Will companies continue to bid for franchises?

So considering Northern has recently fallen into public hands, alongside LNER, I wonder whether companies will continue to bid for future franchises. Scotrail under Abellio is also having it's franchise stripped early, in 2022.

The tender for EMR ended up resulting in one bidder and was handed by default to Abellio, due to a refusal of Stagecoach to accept pension liabilities.

Franchises are becoming a riskier venture and more recent ones have struggled to make money. Arriva claims to have not profited from the duration of the Northern franchise, although I'm unsure if this is 100% true. Scotrail also lost around £10m over a 15 month period.

I wonder whether the fact bidders will be becoming fewer and further between is pushing the government to review the franchise system entirely. I highly doubt any company would bid for the Northern franchise as is.

As I can tell, the following reasons make franchises untenable:

• DfT cannot be relied on to deliver planned infrastructure improvements, needed for service improvements specified in franchise contract.
• Businesses refuse to take on pension liabilities.
• Franchise tenders requiring DOO will cause almost immediate problems with unions and workers.
• Subsidies are reduced significantly, or the DfT expects to see quite high re-payments. Higher passenger numbers have to be dealt with on the same operational budgets.

I wonder what others in the industry think, are there good reasons to bid on franchises still, or is the whole scheme is becoming untenable?

This is what the Williams review, due out imminently, will report on. Expect to see many recommendations on changing the system.

Scotrail isn’t having its franchise stripped though, it’s simply not having the extension to the franchise granted which was contingent on performance criteria being met.

It was always a 7 year franchise with the latter 3 years extension being conditional on the above being met.

Aictos said:

Scotrail isn’t having its franchise stripped though, it’s simply not having the extension to the franchise granted which was contingent on performance criteria being met.
It was always a 7 year franchise with the latter 3 years extension being conditional on the above being met.

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Exactly right. Intentionally or otherwise, the story has been 'spun' into something more akin to a punishment than 'no extra reward'.

Worth noting that the TransPennine Express franchise was losing money before the impact of any infrastructure-related issues.

The background trend is that passenger growth isn't what it was, and for a period almost all franchise bidders overestimated the revenue they would make.

I would also suggest that some groups are being a bit wary of bidding for franchises in view of the DfT habit of micro managing.
I'll bet Stagecoach are glad to be out of the heavy rail business. Pension fund problems might be a convenient excuse?

The franchises/concessions need to be smaller so they are diversifying their risk across the group, not betting the company on one franchise.

Part of the problem is First group putting in stupidly low bids, and then driving out other operators like Virgin that might do a better job. Will First group be around in a few years time ?

sikejsudjek said:

Part of the problem is First group putting in stupidly low bids, and then driving out other operators like Virgin that might do a better job. Will First group be around in a few years time ?

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Why is that a problem? Do you always accept the lowest bidder or do you consider whether it is deliverable? We are back to the DfT....
Anyway if the bonds are set up right that isn’t a problem - First fail, lose lots of money, pay the rebid costs, and we try the next company. In the meantime First’s shareholders have subsidised the railways.

BeHereNow said:

Worth noting that the TransPennine Express franchise was losing money before the impact of any infrastructure-related issues.

The background trend is that passenger growth isn't what it was, and for a period almost all franchise bidders overestimated the revenue they would make.

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That seems about right, although Transpennine wasn't until recently in a position to soak up any more passenger growth. Perhaps bidders are overestimating how many sardines you can cram in a 185.

I think there's a market for more growth, but issues on the network have pushed people back to other modes, or forced them to avoid journeys altogether. (which is my case)

Romsey said:

I would also suggest that some groups are being a bit wary of bidding for franchises in view of the DfT habit of micro managing.
I'll bet Stagecoach are glad to be out of the heavy rail business. Pension fund problems might be a convenient excuse?

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Yeah, I don't really understand the DfT's micromanagement, at the end of the day, isn't this the franchises role?

