force this year because it comes after a ministerial manoeuvre that illustrates the rotten state of the rail franchising system.

That manoeuvre, of course, was Chris Grayling’s soft-shoe shuffle last November that will see Stagecoach and Virgin relieved of the East Coast franchise in 2020 on terms that look extremely advantageous for companies which are currently clocking up losses on the line.

It’s not a bailout, insists the transport secretary, but his claim rests on the Department for Transport’s carefully worded statement that “Virgin Stagecoach will continue to meet its financial commitments”.

All that really means is the operators remain on the hook for the “parent company support” which backs most rail franchisees. In the case of East Coast the sum is about £165m for Stagecoach, which has a 90% interest in the franchise. That’s painful, but not half as severe as being asked to run the franchise until 2023, the arrangement the company freely entered into.

In short, Stagecoach massively overbid in offering to make £3.3bn of payments to the government over eight years. Now, at the point that the financial foolishness has been exposed, Grayling wants to introduce a loosely defined “public-private” partnership from 2020. In commonly understood language, that’s a bailout.

If the department disagrees, let it set out the hit to the public purse from switching to Grayling’s new model on the East Coast compared with the original projections. The figures, one suspects, would show that real financial risk-sharing on the railways is rare. The public accounts committee, when it returns to the issue, should insist on a detailed breakdown.

MPs should also ask why on earth Stagecoach’s optimists still get to bid for other franchises. The honest answer to that one is surely that there too few bidders for a genuinely competitive market to operate. As commuters have noticed, the system looks a mess.

MiFID II a missed opportunity

Welcome to a new dawn in financial markets. If you haven’t read the many thousand of pages of MiFID II – or the second part of the European Union’s Markets in Financial Instruments Directive – fear not. Banks, brokers, pension funds, asset managers and stock exchanges have been on the job and, according to most, the introduction of the new rules on Wednesday won’t cause markets to seize up. Good, but the bigger question is about the long-term effects of MiFID.

The aims themselves are worthy – improve transparency in markets and protect investors. And yes, some of the main measures sound sensible. So-called “dark” trading pools, where blocks of shares can be traded out of sight of other investors, will be limited in size, which should make regulators’ jobs easier.

Yet the long-term worry is that many of the reforms, and the costs of complying with them, won’t make markets more vibrant or improve the lot of the retail investor.

Take the controversial idea that banks and brokers will have to charge clients upfront for analysts’ investment research. That intention is sound since the traditional practice of “bundling” research costs into dealing costs is open to abuse – the temptation is to give the best ideas to the best clients earlier. Yet the effect may be that less research gets done, especially if big banks underprice their research in the hope of making life harder for smaller competitors. Would that count as an advance?

Meanwhile, the whole MiFID process, with its demand for more information and paperwork, may prove a turnoff for individual investors. Yes, individuals deserve protection from the sharks of the financial industry – but they also want a system that is easy to access. If MiFID drives up the cost and hassle of investing directly, it will be a charter for yet more financial intermediation. We have enough of that already.

Iran’s oil no drop in the bucket

Output from Iran’s oil fields has been completely unaffected by the political protests across the country, but that doesn’t stop analysts from asking the “what if?” question. Here’s Bjarne Schieldrop, chief commodities analyst at SEB: full disruption to Iran’s 3.8m barrels a day of production “would immediately drive the Brent crude oil price above the $100 a barrel mark”. That’s from a current price of $67, itself a third higher than six months ago.

The prediction sounds plausible. First, Iran is the third-biggest producer within the Opec cartel. Second, production cuts by Opec and Russia seem to be holding. Third, global demand for oil is relatively strong at present.

File the threat of $100 oil under the long list of possible geopolitical events that could derail markets in 2018. It probably won’t happen, but $67 probably feels quite high enough for central bankers already wondering how hard inflationary breezes will blow this year.

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