Greater Anglia in financial negotiations

[LLivery]

In the latest addition to the neverending saga that is rail franchise financial problems, Abellio is reportedly in talks with the DfT over the "CLE" funding formula.

Sorry if this has been mentioned before...

http://www.eadt.co.uk/news/dutch-taxpayers-subsidise-greater-anglia-1-5740230

Now one of the owners of the rail franchise, which was awarded two years ago, are holding urgent talks with the government in a bid to change the funding formula that has forced this subsidy.

They say that a complicated way of trying to reduce the peaks and troughs of revenue – the “Central London Employment” (CLE) mechanism – no longer works because the pattern of commuting has changed.

Greater Anglia is jointly owned by Abellio – part of Dutch State Railways – and Japanese investment company Mitsui.

The revelation that Abellio has had to pour £80m into the franchise has led to reports that British and Dutch transport ministers are heading for a showdown meeting to try to change the funding formula.

A spokesman for Abellio said the situation was totally different to the funding crisis that prompted Virgin Rail and Stagecoach to hand back the East Coast Main Line to government control during the summer.

In that case the companies overbid for the right to run trains between London and Scotland, the North East and Yorkshire. They were unable to operate profitably and handed back the franchise.

Abellio says that in Greater Anglia’s case, the funding formula has fallen out of sync with commuting patterns causing the financial hole to open up.

The spokesman said the financial discussions should not affect passengers at all and would have no effect on the roll-out of new trains, which are due to start arriving in the region by the end of the year.

He said: “The agreement for the East Anglia franchise includes a risk sharing measure known as the CLE mechanism. This was intended to provide protection for the operator and the Department for Transport against revenue fluctuations as a result of dramatic changes in the London economy.

“However, it is now widely accepted that CLE is a flawed mechanism that does not deliver on the intended aims. We are therefore working with the DfT to develop and implement more effective risk sharing models.”

The CLE formula has already been changed for rail franchises awarded since 2016 – and Abellio hopes the government will change it retrospectively for its franchise which is due to run until 2025.

Any reason why Abellio/NS has had to pump money in and not Mitsui?

 

[EC73LDN]

I believe Mitsui bought into the franchise after award (in a similar way to Stagecoach with VTWC), so probably agreed financial terms to this effect with Abellio/NS.

 

[47421]

Pretty sure both Abellio and Mitsui had to make good on their committed funding in 60/40 proportion, same as their shareholding proportion. Its in the notes to the accounts filed recently. If you put 'Abellio East Anglia Limited Companies House' into Google takes you to them. If I remember rightly the total committed funding is £271m, so at current rate GA ends up like VTEC in 2 years or so.

There is a pathetic note in the accounts along the lines of 'we messed up the revenue support clause in the Franchise Agreement and have asked Mr Grayling if he could let us off our obligations in the agreement we made after extensive negotiations and hundreds of thousands of pounds of legal costs'.

The complaint seems to be that the stats they agreed to use on London Employment show London Employment going up while commuting has gone down. But that is on them. Little chance of DfT letting them off I would have thought when the nice Dutch and Japanese shareholders are on the hook for another £200m+

 

[Kite159]

I seem to recall when the franchise was announced, some of the experts mentioned that it was very ambitious in being based on continuous growth, so it shouldn't be that surprising.

 

[Bald Rick]

Little chance of DfT letting them off I would have thought when the nice Dutch and Japanese shareholders are on the hook for another £200m+

If another franchise fails, that looks rather bad for the DfT, and in particular the Secretary of State who approved the contract to be let under those terms. I wonder who is going to take the decision on the deal proposed?

 

[Meerkat]

I don’t see it as a bad thing for the DfT - surely the occasional failure proves that it isn’t true that the bidders are rinsing the taxpayer?
Who lost the bid for GA? Before any deal is done with Abellio they should go back to the losers and ask for a new quote to complete the franchise, though I guess most of their prep goes in the bin as they have to accept Abellio’s traction plan.

 

[HH]

There is a pathetic note in the accounts along the lines of 'we messed up the revenue support clause in the Franchise Agreement and have asked Mr Grayling if he could let us off our obligations in the agreement we made after extensive negotiations and hundreds of thousands of pounds of legal costs'.

