INFORMED SOURCES e-Preview December 2006 Franchising dominates this month’s column, with plenty of tables and charts providing supporting evidence. Inevitably, there’s yet another consultation document from ORR to fillet, although the result is more like a chain-saw massacre, as theory and verbiage confuse a simple subject. Replacement franchises – there may be trouble ahead.
Franchise charivari
ORR – now its sustainable development
French invasion Sea Containers’ over-optimistic bid for the Inter-City East Coast franchise saw GNER run into cash flow problems in the foothills of the premium profile mountain. Next, First Group won Greater Western with a similar straight line growth profile. So we all wondered whether Stagecoach would do the same in an attempt to retain South Western. Meanwhile, the debate about the future of GNER goes on, generating the disconcerting situation where Gwyneth Dunwoody’s Transport Committee tells DfT Rail ‘no surrender’ while the Conservatives’ Transport Spokesman urges Transport Secretary Douglas Alexander to review the process of awarding new franchises ‘as a matter of urgency’. And after GNER, the Tories’ Exhibit B is the new South Western franchise where, they say, ‘it is clear that the financial provisions of the agreement can only be met if the company crams more and more passengers onto what are already heavily overcrowded trains, and at the same time increases unregulated fares sharply’. So before getting into the analysis I start with a brief summary of the franchise award process, based on a briefing from the people involved earlier in the year. The conclusion is that just because GNER was the acceptable face of franchising, it doesn’t mean to say that it should be let off a hook of its own making. SW Then we get into the detail of South Western, where DfT Rail has finally released the subsidy/premium profile and, yes, Stagecoach has gone for straight line growth, just like the others. And the contrast with the last three years of South West Trains , Informed Sources always tries to provide some historical context, suggests that Stagecoach was pretty desperate to keep its only franchise. An interesting point is that DfT Rail has split the ‘cap and collar’, in my view in revenge for Stagecoach outsmarting the SRA when the original franchise was extended. Revenue sharing starts from Year 1, but revenue support still starts in Year 5 as normal. Which leaves us with the question of whether Stagecoach Chief Executive Brian Souter has shot himself in the foot with a red-mist bid like GNER. . In December 2005, when Stagecoach failed to win either Thameslink/Great Northern or Greater Western he said that while the company had submitted ‘competitive bids’ for these franchises, the bidding process had ‘become frenzied and the prices being offered are toppy’. Nine months later, having won South Western with a similar premium to First Group’s successful bid for Greater Western, Brian claims 'We submitted a high-quality, innovative and value-for-money bid and the new franchise is an excellent result for passengers, taxpayers and our shareholders'. Yeah, right. To illuminate this claim, I have plotted the subsidy/premium profiles for GNER, First Group’s ‘toppy bids’ and Stagecoach’s South Western offer, all on the same graph. It’s an interesting bit of analysis and you will be able to draw your own conclusions. Re-mapping hots-up Now the franchise caravan moves on to the Midlands and Cross Country. And the news here is that Hong Kong MTR has pulled out of the already-slim short-list for West Midlands. Fortunately, I had interviewed MTR’s man in Europe at the end of September, so was up to speed on the company’s capabilities and aspirations. Even so the withdrawal from West Midlands came as a surprise. But remember that MTR was an unsuccessful bidder for South Western, and could compare its bid with the numbers in the winning Stagecoach offer. According to Informed Sources what motivated the pull-out was the balance of risk and reward, both in the bidding process and, should the bid be successful, in the franchise itself. A bid alone costs £3- £5 million and if you win you have to balance the resources needed to run the business against the likely return – which nowadays is pretty low. However, MTR, bidding in partnership with Laing, reckons it has the capability to deliver the transformation that Mayor Ken wants for his new London Rail Concession which will combines Silverlink Metro and the new East London Rail. GNER update Assuming that DfT Rail means what it says on no renegotiation it looks as though the deadline for GNER to hand in the keys is 1 May. This is when the performance bond, which is forfeited if the franchise is terminated, increases from £15.3 million to £28.7 million. Comments by Sea Containers’ CEO regarding the profitability of the franchise have prompted a piece of analysis which shows that GNER is really receiving a £102 million subsidy this year. What everyone forgets is that a TOC’s Track Access Charges pay only a proportion of the true cost of access. The rest of Network Rail’s income comes from direct grant. So, where TOCs are paying premia, it goes to offset this direct grant. Sustainable buzzwords Did you know that ORR’s remit includes sustainable development and environmental duties? Well I didn’t until ORR published a consultation document on the subject. And it is a lulu. I wrote my first article on energy efficiency and the railways 30 years ago, and more recently have been banging on about various aspects of the subject – such as rail losing its environmental edge. So, having been ahead of the current game I make no apology for taking a hatchet to ORR’s document. Did you know about The Five Guiding Principles stated within the UK governments Sustainable Development Strategy? Do you know how these relate to the Three Pillars of Sustainable Development? This months Informed Sources explains all, albeit with a degree of levity. But, there is a chance to be serious when ORR finally gets round to a number of specific examples of cost reflective charges providing ‘some incentives to better environmental decision-making’. Electric current for traction and variable usage charges are quoted, both of which will be familiar to e-Preview subscribers. However, these specifics also highlight ORR’s limited powers to affect the real world. For example it claims that current variable usage charges, partly linked to the weight of the vehicle, provide an incentive to consider energy efficient and more generally environmentally-favourable vehicle types. Hmm, not if this Table is anything to go by. ++++++++++++++++ Comparison of variable track access charges DMU Class Weight (tonnes) pence/mile Three car 158 113 33.78 Three car 170 136.6 42.57 Three car 222* 147.27 64.38 Three car 185 161.9 57.39 *125mile/h ++++++++++++++++++++++++ But, get this, ORR is now asking for a further analysis of possible benefits and known costs of heavier trains. And when this work is done further financial incentives could be introduced to encourage lighter vehicles. Not only that, additional work would be needed on the application of such new incentives to existing vehicles. Any consultants fancy taking a few tonnes out of a Pacer? Allez France Finally, there is a brief note on French Railways applying for freight paths between Dollonds Moor and the Midlands and North of England. Given SNCF Fret’s troubles at home, you have to admire their ambition. Roger’s Ramblings Not a lot of rambling this month because my father died at the end of October. Mind you, he was 96, living in his own home and still happily researching and writing articles on literary topics. In his heyday he was the Roger Ford of the gas industry, or, rather, I became the Eric Ford of the rail industry, and he kept on writing technical features on heating and ventilation and the like into his early 80s. So, hopefully, Informed Sources has some years to run. Meanwhile, I think I have caught up with all my e-Preview correspondents, but if not, please send the e-mail again and it will get my immediate attention. This month I have managed to visit Southern to get their perspective on the Free the Selhurst 13 campaign and have also met some fascinating people who do clever things with performance data – of which more in a future column. On Friday this week we have the Fourth Friday Club’s Golden Spanners Awards for train reliability. January of course, sees the Informed Sources annual fleet reliability review on the basis of which the gold and silver spanners are awarded. There’s a lot to ponder in this year’s results. Also for the January issue, I am writing up the work of Alstom TLS at Preston and next week I will be finding out the very latest information of HST2, now known as ICEP from DfT Rail’s Director Technical & Professional. Looking ahead to the January column I hope to be covering the Transport Committee’s report on passenger rail franchising. Chairman Gwyneth Dunwoody on full throttle is always good value, so I have posted the Committee’s report in Professional Stuff (hyperlink) in case you can’t wait. Roger