Rail franchising in Great Britain
Rail franchising in Great Britain is the process of contracting out the operation of passenger railway operations through a system of franchising to private companies. Passenger services are franchised, for a limited period, to train operating companies. The award of the franchise is determined by competition.
Within the United Kingdom, only railways operating in Great Britain are subject to the franchising system; in Northern Ireland, the railways are owned and operated by the state-owned company NI Railways as part of the Irish Gauge network covering the island of Ireland.
The franchising system was created by the Railways Act 1993 as part of the privatisation of British Rail by the Government of John Major, and the first franchises came into effect in 1996. Prior to this, the railway system had been owned and operated by the government-owned corporation British Rail (BR), which has since been wound up.
Prime Minister John Major envisaged splitting up the railways and returning ownership to an equivalent of the "Big Four" railway companies that had existed before the creation of British Rail (BR). The Treasury advocated an alternative plan put forward by the Adam Smith Institute which separated railway infrastructure from train service operation and contracted out passenger services to seven-year franchises. This scheme formed the basis of the Railways Act 1993, and a new and complex structure of over 100 private companies was created to replace BR; track and signalling was taken over by Railtrack, rolling stock was sold to Rolling stock operating companies (ROSCOs) and leased back to train operators, and train services were put out to competitive tender. All of this was initially overseen by the Office of Passenger Rail Franchising (OPRAF), a public body which specified service levels and public subsidies that were to be paid to operators. Over the years, the system of rail franchising has evolved, but it still continues to be the main form of passenger rail service provision and today, Britain's railway system is operated as a network of over 20 franchises.
Railway franchises are decided by the UK Government's Department for Transport, who design the boundaries and terms of service, and award contracts to the train operating companies. Franchise are generally defined around a geographical region or along a particular railway route or collection of routes; for example the InterCity West Coast franchise covers the operation of long-distance trains along the West Coast Mainline, or the ScotRail franchise, which incorporates all the railway routes across Scotland. In recent years, some franchises have been amalgamated, such as the Thameslink, Southern and Great Northern which was formed in 2014 from the Thameslink and Great Northern routes running across London and south-east England; this franchise will soon absorb the South Central and Gatwick Express franchises, making it the largest railway franchise in the United Kingdom.
Rail franchise holders in Great Britain accept commercial risk, although there are clauses in newer franchises which offer some compensation for lower-than-expected revenue (and also claw back some excess profits, should these occur).
A small number of urban railway systems are not franchised but are contracted out as a concession instead. Examples of this form of operation include the operation of Transport for London's London Overground (awarded to LOROL), Docklands Light Railway (Keolis/Amey plc) or Manchester Metrolink (RATP). Concession holders are paid a fee to run the service, which is usually tightly specified by the awarding authority. They do not take commercial risk, although there are usually some penalties/rewards built into the contract for large variations in performance.
From 2011 franchises, starting with InterCity West Coast, were offered under a new scheme, rather than the previous "Cap and Collar system" which provided for risk-sharing with government regarding future demand. The new franchising scheme is intended to provide greater incentives for cost reduction by operators. Because of the increased future risks carried by operators under the new scheme, the government requires a large financial surety to discourage early contract default.
In 2012 the franchising system ran into some difficulty; the Department for Transport awarded the InterCity West Coast franchise to FirstGroup, but in October the Secretary of State for Transport reversed this decision after significant technical flaws had been revealed in the way the franchise process was conducted. Since then, Virgin Trains has been given a temporary management contract to run the franchise until a fresh competition can be run.
Rail franchising was, initially, administered by the Director of Passenger Rail Franchising. On 1 February 2001 the position of Franchising Director was abolished by the Transport Act 2000 and the passenger rail franchising functions were transferred to the newly created Strategic Rail Authority (SRA). The SRA was in turn abolished in 2006 and the SRA's franchising functions were taken over by the Secretary of State for Transport.
When a franchise becomes due for renewal, the Department for Transport (DfT) invites bidders to tender for the franchise. The DfT specifies the level of service required and judges bids on several criteria. In the past, many services required a public subsidy and the level of subsidy required by each bid was one of the factors considered by the DfT. Although recent franchise renewals have seen a reversal of this process and bidders are now expected to offer a premium (typically around GBP 1,000 million over 10 years) for the franchise, this masks the public subsidy of most rail franchises through the UK Government's direct grant to Network Rail, which therefore does not levy a full access charge to the franchisee for use of the infrastructure. In the interim McNulty report in September 2010 ["Rail Value for Money Study"] the Net (annual) Cost to government (£m) and Net Cost to government as % of total cost were shown as:
- Intercity franchises £693m / 25%
- London and South East franchises £760m / 19%
- Regional franchises £1,873m / 61%
Or put another way 75%, 81% and 39% of costs are covered by the Franchise payments.
Criticism of the franchising process
It has been impossible to compare premiums offered by successful and unsuccessful bidders because the DfT has refused to release the information. A decision on 28 July 2008 by the Information Commissioner may change this, but the matter is still unresolved because the DfT has appealed to the Information Tribunal (case number EA/2008/0070). The DfT has now published the information in anonymised form for the South Western franchise. The winning bidder offered a premium of £1,191 million (net present value) over the life of the franchise, and the other bidders offered £636 million, £513 million and £501 million.
Some critics of the franchising system have suggested that state-owned organisations, such as the Government-owned holding company, Directly Operated Railways, should be allowed to tender for rail franchises. They highlight the fact that many of the current rail franchise holders are actually joint ventures involving subsidiary companies of the state-owned railways of other countries, such as SNCF of France or the German Deutsche Bahn. According to the Railways Act 1993, the public sector cannot bid for rail franchises in Great Britain, although some rail franchises in the past have been taken on temporarily by a state-owned operation following an unsuccessful private franchise. For example, Connex South Eastern was stripped of its franchise in south-east England in 2003 and replaced by the publicly owned South Eastern Trains; and in 2009 the East Coast train operating company took over rail operations from National Express East Coast after it defaulted on its contract. On both occasions, the franchises were put out to tender and returned to private operations. Some commentators have criticised the re-franchising deals by comparing the performance of the private-sector franchisees unfavourably with the public-sector operators. Advocates of the franchising system contrast public-sector operations with commercial operators, citing their ability to invest private capital into the franchises, financial returns to the Treasury and customer incentives such as free on-board wi-fi and loyalty card schemes.
Some campaigning groups and political commentators advocate the return of the UK rail network to public ownership in varying degrees, including the full renationalisation of British Rail. Public polls have indicated a high public support for this, such as a 2013 YouGov poll which found 66% of the public support renationalisation.
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