Foolish Sales of Finland’s Natural Monopolies – Trains

In the last weeks, Finland’s public sector has announced a number of transactions and comments that appear to be made because of idealogical reasons and not for hard logical or hard financial reasons.

The first is that Helsinki Region Transport (HSL) the joint municipal authority of there greater metropolitan are of Helsinki has decided to shortlist 7 companies for a contract to operate commuter train services in April 2020 starting in June 2021.

HSL claims that 2 companies are State-owned but this is simply just not true – 5 of them are controlled or owned by governments:

    1. VR Group Oy is owned by FinnishGovernment
    2. SJ AB is owned by Swedish government
    3. Arriva Sverige AB, owned by DB, the German state-owned railway
    4. MTR Nordic AB, controlled by Chinese government
    5. Transdev Sverige AB, Owned by CDC, a French state-owned promotional bank
    6. First Rail Holdingsand, stock exchange company
    7. Go-Ahead Group plc, stock exchange company

Recent reports from the UK describe the last 2 companies are follows:

Companies like FirstGroup never take direct responsibility for anything as headachy as maintaining hundreds of miles of undulating track. They’re just tenants – they rent use of the lines from the government, from us. So we’re not just FirstGroup’s customers – it’s also ours. And it’s been quite demanding over the years. In 2011 it announced it was pulling out of its 10-year contract three years early – a presciently negotiated “break-clause” allowed this. Unfortunately for us, of the £1.13bn of rent it was contracted to pay over the decade, £826m was due over the last three years, the three years the company adroitly opted out of. This left the landlord, which is us, which is the government, in an awkward position. Does it look for a new tenant who might pay the £826m, or something approaching it, instead? That’s what it ought to do. Otherwise, what force does any future government franchise contract have? How can a landlord expect to receive rent if the sanction for refusing to pay it isn’t eviction? Unfortunately, the government’s most recent attempt to negotiate a major new rail franchise is universally known as the “west coast mainline fiasco”. The Department for Transport, shaken by cuts and new rules, totally screwed it up, and its decision was effectively reversed after a legal challenge by the incumbent franchisee.

So, rather than get into all that again, the government basically told FirstGroup it could stay put. After all, its stuff was everywhere – an eviction would have been an admin nightmare. Or maybe the minister had just seen an upsetting news report about homelessness. Instead of the £826m under the original contract, the company agreed to pay £32.5m for a 23-month extension, a sum which economists have described as “massively less”. 

Source The Guardian 2016

Govia Thameslink owner Go Ahead Group PLC (LON:GOG) saw profits rise last year despite a calamitous timetable overhaul which led to hundreds of its trains being cancelled or severely delayed. The FTSE 250 group, which also runs the Southern and Great Northern franchises, reported a 6.5% jump in pre-tax profits to £145.7mln (2017: £136.8mln) for the year to the end of June. That was despite revenue falling slightly to £3.46bn, from £3.48bn a year earlier.

Go-Ahead apologised for the disruption caused by the disastrous timetable changes brought in in May but refused to take all of the blame, instead citing “collective industry failures”.  

Source: Proactiveinvestors 2018

Should services for such natural monopolies be managed by companies with terrible track records? Should foreign state-owned or controlled entities be allowed to bid? Both questions need to be answered by our public sector masters.

None in the list, with the exception of the Finnish State Railways, complies to these sensible conditions. Taxpayers have the right to know what is going on when Helsinki is making such far-reaching decisions. None of these companies, with the exception of VR and SJ, have any experience of freezing winters – SJ is well known for the excruciating delays almost every day in their operations in Sweden.

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