Rail franchising in Great Britain

Passenger rail franchising in Great Britain is the system of contracting the operation of the passenger services on the railways of Great Britain to private companies, which has been in effect since 1996 and was greatly altered in 2020, with rail franchising being effectively abolished in May 2021.

The system was created as part of the privatisation of British Rail, the former state-owned railway operator, and involved franchises being awarded by the government to train operating companies (TOCs) through a process of competitive tendering. Franchises usually lasted for a minimum of seven years and covered a defined geographic area or service type; by design, franchises were not awarded on an exclusive basis, and day-to-day competition with other franchises and open access operators was possible, albeit occurring on a limited number of services. Over the years, the system evolved, most notably reducing the initial 25 franchises to 17 through a series of mergers. Four franchises are currently in public ownership under the ' operator of last resort' arrangement.

The Government initially suspended rail franchising in order to maintain service as passenger demand fell due to the COVID-19 pandemic, but on 21 September 2020 permanently abolished the rail franchising policy. Emergency arrangements (which effectively convert the franchises into concessions) remain until it legislates for a replacement to the system, likely to be a permanent concession system as is already in place in some urban areas.

The system only covers the railways of Great Britain (and the Isle of Wight); the railways in Northern Ireland are owned and operated by the state-owned company NI Railways.

Process

Tendering, monitoring and termination

Railway franchises are decided by the UK Government's Department for Transport (DfT), who design the boundaries and terms of service, and award contracts to the train operating companies. Under the devolved administration arrangements, franchises for ScotRail and Caledonian Sleeper are awarded by Transport Scotland and the Wales & Borders franchise is awarded by Transport for Wales.

Prior to formally tendering a specific franchise, the DfT publishes a Prior Information Notice (PIN) outlining the basic details, and opens a consultation with relevant transport authorities, devolved administrations and the Transport Focus watchdog. At the end of this process, a formal Invitation To Tender (ITT) setting out the detailed terms of the proposed franchise agreement is sent to the three to five prospective bidders who have been identified as pre-qualified. ITT's may include a range of variations for consideration by the prospective bidder, who may also submit variations themselves. The franchise is awarded to the bid which is deemed most viable, and which offers the best value and reliability. If relevant, bidders' past performance is also considered.House of Common Briefing Paper SN6521 ''Railways: franchising policy'', 30 September 2015, Louise Butcher

Performance is monitored throughout the contract period.

In contrast to earlier bail-outs, following the 2004 changes in approach to cost/revenue risk, unless there are exceptional circumstances, the DfT's policy toward failing franchises is not to rescue them with further financial assistance. Instead, DfT will hold them to the agreement and terminate the franchise early, and then run the franchise directly as an operator of last resort (OOLR), pending a re-tendering. Agreements also contain a cross-default clause, which allows other franchises also held by the company or an affiliate to be terminated.

Financing

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).

The main costs incurred by franchisees are track access charges (paid to Network Rail); other significant costs come from staffing, leasing stations (from NR) and rolling stock (from ROSCOs). Franchisees also pay for light maintenance of stock, with heavy work being done as part of the ROSCO lease. The main revenue stream is from fares, supplemented by the franchise subsidy in cases where there is a shortfall. In addition, franchisees are allowed to sub-let commercial units directly in leased stations.

Franchises and concessions

Current franchises

Concessions

A small number of urban railway systems are not franchised but are contracted out as a '' concession'' instead. 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 penalties and rewards specified in the contract for large variations in performance.

;Examples

Open-access operators

An open-access operator is a train operating company that is not subject to franchising or concessions, but instead purchases individual train paths from a railway infrastructure company such as Network Rail. These operators include Eurostar, Grand Central, Heathrow Express, Hull Trains and Pre Metro Operations (providing a shuttle service on the Stourbridge Town branch line).

Former franchises

Prior to privatisation, the passenger services of British rail were organised into three units:
* InterCity for long distance express services
* Network SouthEast (NSE) for the commuter services from South East England into the various London termini
* Regional Railways (RR) for services in all other areas

They then underwent further reorganisation in preparation for franchising, being split up into 25 train operating units (TOUs) or that were gradually incorporated as separate, shadow businesses operating as 'shadow franchises' that negotiated contracts individually with regulators, Railtrack (the infrastructure and major station owner) and ROSCOs (the rolling stock leasing companies) before being sold off in 1996 and 1997.House of Common Briefing Paper SN1343
Railway passenger franchises
', 14 December 2015, Louise Butcher

History

1996–1997: Genesis to sale

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. 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 system which was implemented, which saw the creation of 25 shadow franchises, to be sold off in a process managed by the Director of Passenger Rail Franchising, which specified service levels and public subsidies that were to be paid to operators. The legislation allowed BR to bid for franchises, if the DPRF agreed, but in practice he never did.

Under the original 1993 legislation, the Franchise Director set out the minimum service levels of a franchise in a Passenger Service Requirement (PSR), being the current BR timetable in the case of the first sell-offs, and put this out to competitive tender. Winning bidders were decided on a pure cost basis – those who offered to pay the highest premium, or receive lowest subsidy, would run the franchise. Once signed, franchise agreements could only be terminated under certain conditions, namely not meeting the PSR, although fines were available as an intermediate step.

The Treasury had initially envisaged franchises to be around 3 years long, to promote sustained competition, however as it became clear that potential buyers were not interested in such short terms, it was announced in 1995 that franchises would be around 5 to 7 years long, or longer if major investment was required. The first franchise agreements to be signed were for the South West and Great Western franchises, on 19 and 20 December 1995 respectively. The first passenger train service operated by a privatised franchise was the South West Trains 05:10 Twickenham to Waterloo on 4 February 1996, although this came after the first privately run service, which ironically was a rail replacement bus service covering the early morning Fishguard to Cardiff journey in South Wales, due to engineering works.

As the program progressed, all franchises had been awarded and commenced by 1 April 1997, the last being ScotRail. OPRAF was initially criticised for taking too long, but answered that most of the delays were outside of their control, and were indeed caused by the government itself. The first four franchise competitions only attracted four bidders each, well below government expectations, although competition increased as the program went on and investors gained more surety over the way the system was to operate as a whole. Ultimately, although there were 25 franchises, the eventual buyers came from only 13 different companies. Many were bus companies, with the hoped-for interest from airlines and shipping groups failing to be converted into solid bids. In addition, despite several bids, due to difficulties in raising finance, only three bids from management buyout groups had been successful.

National Express was the winner of the most franchises, with five (Gatwick Express, Midland Mainline, North London, Central Trains and ScotRail). Prism Rail came next, with four ( LTS, Wales & West, Valley Lines and WAGN). Connex, Virgin Rail Group and MTL all captured two each, with the franchises they won being closely related ( South Central and South Eastern for Connex, CrossCountry and West Coast for Virgin, and Mersey Electrics and North East for MTL). Stagecoach also won two, although the second was the tiny Island Line, which would eventually be merged with their main win, South West Trains. Great Western Holdings also won two, on opposite sides of the country – Great Western and North Western; FirstGroup

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