Franchising – DfT tries again

CP5 - rolling stock prospects unclear

ICWC franchise leaves blood on the carpet at Number 10

Rail smartcard ticketing challenge

SEFT mired in smart card politics

CP5 – funding becoming unclear

In addition to the actual franchising programme, there was a mass of supporting documentation, amplifying some of the basic details and giving me scope for some added value (I hope) analysis.  The programme itself covers every franchise out to the re-letting of Chiltern in the next decade. 

And it has to be said that Peter Wilkinson, on loan to DfT from consultancy First Class Partnerships, has come up with an extremely elegant solution.  He has applied  the key principle in Richard Brown’s review, that there should be no more than three or four franchises being let simultaneously.  He also  allows just under two years from the OJEU Notice inviting expressions of interest to the replacement franchisee taking over, 

This move to steady state franchise replacement  from the previous ‘big bang’, has forced DfT to abandon a decade of competitive procurement dogmatism. It will now have to negotiate what it terms ‘Direct Award Contracts’, to extend 12 of the current 16 franchises. 

 These Direct Awards will be brand new franchise agreements. In effect DfT will be negotiating mini-replacement franchises with TOCs who have seen profits squeezed.  Eight   are receiving, or expect to receive, revenue support under ‘Cap & collar’. So, expect some tough negotiations ahead.

ICEC

With the schedule, Transport Secretary Patrick McLoughlin announced the ‘immediate start’ of the competition for the East Coast franchise, currently run by Directly Operated Railways. The ‘expectation’ is that  the new franchisee will be in place  by February 2015. 

 This sounds like a face-saving political move linked to the May 2015 election.  It could also backfire if, say, bidders don’t fancy DfT’s obsession with  IEP.

 To avoid the East and West Coast franchises being let at the same point in the economic cycle, West Coast  is scheduled for an extension to 2017. This means a clear run at ICEC for Virgin, the franchise it has always coveted. Sparks may fly!

DfT also has to develop from scratch  its new ‘management style contract’ for Thameslink, Southern and Great Northern which is due to be let in September 2014.  Even if the resources are available this seems an improbably short timescale. 

 And TSGN will be the prototype for Great Western, in 2016 where  DfT  is aiming  ‘to put to market’ a ‘competed management contract’.  In a gnomic comments DfT adds that closer to the start of the GW procurement it will also give consideration ‘to the capacity in the market’.  I take this as hinting that the traditional franchise owning groups might need to supplement their train operating teams with some programme management muscle.

What next?

Completing the material issued on March 26 was a Prior Information Notice.  This  sets out the government’s  policies and principles for future franchise replacement procurement.

Optimistic as ever, DfT says that it wants to encourage new entrants, who are invited to approach the Department to learn more about the franchising market and the procurement process. As an invitation that’s the equivalent of  ‘Never tried cage fighting before?  Come and have a go, it’s fun’!  

New rolling stock analysis

When one Control Period ends another starts and with it a new High Level Output Specification is published.  And where the inaugural  2007 HLOS had 40 references to ‘rolling stock’,  last year’s HLOS for CP5, which  starts in 11 months’ time, had but two.

 In 2007, of course, we had the promise of 1300 new vehicles in the current CP4.  By the time of the General Election in May 2010, only 540 of these  had been ordered and the 999 day order hiatus was in full swing.  I make the final total 753.

 For CP5 I have started a new rolling stock order table.  This is dominated by the three total train service provision ‘mega projects’ – IEP, Thameslink and Crossrail. These represent 2400 of the 2750 new vehicles quoted in Network Rail’s Strategic Business Plan for CP5.

 My list of prospective additional  new orders suggests that the SBP  may be slightly conservative.  But don’t forget that  acquisition of rolling stock will have to be negotiated with DfT as part of the Direct Award contracts mentioned above. 

 Meanwhile, the chilling message from the new table, is that Crossrail is now a ‘must win’ for Bombardier and Hitachi.  Apropos of which, at his meeting with the Commons Liaison Committee on 12 March, the Prime Minister said that he wanted to make sure ‘we continue with good train manufacturing in Derby’. So how does he do that? 

 ICWC made PM very cross – official

Yes, I know it’s time to move on, but I couldn’t resist including David Cameron’s views on the West Coast franchise debacle in the column. After all perceptions within Government of the efficiency or otherwise of the Department for Transport reflect for good or ill on attitudes to our industry. 

 And we got the Prime Minister’s views when he appeared before the  Commons Liaison Committee in  March. This Committee is made up of the chairs of all the Parliamentary  select committees.