Stagecoach leaving is a pretty potent sign of the systems failings, I mean the model of Stagecoach is providing public transport on a budget (at least for the buses), which seems exactly like what the tories want.

In regards to the Williams Review, I think the answer should (but most likely won't) be that the network needs more investment. The government is awarding contracts to overly ambitious bids that offer the most repayments or least subsidy, they should realise these bids are unworkable, but either through incompetence or ignorance in order to reach certain budget constraints they reward them anyway.

Maybe the only light at the end of the tunnel if franchising continues as is, less bidders means less competition for contracts and therefore they can be more realistic when putting together their bid.

BeHereNow said:

Worth noting that the TransPennine Express franchise was losing money before the impact of any infrastructure-related issues.

The background trend is that passenger growth isn't what it was, and for a period almost all franchise bidders overestimated the revenue they would make.

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hardly surprising given the huge volumes of media publicity being given to Northern fail,Strikes and disruption not to mention a lot of customers finding the experience not up to the standards they expect.

The media can be very damaging the "Your going to get ripped off" campaign in 1999/2000 killed New years eve for good in the taxi trade there are 52 saturday nights a year busier than new year these days. So unless we get a more positive approach from the media people will assume that all train travel is expensive and poor value for money

Once it gets to the point that the car journey is taking too long and gets too frustrating people will look again at the rail alternative and usage may start to rise

The thing is in how many parts of the world is train operating profitable ? If we had gone down a different route to privatisation it might be in the UK but the current set up has proven that despite big increases in revenue in part due to higher traffic levels costs went up just as fast if not faster

Meerkat said:

The franchises/concessions need to be smaller so they are diversifying their risk across the group, not betting the company on one franchise.

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Which surely achieves nothing but driving costs up? More HR, more managers, more controllers, more train crew depots, more lawyers, etc etc.

The problem with bidding for franchises in the current environment is the quantification and signing off of risk.

The risk associated with delivering an SLC timetable that depends on NR infrastructure improvements is huge and although you can include these in IADs (Infrastructure Assumptions Document) or IRADs (Infrastructure and Rolling Stock Assumptions Document) that cover off a bidders risk to those events, (in addition to your usual Franchise SoSRAs - Secretary of State Risk Assumptions) you still have to go through months or years of negotiation with the DfT to "reset" your franchise payments for these "Change" events. If you don't have that cover in your franchise, you have to get that risk signed off beforehand and for a British PLC signing off a bid, that can be quite a task.

When you could cover risks off in a generous return on your franchise (in excess of 5%), you could take a punt to a certain extent but if you are only returning 2 or 3% on the franchise to your owning group, it isn't really a runner - you can get better returns on your capital in non-rail businesses. So every risk now gets a through going over.

The more complicated and prescribed Franchise requirements become, the worse it gets and the costs of bidding then sky rocket.

The Dft Rail budget is tight and so they want as minimum a payment (and maximum a premium) as possible and to pass as much risk off as they can. Pensions is but one example, albeit a very big one, which sits uneasily with operators who then have to quantify their risk to that kind of exposure.

That leads the DfT to very financially driven in determining who gets a Franchise but that is not the whole story as some franchises have been awarded on the basis of deliverability (given the bid assumptions, which may be undeliverable!) rather than cost. It is a very bad assumption to assume that one particular Group always bids low - it doesn't. Each competition carries it's own risks and bidders "positions" usually vary by a fair amount - you can be "low" in one or "high" in another. But you always answer the exam questions, which are sometimes not reality.

Franchising, as we know it, is dead and another model is coming. Whether this is more of a Regional or part Regional concession model that matches the NR boundaries (leading to a potential Regional or sub-Regional VI model in the future) remains to be seen. But it is likely, Scotland apart (where all the indications are that a public owned service provider will "win" any future competition), that the private sector will be involved somewhere in, at least, operating the trains.

Edders23 said:

hardly surprising given the huge volumes of media publicity being given to Northern fail,Strikes and disruption not to mention a lot of customers finding the experience not up to the standards they expect.

