Review ordered into rail franchising

The review is an attempt to shore up the rail franchise system, under fire since National Express said in July it would hand its loss-making East Coast mainline back to the government. The changes are likely to disappoint unions, which have called for the railways to be renationalised…Train operators are protected by a “cap and collar” arrangement, which ensures the government funds up to 80 per cent of losses on a franchise contract if a train operator is missing revenue targets after four years.

http://www.ft.com
December 28, 2009

Review ordered into rail franchising
Gill Plimmer

The government is to change the way it hands out rail contracts in the new year, as it fights to restore the system’s credibility following the renationalisation of the UK’s biggest rail contract, the East Coast mainline.

Lord Adonis, transport secretary, has commissioned KPMG to consult with the industry as part of a wider review into rail franchising. Any changes would need to be in place by the summer, when the competition to win the next tranche of rail contracts will begin.

Reforms to be considered include:

● a restructuring of the revenue-sharing agreement between the government to reduce the likelihood of train companies handing back a contract to run a service during a downturn;

● the adoption of longer 15-year franchises as the industry norm to buy greater stability. Most are currently seven years but passenger satisfaction is higher on Chiltern Railways, for example, which has a 20-year contract;

● changing the role played by train companies so that they could, for example, improve stations and rolling stock;

● the awarding of franchises on the basis of quality, not only price, so train operators would be encouraged to submit proposals for improving services at the bidding stage and Passenger Focus, the lobbying group, would be consulted,

The review is an attempt to shore up the rail franchise system, under fire since National Express said in July it would hand its loss-making East Coast mainline back to the government. The changes are likely to disappoint unions, which have called for the railways to be renationalised.

By the current system, companies bid for the right to run trains on routes such as the CrossCountry or East Coast main lines. The contracts are often awarded to the train operator that offers the highest premium payments or, if the route requires heavy subsidies to be profitable, to the company that requires the lowest level of state backing.

But MPs, rail chiefs and union leaders have complained the system places more weight on the financial payback to the government than on passenger services. It also means there is little stability for rail operators, which make their bids according to projected passenger numbers but are vulnerable to any recession.

While the government will want to tread carefully, the call for change is nearly unanimous. Train executives complain that a highly regulated structure gives them little leeway to adjust service levels and that their contracts are bureaucratic, excessively prescriptive and wasteful.

Train operators are protected by a “cap and collar” arrangement, which ensures the government funds up to 80 per cent of losses on a franchise contract if a train operator is missing revenue targets after four years.

But while the Association of Train Operating Companies wants this subsidy to be brought forward, the government is also considering linking a proportion of it to gross domestic product. That would reduce the risk of companies reneging on a contract during a downturn.

The Department for Transport confirmed it was re-examining the franchise system but said it was “not meant to be a fundamental review”.

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