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Wednesday, 1 July 2009

A new verb: to Bowker

Whenever I want an opinion on the transport sector, I usually pop over to Christian Wolmar's website. I don't always agree with Christian, but he has an opinion on most things and is worth a read from time to time.

Unlike much of the pro-Labour press, he is not very flattering about Richard Bowker, the young but recently ex-chief executive of National Express and quite a few other organisations, and it is not just because Bowker trashed Wolmar's book in a review. Wolmar is avidly in favour of nationalised railways, and given some of the mishaps during and since privatisation, that is not surprising, even if one might disagree with Wolmar's overall stance. But Wolmar portrays Bowker as one of the profiteers, whereas he is really a New Labour apparatchik who has played his cards right.

Bowker read economics at university and after ayear either, depending on which version you read, playing as a professional session pianist or as the keyboard wizard in a Christian rock band, he joined the London Underground as a graduate trainee in the finance department 20 years ago. At the time it probably wasn't the most promising of career starts, but Bowker was fortunate enough to get involved in initiatives to allow LU to raise money from the private sector in a PFI type schemes involving leasing maintained rolling stock from the manufacturer. This brought Bowker in touch with Babcock & Brown, the now pretty much wiped-off-the-face-of-the-earth investment bank who were heavily involved in tax based finance leasing.

Originally used primarily for aircraft, tax leases allowed a lessee of equipment to achieve a low cost of ownership be leasing an item of equipment from a bank or investor who would claim depreciation allowances. This could be made more attractive if the lessor and the lessee were in different countries and structured so that both lessor and lessee were able to claim the depreciation allowances under their own rules.

But that was not how the LU leasing scheme worked. LU who couldn't claim any allowances because they didn't pay tax would lease rolling stock directly or indirectly from a bank owned leasing company who could claim the allowances, thus effectively getting an interest free loan from the government by deferring taxes (it's a long story, ask in the comments for details and I will explain). So one arm of the government (the Treasury) was subsidising the funding cost for a government owned entity (LU) but at the same time a bank was earning a significant margin over LIBOR rather than the usual gilt rate on lending to the government?

So this was of benefit to the tax payer how, exactly? Well it wasn't, but by wrapping a few maintenance contracts around the deal, they could pretend to the Treasury and the Treasury could pretend to the tax payer that some risk had been transferred so it was alright. Nobody thought to point out that the same risk could have been transferred without any tax subsidy or bank funding.

But then Babcock and Brown had form over rail privatisation, having bought with Nomura, one of the rolling stock leasing companies (Angel Trains), with long term leases and government guarantees in place. Babcock and Nomura securitised the eases raising more than they paid for the company and later selling on the residual assets for hundreds of millions. But that was before their time with Bowker, and with an eye to the LU business, they hired the young man for their financial advisory business, because of his contacts at LU.

Bowker claims to have launched a new leasing system for trains, but the reality was that all forms of train leasing (finance leasing, operating leasing with and without maintenance) had been widespread in the US for many years by GE, GATX and CIT, the ex-BR ROSCo's were far from being the first rail leasing companies in the UK (the North Central in Lombard North Central (NatWest's leasing company) comes from The North Central Wagon Co established Rotherham in 1861 to lease wagons to local railway companies, collieries and quarries), and by 1997 rolling stock had been leased cross-border from Japan, France, Germany, Sweden, Austria, Canada and the US. But hey, who are we to say what Bowker did wasn't new or that it shouldn't be on his CV.

With the break up of BR and formation of many companies requiring management, Bowker was in a fortunate position, having spent some time as Babcock's rail industry insider (even though he was from LU not BR) dealing with OPRAF, and he was seconded to Virgin Rail as Commercial Director. While seconded he left with other Babcock staff to form Quasar Associates, but never associated there because he took a permanent position as co-Chairman of Virgin Trains at the tender age of 31 at a period well remembered for its punctuality (not more than10 minutes late) of 68.7% for the West Coast and 62.5% for Cross Country services.

Nico Lethbridge, Bowker's boss at Babcock was a friend of the Blairs, famously entertaining them at his chateau in France, one of the few occasions when the former prime ministerr has been known to play his guitar in public. Whether or not Bowker was there and tinkled the ivories alongside TB's fretboard gymnastics is unknown, but hobnobbing with the Blairites paid off for Bowker, because when they needed a patsy to run the SRA who better than the open-necked young chairman of Virgin Trains.

