BR franchise bid ruled out

The Government has dressed up the first three rail franchises to make them more attractive for sale by promising to underwrite the costs of future regulatory and tax changes.

It has also rejected an attempt by British Rail to bid for the franchises because it fears a public sector competitor would deter private companies from bidding to take on the franchises.

Roger Salmon, the franchising director, has tried to eliminate much of the political risk faced by potential bidders - and the financial consequences - by taking on the burden of VAT if the Government decides to impose it on rail travel for the first time.

Mr Salmon, who works under the direction of the Transport Secretary, has also agreed to meet any extra costs arising from unforeseen regulatory changes that result in increases in track charges.

Under the system announced by the rail regulator, John Swift, charges are determined by a formula which means they should go down by 2 per cent in real terms each year until 2001.

The guarantees substantially reduce the scope for an incoming Labour government to reverse any of the contracts agreed before a general election.

Mr Salmon has also ruled British Rail should not be allowed to bid because a "considerable number of bidders would not wish to compete".

BR was given the opportunity to bid, subect to the franchising director's consent, in a last-minute amendment to the Railways Act promoted by Tory peers in the summer of 1993. A BR spokesman said last night: "We had applied to pre-qualify for all franchises."

Mr Salmon is also minded to rule BR out of bidding for the next five franchises.

Philip Snowden, group executive of Badgerline, the bus company that has expressed an interest in bidding, said the timetable was very demanding: "The management teams have a big advantage and it is easy for them to put in bids in time. But we have been given little information until now and we have a lot of work to do."

The Passenger Rail Industry Overview issued by the Office of Passenger Rail Franchising with the tender documents yesterday, is the most detailed guide to rail finances ever published. It alerts potential bidders to the political stance adopted by the Labour Party, quoting John Prescott, who has said Labour wants to ensure "a publicly owned, publicly accountable railway".

For the first time, bidders have some idea of the business they will be seeking to run. Over half the costs, not counting those met by subsidy, are fixed, with track access charges and train leasing the biggest components.

Income is hard to increase, after this week's announcement that fares will be linked to inflation for three years and below it thereafter, except for particularly good performers.

Therefore their best hope for healthy profits, which will not be regulated in any way by Mr Salmon, is through subsidy and by reducing costs in an industry still thought to be overmanned.

However, employees will initially be protected by the Tupe rules which prevent new private employers altering the terms of existing workers.

Other warnings issued in the Overview are the lack of any "track record" or relevant accounts, the lack of proper computer systems, several issues where disaggregation is still not complete and the fact that non-privatised parts of the railway have no guarantee of subsidy, which may have a damaging effect on railways generally.

Originally, 37 companies applied for pre-qualification for the first eight franchises. Yesterday Mr Salmon refused to say how many had passed the first hurdle but a source at Opraf suggested that half-a-dozen "railway buffs and eccentrics" had been weeded out.

Several of the potential bidders have subsequently merged and, with eight MBOs and BR applying, about 20 companies remain in the race. At least six are thought to want to bid for the London, Tilbury and Southend line, the smallest of the first three franchises.