News analysis
bail out franchisees that get into financial difficulties. Hence the need to agree deals that will survive fluctuations in the economic cycle. The West Coast franchise was supposed to be the first of a new breed of franchises with a longer life, typically up to 15 years rather than seven which is the norm today.
Franchises let between 2004 and 2009 contain a revenue risk sharing mechanism which offers protection after the fourth year if revenue fails to reach the target set. This is the so-called “cap and collar” arrangement, and 11 out of the 16 franchises are already receiving financial support from the DfT. However, the DfT was unhappy with this system, and decided that revenue risk sharing mechanisms will in future be designed on a franchise specific basis. For example, the new West Coast franchise was to contain an adjustment mechanism linked
to fluctuations in GDP growth which would have cushioned the franchisee against a major downturn in revenue due to exogenous economic factors. Likewise the DfT would share profits in excess of forecast. Is the decision to cancel the
West Coast contract, and put the other tenders on hold, merely a result of flaws in the system and mistakes made by officials, or does it point to
expected to become profitable. Franchisees were free to innovate and introduce new services above the minimum requirement even outside their area. This led to considerable innovation with many services being introduced between places which had never been connected directly by rail before. Franchisees were not expected to invest significantly, as the trains would be leased
This is an ideal opportunity to consider whether more fundamental changes are needed.
deeper problems? If so, this is an ideal opportunity to consider whether more fundamental changes are needed. When franchising first started in 1996, the 25 franchises were of three basic types: regional requiring subsidy, London and southeast England commuter services which might require subsidy initially but had the potential to make premium payments, and inter-city which were
from rolling stock leasing companies (Roscos) and the infrastructure was the responsibility of Railtrack. But over time, the DfT has modified the franchises to eliminate competition between them, thereby ending services outside of the franchise area, and to introduce an element of cross-subsidy by merging loss- making regional or commuter services with profitable inter- city operations. Great Western, for example, now comprises all three. As a result, there are now only 16 franchises for England and Wales.
The DfT has also tightened its grip on the operation of franchises to the extent that it is now very difficult to adapt train services to meet changes in demand, let alone introduce new ones. And to make matters worse, the DfT is entering into new and expensive train deals which will lock operators into using a specific type of train for years to come with no control over the cost. Is it reasonable to expect companies to forecast passenger demand and revenue, as well as the effects of inflation, changes in the economy, and competition from other modes well into future? How many people predicted the current economic downturn and financial crisis five years ago, let alone 15 years ago? Two of the franchises
currently on hold - Great Western and Thameslink - are extremely complicated. Great Western will be affected by the Crossrail project at the London end, the reconstruction of Reading station, electrification of part of the network, and introduction of the controversial
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Intercity Express Programme (IEP) fleet during the life of the next franchise. Thameslink will also be affected by major construction as well as the incorporation of the Southern franchise and part of the Southeastern franchise at some undetermined point during its life.
Is the one-size-fits-all
approach to franchising still appropriate? The government wants to reduce the cost of running the national railway, but it currently costs up to five times more than under British Rail. Only a proportion of franchises go the full term meeting their financial commitments to the government, and so the promised flow of funds back to government rarely materialises. Should other types of contract now be considered for regional services which will never be profitable? The concessioning system, common elsewhere in Europe, is designed to reduce the burden on taxpayers while offering passengers a better deal, and it seems to work. Does Britain actually need franchises for profitable inter- city services? East Coast, which is currently being run by the DfT, operates in competition with two open- access operators, First Group’s Hull Trains and Grand Central, now part of German Rail’s Arriva Group. Another Arriva subsidiary is seeking access to the West Coast route. The introduction of direct competition on Italy’s high- speed network has encouraged the incumbent to up its game considerably, and increased the size of the overall rail market to everyone’s benefit. Why not try something similar in Britain? Wouldn’t it be better to have regular payments from operators, all acting on an equal footing, rather than the high risk strategy offered by the current flawed franchising system? The government will also generate income from the operator’s profits. Clearly, it is time for a fundamental rethink of franchising in Britain, and now is an excellent time to do it. But will ministers be bold enough to take the plunge? IRJ
IRJ November 2012
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