The complaint seems to be that the stats they agreed to use on London Employment show London Employment going up while commuting has gone down. But that is on them. Little chance of DfT letting them off I would have thought when the nice Dutch and Japanese shareholders are on the hook for another £200m+

Possibly they did over-egg the revenue, but it's an accepted wisdom from BR days that CLE and London Commuting are tied. But, from what I hear, that isn't the only reason they are short on revenue; like VTEC they had a lot of new revenue generated by marketing. "What marketing?" I hear you say. Quite.

 

[Bald Rick]

I don’t see it as a bad thing for the DfT - surely the occasional failure proves that it isn’t true that the bidders are rinsing the taxpayer?
Who lost the bid for GA? Before any deal is done with Abellio they should go back to the losers and ask for a new quote to complete the franchise, though I guess most of their prep goes in the bin as they have to accept Abellio’s traction plan.

The ‘loser’ holds all the cards in that situation. They would,just ‘quote’ the price they think DfT can afford.

 

[HH]

The ‘loser’ holds all the cards in that situation. They would,just ‘quote’ the price they think DfT can afford.

This is simplistic. DfT gets advice when negotiating these contracts and the proposers do not get the first number they come up with.

 

[Bald Rick]

This is simplistic. DfT gets advice when negotiating these contracts and the proposers do not get the first number they come up with.

Naturally.

But in a single tender (which is what this would be), with the buyer specifically asking the supplier to help them out of a spot of bother (franchisee has gone bust / walked out), then the supplier will just ‘quote’ what they think they can get away with. Of course there is then some negotiation, but the supplier can walk away without issue, the DfT can’t (at least not easily).

 

[HH]

Naturally.

But in a single tender (which is what this would be), with the buyer specifically asking the supplier to help them out of a spot of bother (franchisee has gone bust / walked out), then the supplier will just ‘quote’ what they think they can get away with. Of course there is then some negotiation, but the supplier can walk away without issue, the DfT can’t (at least not easily).

There is the OLR. It may not be easy, but it becomes easier when the alternative is paying £ms too much.

 

[Meerkat]

Sorry, wasn’t clear. The point was to ask the loser to beat the deal Abellio wanted to offer rather than It being Abellio or DOR

 

[Bald Rick]

Sorry, wasn’t clear. The point was to ask the loser to beat the deal Abellio wanted to offer rather than It being Abellio or DOR

Well yes, but with franchise bids costing upwards of £10m each (per bidder), an owning group is going to want to be sure it will get its ‘quote’ costs back if it doesn’t get an agreement.

 

[Helvellyn]

Maybe Stagecoach didn't like Abellio's sums - never fully explained why they withdrew from the proposed 30% stake they were going to take.

 

[HH]

Maybe Stagecoach didn't like Abellio's sums - never fully explained why they withdrew from the proposed 30% stake they were going to take.

Yes. Stagecoach have become pretty conservative bidders, so they very probably didn't like Abellio's sums.

 

[Class 170101]

Surprised any franchise is losing right now due to the timetable debacle, aren't NR paying hand over fist for late publication of timetables for engineering works?

 

[Bald Rick]

Surprised any franchise is losing right now due to the timetable debacle, aren't NR paying hand over fist for late publication of timetables for engineering works?

No, as the compensation in the track access contracts depends on when the engineering works are notified, not when the timetable is set. However there will be some compensation, but operators will have to demonstrate losses caused specifically by late notification (which they will struggle to do). And it is weekend traffic only, so for the main commuter operators it will be negligible in any event.

 

[F Great Eastern]

There's an accident waiting to happen in this franchise with the recent revelation that the operations team had no input in relation to the total fleet replacement and the number of trains ordered which was a fully commercial decision made by bid managers and the senior management team that is also made up of bid managers and little in the way of operational experience.

Many of us strongly believe that they have not ordered enough units in order to provide adequate capacity on the services from 2020 onwards as well as the fact there have been things which have come up late in the day versus the train lengths and the size of some of the platforms not being ideal, that appear to have been overlooked when the order was placed.

It's very much a case of watch this space in relation to this and may end up being a case study on why operational teams and bid managers and commercial management need to work hand in hand, rather than the GA approach which seems to be the commercial and bid managers plough their own furrow and make the promises and bold claims, without consulting those on the operational side, whilst the operational side are told to make whatever they have work regardless of the practicalities of it.

GA will have to almost certainly either keep some of the older stock on for several years longer than they first planned to deal with these issues whilst they procure additional rolling stock, or keep them on for the life of the franchise to address this issue and this you would think, would have serious implications on Abellio's sums and perhaps someone there has realised this.

