The conventional way for a company to get stripped of a rail franchise is to over-bid massively and inflict such misery on the shareholders that it is cheaper to forfeit the supporting bond and force the government’s hand. Alternatively, making life hell for the passengers very occasionally gets noticed by the Department for Transport (DfT).
Go-Ahead has therefore produced a rarity. Its 65%-owned Southeastern operation, where customer satisfaction metrics have been better than most, has been nationalised because of “a significant breach of the good faith obligation within the franchise agreement”, specifically the under-declaration of a sum of “over £25m”.
That was the government’s dramatic description of events. Go-Ahead pleaded a genuine error, apologised, said it repaid the money and added that its finance director, who used to be in charge of the numbers at Southeastern, had resigned. The cock-up versus concealment versions have yet to be reconciled.
What one can say is that Go-Ahead, when it first alerted its shareholders to this dispute, didn’t expect what has now happened. Note 27 on page 188 in last year’s accounts summarised what sounded like a technical matter related to past profit-sharing calculations and confidently declared: “Should the secretary of state for transport’s notification prove successful then the outflow of resources could be in the region of £8m.”
That estimate was spectacularly wrong, and the question now is whether £25m and getting sacked at Southeastern is the end of the matter. The partners’ other rail franchise, GTR, which includes Thameslink, is unaffected. On the other hand, the government kept the pot boiling by warning that investigations continue and “further options for enforcement action” would be considered.
In the circumstances, the 25% plunge in Go-Ahead’s share price looks about right. The fall overstates the importance of Southeastern for a group with more exposure in the UK to buses, but reflects the shock. Go-Ahead, under chief executive David Brown, always seemed the most geekish of the major transport firms and the least likely to find itself in this mess.
A new chief executive, Christian Schreyer, arrives from Germany in November, just as the old franchising model for the railways is dismantled. His first job is find a way to put a lid on the row with government. If the price is Go-Ahead’s full exit from UK railways, meaning it doesn’t hang around for the new low-margin management contracts, investors probably wouldn’t care. There are always too many surprises on the railways.
Would investors in Wise, the cross-border money transfer business that made a storming £9bn stock market debut in July, have been deterred if they had known that the company’s founder and chief executive, Kristo Käärmann, is the type of person who forgets to pay a £720,000 personal tax bill to HMRC?
Most wouldn’t, one suspects. Wise, formerly Transferwise, is a slick tech business that is taking chunks out of big banks’ traditional dominant position in a large international transfer market. Investors might even have been amused that a boss who says Wise exists to spare its customers banks’ mark-up commissions can be so disorganised that he lets £365,000 – the resulting penalty from HMRC for late submission for the 2017/18 tax year – slip down the back of the sofa.
The question, though, is whether the run-in with HMRC should have been revealed in the flotation prospectus. Of course it should have been. The disclosures are meant to be pedantic to a fault. Yes, most investors wouldn’t be bothered one jot – but that’s for them to decide. Not impressive.
Never mind gas, what’s up with oil?
While we were watching every latest surge in the gas market, oil prices have also been bubbling up. On Tuesday, a barrel of Brent traded above $80 a barrel for the first time in three years, a development that has very little to do with queues at UK forecourts.
Rather, it’s a tale of surging global demand, with the US and China to the fore, plus cuts to supply and inventories being low almost everywhere. Last year’s plunge to $25 a barrel – and the brief sight of negative prices – feels a long time ago.
At $80, according to analysts’ forecasts only a few months ago, the world should be experiencing a touch of “demand destruction” to compensate for the higher input prices. There is little sign of that yet. If the Bank of England sounds more confused than usual about the inflationary outlook, one can’t blame it. Oil, if it goes much higher soon, has the potential to upset most assumptions.