Following the Williams Rail Review, the new Williams-Shapps Plan for Rail proposes that the new Great British Railways organisation let out contracts with the private sector for the delivery of train services through its regional structure. These replacements for the rail franchise system will be called passenger service contracts.
Replacing the rail franchise system
The post-franchise concept of PSCs is based on a concession model for the operation of trains, similar to that used by Transport for London (TfL) for their heavy rail contracts.
For the current London Overground and CrossRail concessions, TfL retains revenue risk and has responsibility for setting fares and promoting travel. The operator is on risk for costs, based on a competitive bid process, and is incentivised to run trains on time through measuring various performance metrics. There are no revenue incentives for the operator, as this is driven by TfL.
The operators across the national rail network do vary, principally, due to the more diverse nature of the markets they serve, for example:
- West Coast Partnership serves a longer distance, largely discretionary travel market, compared to the Essex Thameside franchise (c2c), which has historically been driven by commuter traffic.
- South Eastern serves commuter traffic into London and discretionary travel within Kent, as well as leisure travel to the coast. In contrast, West Midlands Trains serves very distinct markets – the ‘travel to work market’ centred around Birmingham, and longer distance services on the West Coast Mainline.
- The operators are also different sizes, from relatively small operations such as Chiltern, with pre-COVID-19 revenues of over £250 million, to Thameslink Southern and Great Northern franchise (GTR) that had revenues well in excess of £1.5 billion per annum.
The dynamics of how each operator functions is determined by these variations:
- The drivers of revenue are different (eg, commuter versus business versus leisure), and operators often serve a combination of different passengers and markets.
- There are local factors that influence passenger travel choices – the use of the rail network in Telford, for example, where there are viable alternatives to trains is very different to that of Grove Park, just outside Central London.
- TfL coordinates and manages multiple modes of transport within London, and as such can offer a holistic multi-modal service that can encourage the use of rail. This is not the case (yet) across the wider network, where modes are less coordinated.
- Costs are different and so are the drivers of those costs. Shorter distance metro services have a very limited staffing, compared to long distance services with premium seating, which have more staff and more expansive catering.
A framework is required to ensure that there is consistency in approach across all operators. It is rightly recognised by the Williams-Shapps Plan for Rail that a national model based on this concept will also have to account for these differing dynamics, because one size does not fit all.
Although a single solution cannot be blanket applied across all operations, Great British Railways will need a centralised menu of incentives, so that contracts are tailored to meet its objectives within the framework.
This is particularly important because of the regional structure proposed in the Plan for Rail – both at the concession level, but also for services within these concessions where different passenger markets are served.
A national framework
While differences exist within the operations, there is a need for a consistent overarching approach focused on Great British Railways' core principals and objectives, and reflecting the aspects of service delivery that it is responsible for.
Ultimately, the rail network must meet the needs of passengers. Delivering this as effectively and efficiently as possible will bring greater usage of the railways and meet government objectives, priorities, or initiatives, which may or may not always be financially positive.
From our experience of supporting authorities across the UK and internationally (including TfL) we believe that a consistent approach through a contractual framework is essential. This framework will inevitably develop iteratively as the railway evolves, which has been the case with our experience of TfL concessions.
Any framework will need to clarify elements that must be consistent throughout the network, such as a central approach to timetabling, clearly establishing what is being undertaken by Great British Railways, and what is required of the operator. This is particularly important in areas such as innovation, and reacting to changing customer needs, as input will likely be required from both the public and private sector.
A framework will enable the regions of Great British Railways to let the PSCs on a consistent basis for the operators that they are responsible for.
Tailored contracts
As a replacement for the rail franchise system, the PSCs will be the contractual basis for engaging with the private sector through the return of competitive procurements. As set out by the Plan for Rail, a toolkit of incentives that can be dialled up or down to meet the circumstances of the operation will be necessary. Levers afforded to the operator will be equally important so that they can maximise the areas where incentives are applied, which should again align with the requirements of the new 'guiding mind'.
With the proposed ‘splitting’ of the responsibility for revenue and cost risk at the operator level, it is important that incentives are in place to drive the operators towards the right behaviours required by Great British Railways. For example, ensuring primary focus on performance for commuter trains, and appropriate levels of customer service for longer distance premium travel (eg catering).
We believe that the alignment of incentives for each operator and the goals of the 'guiding mind' is critical to achieve the overall collaboration and coordination envisaged by the plan. However, Great British Railways will also have to deliver on its commitments, particularly when there is an impact on the operations.
Promoting rail travel and generating revenues
Getting people using public transport is more important now than ever as the country recovers from the impact of COVID-19 and consequent restrictions, at the same time as working towards the net-zero goals for transport as a whole. In the medium to longer term, improvements in technology and individuals experience of more flexible working will bring more choice for passengers on when and how they travel. These choices will include whether to travel or not (given forecast increases in remote working), the time of travel (with potentially staggered commuting times), and eventually the use of alternative modes, such as automated vehicles.
While Great British Railways will carry revenue risk, it is still important to ensure that the operator's management team is focused on passenger numbers. This will ensure that its focus is aligned with the interests of Great British Railways, which would centre on the overall profit and loss account for the industry. Such an incentive will need to be tailored to the operator and market served, and calibrated against other incentives. For example, as noted in the Williams-Shapps Plan for Rail, an increased revenue incentive, or revenue-sharing mechanism would likely be appropriate on longer distance train operators, where travel is highly discretionary and there is competition from other modes. A commuter-based operator would require less incentivisation, but some may still be beneficial, given the likely increased level of ‘discretionary commuting’.
The levers required to impact revenues will need to be given careful consideration, and be aligned with the role that is being undertaken by Great British Railways. Without these levers, the effectiveness of incentives will be reduced.
Controlling costs and driving innovation
Operators on cost risk will be incentivised to minimise costs and have less regard for the impact on revenues. So, metrics need to be incorporated to ensure that performance levels are delivered. From our experience in supporting TfL on their concession competitions, this is a well-trodden route. Thameslink Southern and Great Northern also offer similar customer experience and ticketless travel metrics. But there are still lessons to be learned.
Innovation will be vital to maximise value for the passenger and taxpayer, particularly given the relative expense in running such regimes.
The introduction of PSCs provide an opportunity to do something different. Not just take what has gone before, but truly integrate innovation in the future of the post-franchise national rail network. There are complexities, but time spent now will ensure satisfaction for passengers, increased use of rail, and value to the taxpayer.
For more information on rail, transport and infrastructure advisory, contact Jason Hurst or Andy Boak.
