Franchising
UK GDP disregarding any local variances, or the impact of rail specific (but non- GDP affecting) incidents such as poor weather or rail infrastructure failure. The 5 per cent ‘dead zone’ means that on a £1 billion/year franchise (using a generous weighting factor of 1.25) roughly the first £50 million of GDP related loss would not be covered by this mechanism – bigger than the EBIT of any franchise last year (with those numbers even including generous revenue support). No doubt this new set of risks will need to be factored into franchise bids, resulting in inflated bid prices to counter risks over which operators have no control. To compound the issue, the DfT
has also left the door open to recoup ‘excessive’ profits from operators. While this step is undoubtedly populist and may indeed de-risk the government’s financial position, two things are immediately apparent. Firstly, this now sounds a little one-
sided and reinforces the perceived divide between the public sector DfT and private sector operators regarding commercial matters, without actually removing any real cost from the equation (it will simply become bid risk premium). Secondly, it doesn’t remove the choke
on innovation – why will operators be incentivised to make investments to
delight customers and increase modal shift to rail if the net answer is that they may lose (if the innovation fails) or not win (if they must return excessive profits)?
'Excessive' profits used for rail projects Given that Network Rail recently announced a significant additional spend of £37.5 billion to develop UK rail infrastructure over the next five years and this money needs to come from somewhere, let’s be ambitious and suggest a different way. Let’s mandate that if the franchisee
makes ‘excessive’ profits, these are added to the financial guarantee made to the DfT - making it even harder for a successful operator to walk away. This money could then be used by government to help kick-start some much needed second tier rail infrastructure projects and then returned to bidders upon successful completion of the franchise, as recognition of consistent good performance over the lifetime of the deal. It is likely that a number of the new
fifteen year franchises will be generating revenues of £1 billion - £2 billion a year – meaning even a small percentage increase in revenue for each of the fifteen operators will generate a significant pot of much needed investment infrastructure cash. Just looking at the ten largest
operators, let’s assume that mid-way through the new franchises there will be five operators forecasting revenues of £1.5 billion and five of £750 million/year. If these operators each managed a 10 per cent uplift in revenues from forecast, the additional financial pot created would equate to over £1 billion/year. Given the Department's ticket price increase constraints, this revenue would have to come from additional passengers who have chosen to use the railway – an indicator that they have actually been impressed by it.
This arrangement will reduce the
burden on UK Plc (requiring less immediate funding from government to pay for rail infrastructure projects) and ensure that operator incentives are more closely aligned to passenger needs. For what would be a relatively simple
scheme to set up and administer this change could yield significant value for UK Plc and finally see rail private and public sector interests gaining alignment. It may not provide all the funding we need, but why wouldn’t we take this opportunity? Now that sounds like a win–win instead of the current system’s lose–lose.
Amish Patel is a member of the Transportation Team at management consultancy Boxwood
www.boxwood.com
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Page 36 July/August 2013
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