The media can be very damaging the "Your going to get ripped off" campaign in 1999/2000 killed New years eve for good in the taxi trade there are 52 saturday nights a year busier than new year these days. So unless we get a more positive approach from the media people will assume that all train travel is expensive and poor value for money

Once it gets to the point that the car journey is taking too long and gets too frustrating people will look again at the rail alternative and usage may start to rise

The thing is in how many parts of the world is train operating profitable ? If we had gone down a different route to privatisation it might be in the UK but the current set up has proven that despite big increases in revenue in part due to higher traffic levels costs went up just as fast if not faster

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This is very true. You only have to look at HS2 - media keep referencing cost and time saved travelling and nothing about capacity issues WCML and ECML currently suffer from that HS2 will ease. Lack of understanding in the media and putting across balance as two differing opinions rather than putting across the facts is an issue they're having industry wise.

ainsworth74 said:

Which surely achieves nothing but driving costs up? More HR, more managers, more controllers, more train crew depots, more lawyers, etc etc.

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Not necessarily I'd have thought - instead of two large franchises, the Firbelio-Arrivia group could have a larger number of small franchises, with the same staffing requirement across the total estate (I'd expect legal and HR to sit in the holding company, providing the services for the smaller franchise companies) but spreading the failure risk across a larger number of franchises. I'd expect there to be some extra admin costs, but balanced out by the reduced overall risk.

[Not that I necessarily think this is the way to go, but I think that particular objection can be worked around.]

ainsworth74 said:

Which surely achieves nothing but driving costs up? More HR, more managers, more controllers, more train crew depots, more lawyers, etc etc.

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Bigger isn’t always better. Often bigger just puts another level of bureaucracy on top, rather than an efficiency of scale. Why do you need more managers- you will have an area manager, they just stop having someone above them within the TOC. You need some local HR anyway - the big bidding groups would have their own group HR/legal etc to cover above that.
Whilst possibly being less “efficient”, having slightly more crew and a local depot (probably one in each small franchise anyway ie Heston in the NE) might give a better service than the overly streamlined cross covering big TOC, and certainly more responsive to local issues.
I would think big corporates would prefer to have a number of smaller franchises of varying types so they can spread their risk profile more.

Seems to me that it's a government masterplan to get the railways back into government hands without having to talk about re-nationalisation. Give the TOCs a network that's not fit for purpose and gives them little chance of success and then strip them of the franchise when enough complaints roll in.

LNER first, Northern second, WMT next, then XC. Even when they realised that getting rid of Virgin would be difficult based on performance, they dug deep to get rid on other technicalities

Any company would be mad to get involved in the railways these days

The_Train said:

Seems to me that it's a government masterplan to get the railways back into government hands without having to talk about re-nationalisation. Give the TOCs a network that's not fit for purpose and gives them little chance of success and then strip them of the franchise when enough complaints roll in.

LNER first, Northern second, WMT next, then XC. Even when they realised that getting rid of Virgin would be difficult based on performance, they dug deep to get rid on other technicalities

Any company would be mad to get involved in the railways these days

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I like how you think

Honestly and I have been saying this for a long time. The DfT is far too involved with what is mean’t be a private company run system. The williams review wont help that it will just turn the tides and give the DfT even more control than now which is not going to attract many bidders even for management contracts.

Yes it means less risk for the bidder (depending on the exact outcome of the review) but the bidder even if they win still will have less of a say than they do now. Our franchised railway has just become the governments toy at this point.

I'm pretty sure we are just bumping up against the reality that our railways just aren't very efficient to operate.

Aging infrastructure, outdated equipment and working practices (the fact signal boxes even exist etc), tiny loading gauge and lightweight trains.

I'm not sure how you really fix that other than Shinkansen and endless tram conversions.... but yeah

Clarence Yard said:

The problem with bidding for franchises in the current environment is the quantification and signing off of risk.

