Memorandum by Go-Ahead (PRF 43)
1.1.1 The agenda presented in the draft
Policy Statement on Passenger Rail Franchising issued by the Secretary
of State for Transport on 16 July and in the draft Directions
and Guidance to the SRA issued by Secretary of State on 29 June,
outlines a different agenda to that which was presented to Train
Operators 18 months ago. It is not yet clear how different this
approach will be until the SRA Strategic Plan is published in
1.1.2 The views expressed below are therefore
in the context of the above.
1.2 Necessity for a change of approach
1.2.1 It is recognised that the SRA's previous
policy of encouraging innovative thinking and inviting Franchise
Replacement Bids on the basis of Core Franchise Propositions which
were not backed up by detailed Engineering Feasibility work that
had been signed off by Railtrack was flawed. Insufficient time
was allowed within the bidding process for parties to conduct
Due Diligence in relation to the assumptions made. The process
inevitably generated uncertainty as to the deliverability of the
Railtrack element of Committed Outputs that were to form part
of the 20-year franchises. The process of bidding thus led to
gaps between the innovative thinking and the reality of what was
possible on the network.
1.2.2 The process also required much effort
and time on the behalf of management teams and consultants, and
whilst companies organised their management in such a way as to
not prejudice the safety and operation of their train services,
it was inevitable that there was some loss of focus.
1.2.3 There was also the issue of an impossible
timescalenamely to replace all short-term franchises by
the end of 2001together with a shortage of available resources
within the railway industry to subsequently implement the committed
outputs entered into.
1.2.4 Further significant events in the
railway industry such as the accidents at Ladbroke Grove and Hatfield,
and their impact on Railtrack and the subsequent degradation of
the rail network, had a huge impact on the punctuality and reliability
of train services and the benchmark from which future performance
improvement can be realistically measured. The recommendations
from the Inquiries, coupled with the need to rebuild the network,
has meant that both resources and funding were diverted away from
the Franchise Extension process.
1.2.5 All of these factors combined to make
a change of direction inevitable.
1.3 Lessons learnt from the refranchising
process to date
1.3.1 Train Operators must be more closely
involved with the SRA in the development of strategy; other industry
partners such as Railtrack and Freight Companies also need to
1.3.2 Project planning of the Franchise
Extensions needs to be better organised by SRA, and the bidding
framework should be more prescriptive.
1.3.3 Human, technical and financial resources
must be reviewed in light of the specific events which have occurred
since the publication of the 10-Year Plannamely extra money
for Railtrack for network maintenance, DDA and significant additional
1.3.4 The SRA must work more closely with
2. SHORT EXTENSIONS
2.1 Safety, Reliability, Punctuality, Comfort
2.1.1 There will be no step-change improvements
in frequency, reliability and punctuality with short-term extensions.
Delivery will need to be founded on a realistic review of what
the Network can be expected to reliably provide over the short-term.
2.1.2 Changing maintenance regimes post
Hatfield, which could include more intrusive possessions, may
lead to lower levels of short-term performance. Further, any granting
of new access rights without infrastructure investment could again
lead to degradation of performance rather than improvement.
2.1.3 The immediate priority is to allocate
sufficient funding to allow the rail network to return to the
levels of performance that were being achieved in the late nineties.
Railtrack must, as a minimum be able to deliver Rules of the Route/Plan
and be able to fulfil its obligations under Licence Condition
2.1.4 Subsequent improvements in frequency,
reliability and punctuality will then be capable of delivery via
a range of potential initiatives. The following issues will emerge:
220.127.116.11 With limited resources, what parameters
will be defined to evaluate the relative desirability of new infrastructurewill
the focus be on capacity or reliability?
18.104.22.168 Many infrastructure schemes will
give rise to reduced performance levels whilst being constructed.
22.214.171.124 The extent to which new infrastructure
may be needed will be a factor of reviews of Passenger Service
Requirements (PSRs), fares regulation and timetable capacity optimisation.
