The railways and profit do not sit easily together, largely because a carriage load of other considerations need to be weighed first: safety, punctuality, affordability. The presence of private rail operators on our infrastructure is therefore contingent on the public accepting this added, complicating consideration.
One way of keeping that delicate compact in place is to make clear to private rail companies, as would be the case in a purely commercial endeavour, that they are responsible for the risks they take.
The east coast mainline debacle is an example of a business shunning that risk – and endangering the entire rationale of rail privatisation in the process. Virgin Trains East Coast (VTEC), a joint venture between Scottish transport group Stagecoach and Sir Richard Branson’s Virgin group, signed an eight-year contract to operate the London-Edinburgh route and agreed to pay the government £3.3bn over the lifetime of that deal.
Last week the transport secretary confirmed that VTEC had breached its contract and the franchise would be scrapped. The punishment is likely to be the loss of a joint deposit worth £165m, plus a cash hit of £19m for Stagecoach and further non-cash charge for the Scottish group of £75m.
Those are big numbers, but not big enough. VTEC has paid £1bn to the government over its near three years of operation, which means the taxpayer is around £2bn short. Neither Stagecoach founder Sir Brian Souter nor Branson, who have both made fortunes from rail, are on the hook for that £2bn.
At the extreme end of the punishment scale, they shouldn’t have to liquidate their fortunes over misjudging the profitability of a contract with the public sector. But between losing their deposit and writing a cheque for £2bn, there should have been weightier sanctions.
The option of imposing a franchise-bidding moratorium on both companies was discarded on the same day as they lost the east coast last week, when it was announced that Virgin Trains’ west coast operation – another joint venture between Stagecoach and Virgin – had secured an extension. The transport secretary, Chris Grayling, added that there was no legal precedent for barring both firms from bidding for other deals – much to the chagrin of his predecessor, Lord Adonis, who said he had blacklisted National Express for defaulting on the same east coast route in 2009.
The efficient function of the franchise market, and the industry’s funding assumptions, are threatened when bidders throw large sums at a contract in order to win it and are rewarded for failure with comparative lenience. The way Grayling handled the third default on an east coast mainline contract in 11 years will do nothing to discourage reckless bids for operating rail services when profitability should be far down the list of concerns.
If private operators such as Stagecoach and Virgin want to guarantee a long-term future for the private sector in rail franchising, then heavier punishment is probably in their interests. It is not a question of wishing the private sector to fail, but that it must be seen to fail fairly when it does. The alternative is letting bad risk-taking go unpunished sequentially until public patience, perhaps under the relentless prodding of Adonis, snaps. And then Souter and Branson will have very little cover when passengers start to call for the return to public operation of key rail routes.
Network Rail, the organisation behind Britain’s tracks and stations, is already in public ownership and its record has been a vast improvement on what went on before. If there are more episodes like east coast mainline, voters will start to wonder if the same system will work for rail franchises.
Musk boldly goes where no bean-counter has gone before
For all the technological achievements of recent decades – the internet, artificial intelligence, electric cars – space travel remains peerless as a symbol of modern human endeavour. As an emblem of financial efficiency though, the point is moot. Nasa and the Soviet state pumped billions into projects whose primary value appeared to be to score interstellar points in the cold war.
Nasa’s investment over the years led to the invention of artificial limbs and scratch-free lenses (no, Teflon and Velcro were not discovered by Nasa) but those were ancillary benefits from the main goal: getting one over on the Kremlin.
Does this mean that Elon Musk’s ambition to put human beings on Mars should be treated with similar scepticism? Last week his privately owned company, SpaceX, managed to put the second-most powerful rocket in history, and a Tesla car, into orbit. Musk has stated with the characteristic hyperbole of an internet entrepreneur that his aim is nothing less than saving the planet. Rocket travel will help us become an apocalypse-dodging multiplanetary species, he claims – a loftier goal than blasting Marxism into the heart of the sun.
Indeed, Musk rarely couches his space travel pitch in terms of profit. SpaceX needs to overcome fixed annual costs of around $900m (£640m) to make a profit (according to an internal memo written in 2013). That said, he has been helped massively by the multimillion-dollar Nasa contracts that have kept the company afloat. But he has taken on establishment naysayers nonetheless. South African-born Musk is a classic American entrepreneur in the mould of Jobs or Edison – acting on a hunch, not the desire for a fortune. Such is the vaulting nature of Musk’s moonshot that perhaps only a risk-taker, putting their own money on the line, could pull it off.
Energy giants must move fast
Big Oil’s leaders have spent a lot of the past fortnight talking about the crude-price recovery that has reaped them bumper profits. More surprisingly, large chunks of chief executives’ speeches and presentations have been given over to their moves “beyond” petroleum, following a “buzzing” period of investments by oil companies in green energy firms. BP and Shell said they were looking to buy more, while Total chief Patrick Pouyanné talked of expanding a profitable low-carbon business.
ExxonMobil bowed to shareholder pressure and spelled out how climate-change action would affect its reserves, though it downplayed the impact as being of “little risk”.
The company’s European peers deserve some credit for a better understanding of the fundamental risks to their businesses. While oil companies have been under pressure for years from investors and government regulations to take climate change more seriously, now the big driver is an economic one.
Peak oil demand is a very real prospect in the next two decades. New technology will disrupt crude demand, from cars burning petrol and diesel much more efficiently, to the rapid uptake of electric vehicles and growing trends of ride-sharing and driverless cars. Energy demand growth will slow; government climate policies will bite.
Now the challenge for the more progressive oil firms is to make their spending commensurate with the scale of the transition needed. A fraction of the billions they plan to spend pumping more crude in coming years is allocated for renewables and building the charging networks for electric cars.
Buoyed by higher oil prices and the reduced costs of their operations, the majors are on the cusp of a new growth cycle. That growth needs to be in green gold, not black.
Oil giants are changing. But not fast enough to avoid the climate change that will devastate both the world’s poor and some of its richest: Big Oil’s shareholders.