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at which point do the companies involved say the risk is too great and not bid?
in order to make the franchise system work you have to provide an incentive for profit,and that means also looking at/adopting new working practices as well as efficiency gains from new stock etc.

if you have micromanaging DFT, abrasive unions and so on, then a prospective suitor is likely to at least take a second look at the due diligence,if not walk away sooner.

HSTEd said:

I'm pretty sure we are just bumping up against the reality that our railways just aren't very efficient to operate.

Aging infrastructure, outdated equipment and working practices (the fact signal boxes even exist etc), tiny loading gauge and lightweight trains.

I'm not sure how you really fix that other than Shinkansen and endless tram conversions.... but yeah

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I'd agree with infrastructure/equipment being an issue, but that's only part of the story.
the new infrastructure being built is forever taking way too long and costing too much as well.This is mostly coming out of the public purse as well.

the only people doing well out of this are the box tickers,inspectors,auditors,lawyers and regulators.
The people who actually have to produce something for a living are getting a very raw deal due to being hamstrung by the above.

BeHereNow said:

Worth noting that the TransPennine Express franchise was losing money before the impact of any infrastructure-related issues.

The background trend is that passenger growth isn't what it was, and for a period almost all franchise bidders overestimated the revenue they would make.

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passenger growth????? you can't get many more passengers onto some XC services and some Northern services where the trains are packed and passengers get left behind. It's vicious circle, and passenger growth will not happen unless services have more capacity and are more reliable.

Kettledrum said:

passenger growth????? you can't get many more passengers onto some XC services and some Northern services where the trains are packed and passengers get left behind. It's vicious circle, and passenger growth will not happen unless services have more capacity and are more reliable.

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totally agree.
from a TOC perspective :
1) capacity has to improve..that means increased costs
2)reliability has to improve..that means more stock/staff
3)operating costs must be minimsed..that means less stock/staff if at all possible.

if passengers are getting left behind that frankly is a big stain on the route,it shows quite plainly there is not sufficient stock for capacity to improve.
Howeve I doubt the likes of bombardier/siemens and so on would be entirely pleased if TOC's said "we don't want any new trains, but we'll take 300 more turbostar centre cars off you"
DfT would probably throw a hissy-fit as well for not being compliant with latest regulations, but that would be the easiest fix I think.

-maybe something that should be considered when the new stock is ordered,is not necessarily clauses for follow-on units,but follow on carriages, or have the block fleet order, but reduce centre cars on some routes and store/redeploy them.

Romsey said:

I'll bet Stagecoach are glad to be out of the heavy rail business. Pension fund problems might be a convenient excuse?

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Stagecoach showed pretty canny timing in getting out of the London bus market and pretty canny timing in getting back into the London bus market.

Souter showed similarly good timing in buying into Alexander Dennis and selling again

Now it looks like Stagecoach have timed their exit from UK rail rather well - not being willing outbid First's optimistic premiums for SWR - not being willing to accept the financial risks that the DfT were trying to dump on them for future franchises - they could have bid silly for the sake of market share but were careful not to get sucked in (unlike First and others, who've bet the farm in the hope that their OTT projections would somehow work)

Put it this way, if Stagecoach scrap my local bus route in Yorkshire, I'll be worried about the future of my neighbourhood since they seem good at knowing when to leave a sinking ship!

hooverboy said:

totally agree.
from a TOC perspective :
1) capacity has to improve..that means increased costs
2)reliability has to improve..that means more stock/staff
3)operating costs must be minimsed..that means less stock/staff if at all possible.

if passengers are getting left behind that frankly is a big stain on the route,it shows quite plainly there is not sufficient stock for capacity to improve.
Howeve I doubt the likes of bombardier/siemens and so on would be entirely pleased if TOC's said "we don't want any new trains, but we'll take 300 more turbostar centre cars off you"
DfT would probably throw a hissy-fit as well for not being compliant with latest regulations, but that would be the easiest fix I think.

