INFORMED SOURCES e-Preview March 2013
Franchise replacement increasingly intractable
Frustrated GW franchise bidders somewhat miffed
More IEP misinformation from DfT
TOC profits suffer as premium payments rise
Electrification follies
East Coast – in for the duration.
Aftershocks from the cancellation of the Intercity West coast franchise continue to shake the industry. Last month’s column left us all waiting for Transport Secretary Patrick McLoughlin to publish his programme for restarting Essex Thameside (c2c), Thameslink (now known as Thameslink, Southern, Great Northern or TSGN) and Great Western, the three replacement franchises left in limbo.
Bang on time the programme appeared together with Richard Brown’s recommendations which had been redacted from his Report. And what we have is a holding operation.
DfT is negotiating new two year interim franchises for c2c, First Capital Connect and First Great Western with National Express and First Group. To buy time DfT will exercise its contractual right to extend the existing contracts by seven reporting periods. In parallel, Directly Operated Railways, will be undertaking the ‘minimum necessary preparations’ to take over services in case terms cannot be agreed.
Essex Thameside is the least demanding and a revised Invitation To Tender (ITT) for a 15-year franchise will be issued ‘over the summer’. Informed Sources Third Law applies, of course, but by September could be feasible.
Richard Brown identified TSGN as ‘likely to be most suitable for a management contract arrangement’. In the redacted section of his report he adds that the current ‘value proposition is not the right one for the Great Western franchise’.
Mr McLoughlin has now terminated the Great Western franchise competition and TSGN will be let as a ‘short’ seven year franchise which will be ‘more of a management-style contract’. A timetable for the new GW competition will be part of DfT’s overall long term franchising timetable to be announced ‘in the spring’.
Metashambles
This section of the March Informed Sources is a bit of a chart-fest with timelines for the three paused franchises. In the case of TSGN and GW there is also an overlay of key activities such as electrification and new train deliveries. This highlights the fact that both new contracts would start in the middle of major work programmes.
A second, even bigger, chart shows all franchise timelines up to the end of Control Period 5 in 2019.
Add in Richard Brown’s recommendation of a 24 month franchise letting programme with a maximum of three to four franchises being let simultaneously and it shows that franchising is in deep trouble.
And the more you look at the chart the more mismatches appear. Is the two year interim Thameslink franchise really going to take over Southern before the seven year management-type contract is let?
My forecast is that no full length replacement franchises are going to be re-let before the May 2015 General Election. Suppose the good news for the politicians is that it’s going to be someone else’s problem in just two year’s time.
Owning groups get stroppy
In his 31 January statement, Patrick McLoughlin told bidders for the paused franchises that they would not get their costs reimbursed. This went down badly with the bidders for the terminated Great Western competition.
Since the bidders for the cancelled Intercity West Coast franchise are getting their costs repaid, GW bidders had expected similar treatment following the termination. However, their howls of protests received short shrift from DfT which pointed to the relevant clause in the Invitation to Tender which was clear that bidders would be responsible for their costs, even in the event of termination.
So the owning groups went public with National Express, Chief Executive Dean Finch the most outspoken. Informed Sources I have spoken to reckon it is worth a legal challenge because serious money is involved.
Dean Finch put the cost of National Express’ abortive bid at £10million. Virgin’s ICWC replacement franchise bid cost £13 million. But only 10 years ago in the last round of franchising the rule of thumb was that a bid cost £3-5 million.
To put these costs in context I have produced a small table tracking the evolution of franchising, with the typical bidding costs for each iteration, starting with OPRAF back in 1995. It brought home to me just how much franchising has changed – and now we are promised yet another rethink.
DfT’s latest IEP claim
Just before starting this e-Preview I spent some time photo-copying all the articles on the Intercity Express Programme (IEP) that have appeared in Informed Sources since procurement started in 2007. It was reminder of the erroneous claims that have been made for the train from its inception.
And it seems it is still going on. In a recent Parliamentary written answer Transport Minister Simon Burns said that his Department estimates that the IEP trains ‘will see a reduction of approximately 38% in variable track access charges (VTAC) per seat-mile compared with existing high speed trains’ He added that these charges ‘can be used as a proxy for track wear costs’.