126.96.36.199 Current PIXC rules allow standing
on any train for journeys stretching over 20 minutes. The standee
targets tend to reduce value for money on vehicle utilisation
when a small increase in passengers triggers the need for a new
unit in advance of when it might be actually "necessary"
when considering all available capacity.
188.8.131.52 In defining the capacity of a unit
considerable thought will have to be given to whether this is
seats or floor space, especially relevant with the DDA guidelines
for new fleet, and their applicability levels for refurbished
fleet is considered.
2.1.5 Safety enhancements are naturally
to be welcomed, and are already being implemented, but it is possible
that these may actually serve to reduce capacity and worsen performance.
For example TPWS failureson unit or infrastructure, will
add to impact minutes and worsen punctuality. This clearly has
to be set against the very significant benefit of a reduced likelihood
of serious collision and accident.
2.1.6 Safety enhancements on the railway
are more likely to be driven by a legislative timescale, and whilst
funding will be a core issue they should rightly be considered
to be outwith any refranchising timescales.
2.2.1 The shorter the franchise, the less
private finance that will be available as:
184.108.40.206 A short franchise term provides
a very small window for financiers to recover their investment.
This will mean that the SRA will have to make higher annual/periodic
subsidy payments to the TOCs.
220.127.116.11 Financiers need a "tail"
beyond the target completion date for each infrastructure enhancement
project, to allow scope for remedying any delay. In the absence
of such "tail", financiers will only finance a more
modest enhancement programme and demand a higher return.
18.104.22.168 Economies of scale in terms of the
set-up costs for putting together financing and legal contracts
mean that short franchises with smaller capital expenditure requirements
are unlikely to be economic. Finance could be raised on a corporate
basis (ie where lenders have recourse to a Plc) for small projects,
but this is more expensive in total and is limited to the larger
Owning groups, thus potentially reducing competition.
22.214.171.124 To the extent that HMG wish to maximise
the amount of non/limited recourse finance from the private sector,
the biggest source of funding is the capital markets, which offer
best value at longer maturities (15 years+). Whilst the bank market
is large and able to offer shorter maturities, HMG's requirement
for private sector funding across the wider PFI/PPP arena, may
present capacity constraints.
2.2.2 In summary, short two year extensions
to franchises are unlikely to deliver a significant step change
that will result from longer term investment.
2.2.3 Investment, however is only part of
the solution. As indicated in 2.1.4 above. Capacity could be increased
by widespread reviews of PSRs. These have ossified some service
levels, often at a level not in tune with today's markets, or
preventing expansion where required, and where relative benefits
would be much greater for change. However, resistance to change
will be significant and it will require consistency of policy
purpose and adequate consultation with stakeholders to deliver
2.2.4 Further, the current fares regulations
prevent pricing being used to redistribute demand. As they exist
for London, they will continue to lead to increasing peak numbers
as fares fall in real terms. In time, they will also lead to defacto
capping of off-peak fares, as off-peak fares have to retain their
cheaper differential with peak fares.
2.2.5 Alternatively, small fare increases
in line with inflation could generate very significant revenue,
which could be ploughed back into capital investment in railway
2.3 Framework for Major Infrastructure Enhancement
2.3.1 The current Railtrack/TOC "contractor"
model has been shown to be seriously flawed, with serious project
cost and timescale overruns, epitomised in the West Coast Mainline
Upgrade project entered into by Railtrack and Virgin Trains.
2.3.2 Short extensions to existing franchises
will not provide the necessary timescales for a new approachSpecial
Purpose Vehicles (SPVs) to work.
2.3.3 The Go-Ahead Group has been developing
the SPV concept over the last 12 months with its partners in the
South Central route upgrade, Railtrack and Bechtel.