-maybe something that should be considered when the new stock is ordered,is not necessarily clauses for follow-on units, but follow on carriages, or have the block fleet order, but reduce centre cars on some routes and store/redeploy them.

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Spot on posts both of these!
The current models for bids are based on a growth in numbers, but rarely does the bid include an increase in the stock level sufficient to cope fully with the existing traffic let alone an increase. TPE Is a classic example where their routes prior to Nova schemes were already often full and standing, and I have watched people at York and Manchester unable to get on and waiting for the next service. Increasing the stock so that it now copes with existing demand does not encourage growth.

Abelio are not having their franchise extended due to performance, but at least their intent was worth some praise - the main routes have increased capacity (Edinburgh-Glasgow up from 6 car to 8) and regional intercity services up from 3 to 4 car, with the potential to add additional coaches to the 125s. Now, I am fully aware of the rough ride it's been to get to that point, and certainly not all issues are the operators fault, but the vision was right. Some franchises seem to be either not planning properly for increased passenger numbers and replacing like for like - even though the financial side is based on growth - or merely getting the number of seats to match the existing passengers. None of these things encourage growth.

So back to the DfT - yes, they should be looking for value for money from a bid, but they also need the expertise to understand if the model proposed, based on existing numbers and indeed future paths, would actually deliver sustainable growth. If the DfT cannot evaluate this as part of a bid, then the franchise model is doomed to failure. And as that seems to be the consensus, the finger of blame only really points one way.

BW

BigB said:

Spot on posts both of these!
The current models for bids are based on a growth in numbers, but rarely does the bid include an increase in the stock level sufficient to cope fully with the existing traffic let alone an increase. TPE Is a classic example where their routes prior to Nova schemes were already often full and standing, and I have watched people at York and Manchester unable to get on and waiting for the next service. Increasing the stock so that it now copes with existing demand does not encourage growth

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What my concern here is - as much as the new TPE Nova stock are lovely to travel on with more seats (MK5A in the morning and Class 802 in the evening). Does TPE have the option for extending the number of carriages on the new stock?

I'm concerned that in 18 months - 2 years time (when the new stock is bedded in) we'll be exactly in the same position we're in now. All the new stock will be full with significant amounts of standing people. So we will have gone through this pain of testing new trains, disruption due to staff training (with the cancellations etc) and ad-hoc swaps due to niggle issues with new stock only to be back in the same position in a short amount of time.

I'm sure without much wiggle room the stock could be increased to 6 carriages a piece easily enough.

One thing to consider is that business is all about risk and managing it. Businesses that don't take risks rarely make profits. So I think whilst the number of bidders will come down there will be bidders because if you have fewer bidders you can chance your arm and bid at much lower premiums/greater subsidy and at that point Stagecoach/virgin etc. might well throw their hats back in the ring because the potential profits will be higher

Who says there will continue to be franchises?

Clarence Yard said:

The problem with bidding for franchises in the current environment is the quantification and signing off of risk.

The risk associated with delivering an SLC timetable that depends on NR infrastructure improvements is huge and although you can include these in IADs (Infrastructure Assumptions Document) or IRADs (Infrastructure and Rolling Stock Assumptions Document) that cover off a bidders risk to those events, (in addition to your usual Franchise SoSRAs - Secretary of State Risk Assumptions) you still have to go through months or years of negotiation with the DfT to "reset" your franchise payments for these "Change" events. If you don't have that cover in your franchise, you have to get that risk signed off beforehand and for a British PLC signing off a bid, that can be quite a task.

When you could cover risks off in a generous return on your franchise (in excess of 5%), you could take a punt to a certain extent but if you are only returning 2 or 3% on the franchise to your owning group, it isn't really a runner - you can get better returns on your capital in non-rail businesses. So every risk now gets a through going over.

The more complicated and prescribed Franchise requirements become, the worse it gets and the costs of bidding then sky rocket.