This figure was clearly bonkers. But, there is always the problem, illustrated in the Western ‘The man who shot liberty Valance’, where a newspaperman says, ‘When the legend becomes fact, print the legend’.
This column sticks to the facts, so using the official variable track access charge price list and provisional IEP figures, I worked out the costs per seat mile for the Great Western IEP electric and bi-mode units and the current Intercity 125 trains.
And it showed that while the nine car electric VTAC per seat mile was 5% cheaper than IC125, the five car bi-mode was actually 2% more expensive. Even comparing the nine car electric against the relatively heavy IC225 the saving on VTAC/seat mile is only 17%. So no 38% there.
This set me off on a more detailed analysis of train and fleet VTAC costs, rather than per seat mile. And after more spread-sheeting I concluded that where today First Great Western’s diagrammed Intercity fleet cost is £54 per mile, the future mixed fleet of IEP and IC125 will cost £58 per mile and VTAC per seat mile will be much the same as today.
Table highlights TOC financial challenges
Tucked away in an annexe at the end of the Transport Select Committee’s report on ‘Rail 2020’ is a useful little table of Train Operating Company profitability for the past three years. Given the current state of franchising I thought it worth reproducing in the column.
It also shows each TOC’s net subsidy for the relevant financial years. And the two sets of figures provide some interesting material for analysis.
Taking the franchised passenger industry as a whole the Table shows that, while there are profits to be made, the margins are generally slim. Over the three years, passenger operators have seen their collective profits halved from roughly £190 million to £90 million while losing £670 million in net subsidy.
What message does this give potential bidders when franchise replacement re-starts?
Electrification meets the real world
Electrification of the Gospel Oak-Barking route has to be an absolute no-brainer, especially when its strategic importance in allowing electric traction to service the new London Gateway container terminal is taken into account. So why isn’t happening?
Well, as Transport Minister Simon Burns pointed out just before Christmas, at approximately £90 million for 12 miles of railway electrification through suburban London the cost is ‘very high’. Since several readers have expressed astonishment at this figure, I have done some delving. And it does add up.
First the core section includes 3.8 miles on viaduct, requiring special foundations for the overhead line equipment support masts. A further 1.24 milers is in cutting with a low retaining wall, similarly complicating support structures.
On top of that, there are 15 low bridges requiring clearance work many of which are used to carry utilities such as water, gas and electricity across the railway. So it is going to be expensive. One informed estimate puts the cost at around £45 million.
Then you add the extras: a contingency allowance plus compensation to operators for disruption to services. Say another £30 million.
Despite the contingency allowance, we now have to add the Treasury’s optimism bias. This is nominally 60%.
So this tiny scheme is now looking like £120 million. But as the scheme progresses the contingency allowance should shrink so the £90 million quoted by the minister is probably about right.
Bath
But there are other factors threatening the cost of electrification. Another place where the railway runs on viaducts is Bath. And when the support masts and overhead line equipment go up they are clearly going to affect the view.
So Network Rail is having to dust off the details of how it met similar aesthetic objections when the East Coast Main Line was being electrified in the 1980s. Ove Arup & Partners had to designing special masts to support the wires over the Durham Viaducts and the Royal Border Bridge which had to be approved by the Royal Fine Arts Society. What with other changes, such as a less obtrusive shape was for mast-mounted booster transformers in areas of outstanding natural beauty, this added some £2 million in modern money to the cast of the project.
If anything the Bath viaducts are even more sensitive, so, and this is not an early April Fool, the possibility of running 750V dc third rail over them is being explored. I would expect this to be a precautionary move, allowing Network Rail to show that it has considered every mitigating measure – even the operationally and commercially unviable.
Faster
Meanwhile, the late decision to make the OHLE on the GHWML 140 mile/h capable could also add to the cost of the scheme, which is now over £1 billion. Apart from the masts having to be spaced closer together to accept the increased contact wire tension for 140mile/h current collection, changes of wire height would be constrained.