 When it came to Transport Select Committee Chair Louise Ellman, she asked, in her disarming manner, about the ICWC cancellation affaire.  It turns out that when Sir Richard Branson wrote to the PM with his concerns, the PM asked  the Cabinet Secretary Sir Jeremy Heywood  to examine whether the procurement  ‘was being done properly’. 

 So, as Mr Cameron related to the Committee, Sir Jeremy  asked for and received  assurances about the process from DfT.  But ‘it turns out that the assurances he (Sir Jeremy) got were wrong and the assurances he gave me were wrong.  So am I happy with what happened? No I am absolutely not’. Mr Cameron added that Sir Jeremy is ‘very  apologetic and very angry and  feels let down by the Department for Transport’.

 Mind you,  given that DfT spent £2.7 million preparing to defend its decision in court, before financial  advisors discovered errors in the bid evaluation, you do wonder what more Sir Jeremy could have done.  According to Informed Sources he is now maintaining  a personal interest in DfT’s handling of Virgin’s  23 month franchise extension.

 Meanwhile, none of the various reviews of the cancellation asked the killer questions.  Perhaps readers can help with some answers.

1) Why did DfT’s Contract Awards Committee consider it necessary to impose a £40 million Subordinated Loan Facility on Virgin when none was required by the computer model while reducing the first Group SLF from £252 million to £190 million?

2 Who chaired that fateful Committee meeting?

3) And where are the minutes recording these decisions?

 South East smartcard challenge

SEFT, the South East Flexible Ticketing project  was announced in the Chancellor’s  2011 Autumn statement.  The £45 million scheme is aimed at introducing a range of ITSO smartcard-based ticketing products ‘more aligned with current requirements’.

 Flexible was the key word, the aim being to produce season tickets which could be used to manage peak overcrowding, for instance by charging less when the passenger travels outside the high peak.  A discounted shoulder peak Smartcard season would know the time it was tapped on the gate reader and react, in some undefined way, if you were trying to use it in the high peak.

SEFT  involves 12 TOCs around London.  Initially it will cover Rail-only ‘point to point’ season tickets (monthly and longer), season Tickets with Travelcards, Anytime and Off-peak singles and returns (including cross-London), Super Off-Peak day returns and  Anytime and Off-peak day Travelcards

These will be followed by  a number of new products still in development, including  flexible season tickets, carnets, what are termed ‘Demand managed seasons’ and Pay-As-You-Go.  Smart card technology and railway politics mean that none of this is easy. 

DfT planned a two stage phased roll out for SEFT  starting in March 2014.  Informed Sources suggest   Summer or Autumn 2014 are now more likely.

And with Stage 1  SEFT will  be limited to point-to-point monthly and longer season tickets.  They will be available only through internet sales  and will be restricted  to travel between gated stations.

Stage 2, originally scheduled for  November 2014, should be able to handle all the other standard  ticket types at all stations in the SEFT area.  Only then  will it be possible to buy tickets at stations and use the smartcards with platform validators. 

Oyster

Complicating matters is the need for SEFT, with its ITSO compliant smart cards, to complete journeys into and through  central London.  DfT has given TfL £65 million to update Oyster gates and validators to read ITSO compliant smart cards. This programme is known as ITSO on Prestige (IoP). 

When  I phoned the TfL press office, I had this conversation.

Press officer. ‘What do you want to know?’ Me. ‘I’m after an update on progress with IoP.’ Press officer.  ‘It’s on-going’. Me. ‘Do you have a date for completion?’ Press officer. ‘No date and we wouldn’t give it to you anyway’.

 But  Informed Sources report that IoP, like SEFT, is being phased.  Season tickets can be handled now, but the full panoply of ITSO tickets with LUL validity  will have to wait until November this year.  Given the slipping SEFT timetable this is of academic interest.

SEFT – a mountain to climb

It doesn’t help that aim of differential  pricing of peak travel is expected to have been abandoned when the promised Fares Review is published.  And it never really made  sense, unless new higher-priced ‘super peak’ fares were introduced . 

Also, people who have to work 9-5, or drop children off before going to work, are usually the lower paid. With an election coming you can imagine the political attraction of a scheme where the ‘bosses’ got a discount denied to the ‘workers’. 

ITSO

Next, there is the ITSO problem.  Set up by DfT as the Integrated Smart Ticketing Organisation is became ITSO Ltd, one of those fashionable Companies limited by guarantee. 

Intended to be self supporting, earning revenue from licence holders plus testing and certification of hardware and software, ITSO then suffered growing pains, requiring DfT to  appoint its own board members with multiple votes so that the Government had an automatic majority.  This arrangement ended in December 2012.