The Dft Rail budget is tight and so they want as minimum a payment (and maximum a premium) as possible and to pass as much risk off as they can. Pensions is but one example, albeit a very big one, which sits uneasily with operators who then have to quantify their risk to that kind of exposure.

That leads the DfT to very financially driven in determining who gets a Franchise but that is not the whole story as some franchises have been awarded on the basis of deliverability (given the bid assumptions, which may be undeliverable!) rather than cost. It is a very bad assumption to assume that one particular Group always bids low - it doesn't. Each competition carries it's own risks and bidders "positions" usually vary by a fair amount - you can be "low" in one or "high" in another. But you always answer the exam questions, which are sometimes not reality.

Franchising, as we know it, is dead and another model is coming. Whether this is more of a Regional or part Regional concession model that matches the NR boundaries (leading to a potential Regional or sub-Regional VI model in the future) remains to be seen. But it is likely, Scotland apart (where all the indications are that a public owned service provider will "win" any future competition), that the private sector will be involved somewhere in, at least, operating the trains.

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A day and a bit later and nobody has responded to this post - which indicates to me that many are not really interested in the underlying reasons, or possibly don't understand them or their significance.

I think it has been clear to outside observers for some time that the DfT has been trying to export risk on almost anything for which it pays money. This is acceptable if it is clear to all concerned that if one doesn't want to carry any risk oneself then the premiums get very expensive. I recently heard this being explained using a rather nice example: a leased car has a clause in the contract that if the car breaks down a substitute will be offered until the original is repaired. This swap over will be affected within three hours of the failure within 20 miles of home or workplace. However consider the case when the driver will not accept any risk that he/she will be without a car for more than a few minutes wherever in the country they happen to be. What would be the size of the premium be if a car had to be supplied within half an hour to a god-forsaken road in the Brecon Beacons?

A classic example on the railways is the IEP contract: the DfT exported practically all the technical, commercial and operational risks to third parties although it was the instigator of the programme. Apart for paying for consultancy services during the 'project definition' phase it has put no money into the programme. Similarly for Cross-London Trains, the Class 700s for Thameslink, and the recent spat about pensions liabilities for periods which were not the responsibility of the putative operators.

Rail magazine recently mentioned in an editorial that one of the reasons for the high cost of HS2's infrastructure was the requirement that the earthworks would be stable within very tight tolerances for a period of thirty years or so. To meet this it would seem that a form of bridge structure within embankments would be needed to carry the tracks (a little like the way HS1 is carried across the marshy ground at Rainham) - so pushing the costs up. Whether this is so, I don't know - but it seems of a piece with the DfT's 'modus operandi'.

As you say, the current form of franchising is dead - together the DfT and the Treasury have killed it. To my way of thinking the Williams review must in the first instance identify and nail down this issue of who carries the technical, commercial, financial and operational risk of each activity: the DfT or the future devolved sub-national transport authorities, the infrastructure suppliers; the infrastructure operator(s), the ROSCOs or the TOCS.

One can fiddle with the organisational model as one will - but if the cost of risk is placed on the wrong body it will all go pear-shaped again.

Those are two very interesting posts - yours and the one by Clarence Yard that you quoted. I think you're right that people don't readily understand the underlying issues. I find the concept of "risk" difficult to grasp. Well, perhaps not the concept itself, but certainly some of the more subtle factors about which risks are with whom. My own feeling has been that the DfT had become too prescriptive in its tender documents and was expecting bidders to offer a wider range of improvements and enhancements than was realistic within the total infrastructure on which a franchise would operate. Your analysis goes further and suggests additional factors which have made franchises unrealistic. As a result of all that, the cost of bidding has increased, which in turn encourages bidders to offer large premiums (or ask for low subsidy), because no-one knows how much the other bidders may offer and they don't want to have wasted the time and effort they have spent.

A new regime in which bidders for whatever replaces franchises pay a lot less than now (or less than winners in the last few years have offered) may mean that the Treasury has to find a greater amount to keep the system running. That raises uncertainty about possible cutbacks.