On the ECML there were locations where the wire height had to be at its maximum over a level crossing and then come down to go under a bridge or tunnel. But the faster you go, the longer the distance needed for the wire height to change to maintain acceptable contact forces.
And if the distance remains the same, the clearance height at the bridge will have to be increased. Redesign and raised clearances will all add to the cost.
East Coast looking to the longer term.
Shortly after she took over a Managing Director of East Coast in November 2009, the local press at York asked Karen Boswell what she would do when the franchise returned to the private sector in two years’ time? ‘I’m a firm believer that you get on with the job in hand, and that the future takes care of itself’ she replied.
Today, having been in the job for over three years, Karen and her team have decided that the future can’t wait and are preparing a five year strategic plan. At the same time they have published a new brochure, ‘East Coast – The essential short guide’.
Given the state of franchising, I think it is a pretty provocative publication. It contains 15 charts of East Coast performance and what makes it provocative in my book is the fact that many of the charts go back to the first GNER franchise in 1997-98.
The message in the cold numbers is quite clear. Under state run East Coast, performance is no worse and in most cases is considerably better than it was under the two periods of GNER ownership and the short-lived National Express franchise. In other words East Coast is pretty good at running an expanding passenger business. And when you see the franchising timelines in this month’s column it is pretty clear that East Coast won’t be re-let before the next election
While Karen wouldn’t be drawn on how much longer East Coast will be in charge, she has made clear to her board that it can no longer afford to be run on a short term basis. She told me a couple of weeks ago ‘I can’t sit here as the leader of this company and say I’m going to let it run on for another two years’
So now a five year strategic plan is being developed covering the Period 2014-2020 ‘Why five years’ I asked? ‘There are too many important things to consider in that time’, she replied.
These include future timetables and access rights in CP5 plus, of course rolling stock policy where a decision must be made on IC225 this year. The choice here is between the various IC225 mid-life upgrades, Pendolino or the option in the IEP contract.
Just before my interview with Karen DfT said in a written answer said that it is ‘currently analysing the strategic options for replacing or upgrading the electric Intercity 225 stock’ A decision on whether to exercise the IEP option is due to be taken later this year’.
Hmm, I thought the new DfT policy was that train operators are responsible for rolling stock procurement. DfT’s role is to check that the decision is value for money.
Roger’s blog
Conveniently, IEP brings me to my meeting with the National Audit Office which I mentioned in last month’s blog. I had written to the Comptroller & Auditor General (what a title!) enclosing a copy of my cost analysis. This resulted in an invitation for a session with NAO’s Director responsible for transport value for money studies. After the meeting I had offered the NAO a set of my Informed Sources coverage of IEP from its inception, hence the photocopying session mentioned earlier
Such meetings are separate to my journalistic activities and must remain confidential. However, I copied my letter to the Parliamentary Public Accounts Committee. Committee Chair Margaret Hodge replied saying that the issues I had raised were indeed of interest and she had asked the NAO to look further into them. She added that the NAO had found my discussion session ‘helpful’.
Meanwhile, some seriously important people from the industry have also been in to see the NAO on the subject of IEP.
Looking ahead, I’ve got a busy time this week. ATOC and the ROSCOs have produced what is termed a ‘long term passenger rolling stock strategy’, which I will start analysing after finishing this blog. This will set me up for a briefing meting at ATOC on Tuesday.
On Thursday I’ve got a session with South West Trains on, among other things, their future rolling stock plans. I suspect that this will be more interesting for readers than the ‘Strategy’, which can’t deal with practical things like Class numbers and cascades.
Next week there’s the Railway Engineers Forum meeting on electrification, which should be fun. Then it’s March where I have a couple of meetings already set up. ORR is going to brief me on its response to Network Rail’s Strategic Business Plan and at the end of the month I am seeing Eversholt for a routing update.
Now for the rolling stock strategy. After a series of sizeable reports stemming from the ICWC fiasco, the modest 24 pages looks like a gentle afternoon’s read.
Roger