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Precise Rail Solutions +++ +++ RAIL · TUNNELS · MONITORING · CONSTRUCTION · BRIDGES · ENGINEERING +++ design: grafit-werbeagentur.de Providing precise positioning and heading solutions for challenging rail environments. www.topcon.eu Simon Crowhen Rail/Geomatics Product Manager simon.crowhen@topconsokkia.co.uk 07710 858417
Franchising Amish Patel believes that Toc’s face a lose-lose situation under new franchise rules The rail industry breathed a collective sigh of relief when it was announced that Cap and Collar would end with the current franchise cycle, but in a masterstroke that threatens to grab defeat from the jaws of victory, the replacement scheme based around GDP risk sharing has seemingly inherited many of the major weaknesses of its forebear. Worse still, it is missing a real opportunity to use the franchising model to provide a desperately needed boost to the UK’s rail infrastructure. Under Cap and Collar, rail franchises incorporated mechanisms for revenue support (government top-ups if revenue falls short) and revenue gain-share (the reverse should revenues exceed forecasts). The standard tolerance was a tiny 2 per cent - meaning most franchises soon fell into one or the other mechanism, albeit revenue support was only offered from year four of a franchise agreement. Looking at the last set of reported numbers makes for staggering reading – First Great Western receiving an extra £209.4 million, South West Trains £69 million and Virgin West Coast £44 million – all in a single year from government. These numbers are even more surprising when you consider that these are the three biggest franchises in terms of revenue, representing three of the primary routes into London. So, what happened The DfT accepted some very over optimistic revenue forecasts from operators, who had worked out how to game the bidding system to gain maximum marks at lowest commercial risk – in this instance the risk of being ‘collared’ by the Cap and Collar system. It’s the age old problem of setting out overly prescriptive rules in a tendering process only to have them used by the bidder’s commercial and legal teams to their advantage. These forecasts made it into the resulting franchise agreements and the net effect is today’s staggering revenue support numbers. These issues have not escaped the attention of our most recent high profile rail reviews: 'A common criticism of franchising has been that bidders have too often constructed overoptimistic revenue forecasts in order to win franchise competitions. This was certainly the case with some franchises let under ‘Cap and Collar’ because bidders knew they would enjoy a measure of protection from approximately year four of the franchise, and therefore had much less to lose by bidding aggressively in later years. Over-optimistic forecasting was also a concern with the two East Coast franchises which ended in default and, in some quarters, with the recent ICWC competition.' The Brown Review of the Rail Franchising Programme - Dec 2012 'A more generalised problem with unrealistic bidding is that it can lead to unexpected shortfalls in revenue for the taxpayer and corresponding pressure on the budgets available to support the railways.' Reforming Rail Franchising, DfT – July 2012 Limited incentive to delight passengers In a salutary lesson about the danger of unforeseen consequences, an additional challenge was that once at the maximum level of revenue support, the operator received a generous 80 per cent of the revenue against its forecast from government. Meaning for every £10,000 of additional revenue it generates, the extra value received is only £2,000 – which is often greater than the cost of generating the revenue in the first place. For passengers, this means one thing - operators have very limited incentive to delight them, particularly given the fact that if many more passengers travel, the operator enters revenue gain-share and loses a proportion of the gain their investment created. By ditching Cap and Collar the government showed at least it is not willing to bankroll a system that just isn’t working. In the new system a weighting factor will be decided by government at the time of tender together with predictions of annual GDP rise or fall through the franchise lifetime. This weighting factor will be applied to the forecast and actual GDP deviation and a difference calculated. Any difference above and beyond 5 per cent in either direction (as opposed to 2 per cent last time) will be applied to the revenue generated to yield a revenue support or gain share value for the operator (the actual money to change hands likely to be 80 per cent of the answer to this calculation). This mechanism will effectively tie the operator to rises and falls in overall July/August 2013 Page 35
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