The Strategic Rail Authority had no strategy and no authority. Transport Act 2000 gave the Secretary of State the power to direct the SRA to write and update any strategy he wished. In the matter of railway strategy, the law clearly stated the SRA was subordinate to, not separate from, government.

Still, being a placeman has its price and Bowker was paid £350,000 a year for turning up to work. He showed his New Labour credentials by bailing out rail companies whenever the RMT went on strike, thereby undermining the strikers' only bargaining chip and causing the union to wonder why they paid their party dues. Despite several bailouts of Railtrack, Hatfield, Potters Bar and Great Heck rail crashes all occurred under his watch at the SRA, and eventually the quango was wound up when Railtrack was nationalised.

Even failure needs its rewards, and not only did Bowker trouser a £377,157 payoff, but the government took him back onto their books as the head of the national programme to invest in the building of new schools, at a paltry £200,000 a year. Little wonder then that Bowker stayed their barely long enough to pick up his £50,000 guaranteed first year bonus, before heading back to the rail industry as the chief executive of National Express on a reported £1m package.

At the SRA Bowker had seen how GNER had overbid for the East Coast mainline franchise. Bowker bid for the ECML franchise, won and was als hit with the winning bidder's curse. A less sympathetic view would be that the government auction regime of selling to the highest bidder as in the 3G auctions maximised government revenues, passing on the cost to the maximum extent possible to the fare payer or phone user. Rather than paying a fair price for the train service, the government was imposing a hidden tax on rail and phon users intermediated by commercial companies. As a New Labour patsy Bowker may have been at least as concerned about government revenues as shareholder returns, or perhaps he knew he wouldn't have a job without a franchise.

Bowker pledged to pay the taxpayer £1.9bn by 2015 for the franchise. The numbers behind his bid assumed an annual passenger revenue growth of 9 to per cent. Where those figures came from is anybody's guess, but as he would have learnt from his LU days, you can strike a deal on unrealistic pricing if you push hard enough, and if you move fast enough you can pick up the fees or fat salary for a while before you move on. And move on is what he has done because the actual growth has been 0.3 per cent this year.

The trouble for Mr Bowker is that whereas in the past he had shafted the tax payer, the travelling public and the unions, this time he has shafted the shareholders in National Express, who are not at all happy at seeing their share price drop from 1300p to around 280p. Not good for the chief executive of a public company.

National Express has a problem because it risks breaching covenants on £460m of debt which provide that net debt must be less than 4 times EBITDA, difficult given flat revenues and escalating franchise payments. The debt needs refinancing through a rights issue and shareholders are unlikely to stomach putting up more cash while Bowker is in place and the company is leaking cash.

The only solution was to surrender the franchise, sack the chief executive and probably cave in to an offer from First Group.

But spare a thought for the eople of the UAE, where Bowker has been appointed chairman of Union Railways. There isn't actually any railway in the UAE apart from the Dubai Metro and the monorail at Jumeirah Beach, but they plan to build one. Tenders are due in by 2015, and a cargo line is expected to be running by 2020. A 600 mile passenger line will follow, but by that time the people in the Gulf will realise that they have been Bowkered.


Demetrius said...

Ooyer, what did they call the old LNER? Late and never early railway. But Bowker is not an exception, he has been one of rule in recent government. We cannot bring back BR, but we can stop the fancy finance.

Alex said...

The "fancy" finance is largely gone and Bowker was not one of the key players in that.

The rail franchising model is largely broken. Private rail should work just as much as but not necessarily in th same way that private airlines and pivate shipping works.

The current franchising model works on the premise that the highest, or at least the selected, bidder is given a medium term franchise from which to earn a profit, but it is a one way bet. Either the franchise holder bids low and makes a fantastic profit, or they bid too high, the franchise fails and they walk away.

There may well be other franchise models that work, but that isn't the issue here. Bowker has gone from one high powered job to another, largely supported by favourable media because of his New Labour imgae, but by and large he hasn't been able to run or build a transport business the way that the Souters or Moir Lockhead have done.

He is one of many that exist in a semi-commercial heavily regulated but simple business that hitherto has paid high salaries to company managers at a high cost to travellers.