2.3.4 The SPV model is similar to the PFi
model, but there are features specific to the rail industry which
mean that modifications are required:
126.96.36.199 The complexity, number and consequential
impact of the interfaces in the rail industry are significantly
greater than in conventional PFI. For example, a small delay in
a track possession on an operational railway during construction
can have a very substantial knock-on effect and liability to pay
financial compensation to other parties. These financial consequences
are too great for a private sector party to bear.
188.8.131.52 The safety and operational requirements
of a mainline railway network make it very difficult to provide
funders with the normal rights to step-in and remedy a failure/mitigate
184.108.40.206 The risk of change of law is more acute
(and the consequences likely to be of a much greater financial
quantum) in the railway sector than mainstream PFI, given the
220.127.116.11 To obtain cost-effective funding, there
will need to be implicit, if not explicit, Government support
to cover certain "extreme" events such as TOC or Railtrack
insolvency or Force Majeure events. Such support should allow
for a timely and orderly transfer to a replacement party and/or
some form of stop-loss protection above certain threshold amounts.
2.3.5. For TOCs not already in the replacement
process, SPVs will not be required and the current move towards
extensions is a sensible, pragmatic interim step for the following
18.104.22.168 The current state of the industry, and
particularly Railtrack, does not lend itself, especially when
combined with possible spending constraints, to long-term commitments
at reasonable value for money criteria.
22.214.171.124 Bidders only have finite resources, both
financial and human, to undertake multi-bidding in parallel (and
development of successful bids). A staged replacement programme
will optimise quality.
126.96.36.199 A simultaneous programme of delivery
for 20 year bids will overstretch the capability of the industry
to fulfil obligations, will lead to increases in costs for programmes,
and possible boom and bust in key supply chain elements (especially
188.8.131.52 It enables rational analysis of network
requirements, prioritisation of need and time for the definition
of the specification of future franchises.
2.3.6 However, this statement is made in the
184.108.40.206 There will be times and occasions
where a logical length for an extension will be more than the
two years currently allowed for in the Franchise Agreements.
220.127.116.11 The extension programme must be seen
as an interim expedient. In the absence of wholesale revision
of PSRs and fares increases step change improvements will only
be brought about by major investment, requiring long franchise
2.3.7. The granting of franchise extensions
can provide breathing space to resolve some important issues for
the next stage of development. These include:
18.104.22.168 Definition of reasonable targets, otherwise
the inevitable result will be a translation of risk into higher
costs, and reduce value for money.
22.214.171.124 Detailed definition of SRA requirements
and specifications for each franchise to avoid wastage (both financial,
time and human resources), and the avoidance of producing non-comparable
126.96.36.199 A sensible, reasonable timetable for
the overall replacement programme to ensure recognition of national
priorities and the capability to effectively organise groups'
2.4 SRA Leadership of the Industry
2.4.1 Changing the period over which new
franchises are competitively tendered/renegotiated in so far as
they are introducing pragmatism, may bring about improvements
in the SRA's position within the rail industry.
2.4.2 However, there is a fundamental need
to realign the many players within the industry and to learn the
lessons (see 1.2/1.3) from the mistakes of the refranchising process
2.4.3 Bidders who have expended very considerable
sums in development costs also need to be given the opportunity
of amortising these over shorter franchise periods in order to
ensure there is future private sector appetite to invest in further
2.4.4 Railtrack and the SRA, and to a lesser
extent DTLR, are engaged in the strategic planning of the rail
industry. This is largely carried out in isolation, each party
showing much concern for "commercial confidentiality"TOCs
and FOCs are outwith the process. This leads to much duplication
and abortive work. The new approach to franchising, including
a more detailed and prescriptive Core Franchise proposition in
so far as it will provide a consistency of strategic direction,
will be welcome.
2.5 Industrial Relations
2.5.1 Industrial Relations are much improved
on the railways post-privatisation. Trade Union matters should
rightly remain with the employers of railway staffTOCs,
FOCs and Railtrack, at a Company level.
2.5.2 Returning to a round of national rail
strikes, a feature of the pre-privatisation years, will reverse
many years of progress.