Meanwhile the crucial specification for interoperable smart cards has stagnated.  ITSO is not a physical  smartcard, but a specification for the software and architecture which will ensure that smartcards are interoperable.  The current specification dates from 2002.

 It didn’t help that because of its bus orientation, plus a lack of engagement by the railway industry that the rail ITSO Product Entities (IPE) which hold the ‘tickets’ were deemed unfit for purpose by ATOC and RSP when they eventually took an interest .  This has been rectified.

 Meanwhile those Train Operating Companies  implementing ITSO-compliant smart cards are doing so only because DfT requires it in  their Franchise Agreements. Some Informed Sources suggest that there is not a business case for implementation. 

Politics

SEFT will have to interface with three types of  user.  First, there are the train operators already implementing ITSO compliant smart cards.  These smartcards are not interoperable and are essentially still pilot schemes.

Then there are the ‘white label’ TOCs – the other operators  in the SEFT area  without smartcard systems.  Finally, there is TfL with Oyster.

ATOC is now managing SEFT – a logical move since ATOC owns Rail Settlement Plan which holds ticketing together. RSP is procuring a common ‘back office system’ for the ‘white label’ TOCs.  Each TOC will have its own partitioned system within this, but will use a common RSP ‘shell’ (the area within the smartcard on which products are loaded) and ‘products’ (tickets to you and me). 

This is an elegant solution, because the single product owner and shell ensures interoperability. But then there are Stagecoach and Go-Ahead  with TOCs already implementing ITSO.

 Following what sound like robust  negotiations DfT and the two operators have agreed the principle that when it comes to implementing SEFT they will work in parallel but separately. Meanwhile, smartcards are becoming yesterday’s technology.

CP5 – enhancement costs uncertain

In 11 months’ time we should be welcoming the dawn of a new regulatory Control Period – CP5. And what a glowing prospect lies before us.

In last year’s High Level Output Specification DfT proposed an ambitious programme of enhancements with the necessary funding in the  accompanying Statement of funds available,.  However, DfT’s financial expectations have changed since than, not least in franchising where ambitious premia died on 2 October with the ICWC competition.  So less money will be coming in. 

Equally, increased collaboration between the new  replacement franchises  and Network Rail  was considered the  key to reducing to whole industry costs.  With Direct Award contracts the temptation must be to save up such efficiency gains for when you bid the long term franchises. 

When I met ORR Chief Executive Richard Price in March he was clear that the affordability of the HLOS  against the SoFA will be much tighter this time round compared with the same exercise for CP4 back in 2008.

That’s not all. Richard pointed out that ‘a massive proportion’ of the enhancements programme for CP5 is ‘deeply uncertain’ when it comes to cost.  Out of 75 projects only 5 are at Network Rail’s GRIP 4 or above.

This is another of the railway’s insurmountable opportunities because  the uncertainty stems from the fact that the  enhancements proposed by DfT have  been defined largely in terms of outputs required. So, far from schemes being ‘shovel ready’ they are still being developed, costed and evaluated through the GRIP process. 

ORR is not overly  concerned by this situation since by the time work can start, industry will have had time  to value engineer schemes to give the most cost effective was of meeting DfT’s output  requirements. And where final costs vary from those assumed for the purpose of setting Network Rail’s income for CP5, ORR will allow for the difference by adjusting the Regulatory Asset Base in CP6.

Roger’s Blog

Last month’s e-Preview left me looking forward to the First Class Partnerships’ evening reception and the March Fourth Friday Club meeting.  Everyone who is anyone, and a few more besides, was at the FCP ‘do’ with old chums and Informed Sources wall to wall.  At the FFC meeting, Howard Collins was in cracking form giving us the inside story on the Tube 150 celebrations and  how that steam hauled train of vintage rolling stock happened.

Then, having finished Informed Sources in good time it was off to St Pancras for our Easter break to Turin (rain/cold), Genoa (blue skies/warm) and back via Zurich (cloudy).  On the final leg we left Zurich at 13.24 local time and were back home just after 22.30.  Clever things railways.

 April is dominated by Railtex.  I hope to be at the exhibition on the Wednesday, so if you see me tramping the aisles do stop me for a chat.  Also in April I’m waiting on a date to go and see Signalling Solutions for a briefing on their modular signalling pilot scheme which is now commissioned and running.

Meanwhile time to start the research for my regular introductory article to Modern Railways’ annual review of the rail consultancy business.  Ideas for topics from consultants or consultancies are welcome as always at roger@alycidon.com.

Roger