The jury in my opinion has very much out on the deliverability of the Abellio bid from day one almost and it looks like Abellio may well be trying to look into ways to try and bring in extra revenue or reduce outgoings because of they may well have got their sums wrong.

 

[Class 170101]

No, as the compensation in the track access contracts depends on when the engineering works are notified, not when the timetable is set. However there will be some compensation, but operators will have to demonstrate losses caused specifically by late notification (which they will struggle to do). And it is weekend traffic only, so for the main commuter operators it will be negligible in any event.

T-12 obligations are not being met due to NR timetable fiasco though. I gather claims are being made and NR are paying handsomely apparently.

 

[Bald Rick]

T-12 obligations are not being met due to NR timetable fiasco though. I gather claims are being made and NR are paying handsomely apparently.

No doubt claims are being made, and some operators will be doing well out of it, but not many, and not that much (in the scheme of things). Presumably some of the claims relate to additional costs incurred by operators, so in theory a zero sum game in so far as overall TOC profitability is concerned.

 

[HH]

T-12 obligations are not being met due to NR timetable fiasco though. I gather claims are being made and NR are paying handsomely apparently.

No claims have been made yet and NR have paid nothing. I'd go and kick whoever is feeding you this dodgy information.

NR have been put on notice by owning groups, but as Bald Rick noted, they have to demonstrate losses - and NR will be looking at how they might have contributed to those losses and how they mitigated them.

 

[Class 170101]

No doubt claims are being made, and some operators will be doing well out of it, but not many, and not that much (in the scheme of things). Presumably some of the claims relate to additional costs incurred by operators, so in theory a zero sum game in so far as overall TOC profitability is concerned.

Also revenue loss due to late advertising of the revised train plan and loss of advance revenue.

 

[HH]

Also revenue loss due to late advertising of the revised train plan and loss of advance revenue.

Very minor as very few sales are made before T-6 and those that are, are at the highest discount.

 

[Class 170101]

No claims have been made yet and NR have paid nothing. I'd go and kick whoever is feeding you this dodgy information.

NR have been put on notice by owning groups, but as Bald Rick noted, they have to demonstrate losses - and NR will be looking at how they might have contributed to those losses and how they mitigated them.

Very surprised NR have not paid anything yet given how long its gone on for already.

 

[HH]

Very surprised NR have not paid anything yet given how long its gone on for already.

Well if the TOCs haven't made a claim there's nothing to pay now, is there?

 

[Bald Rick]

Also revenue loss due to late advertising of the revised train plan and loss of advance revenue.

That’s the same thing. Operators will have to demonstrate how their advance revenue is affected by having final timings a few weeks later than usual. And then, only on services affected by engineering works. For LSE operators however, weekend revenue is a relatively small part of total income, weekend advance revenue is a small fraction of that, and given that (contrary to popular opinion) the proportion of weekend services affected by engineering works is relatively small, the amount in question is almost negligible.

 

[Panupreset]

Possibly they did over-egg the revenue, but it's an accepted wisdom from BR days that CLE and London Commuting are tied. But, from what I hear, that isn't the only reason they are short on revenue; like VTEC they had a lot of new revenue generated by marketing. "What marketing?" I hear you say. Quite.

The world has moved on since BR days. You don't need to be in the office to work these days. Some people are able to work from home on some days, or they come to the office for half a day for meetings etc and do the rest of their work away from the office. It seems this is being reflected in revenue generated.

And the endless endless never ending weekend and late night engineering work, IMHO, have turned substantial numbers of leisure travellers away from the GEML. An MP from Essex recently described GA as 'a bus company that occasionally runs a train'.

 

[HH]

The world has moved on since BR days. You don't need to be in the office to work these days. Some people are able to work from home on some days, or they come to the office for half a day for meetings etc and do the rest of their work away from the office. It seems this is being reflected in revenue generated.

And the endless endless never ending weekend and late night engineering work, IMHO, have turned substantial numbers of leisure travellers away from the GEML. An MP from Essex recently described GA as 'a bus company that occasionally runs a train'.

Yes, I'd agree with both of those observations; however, GEML trains are still pretty busy - just not as busy as Abellio thought they'd be.

 

[306024]

Possibly they did over-egg the revenue, but it's an accepted wisdom from BR days that CLE and London Commuting are tied. But, from what I hear, that isn't the only reason they are short on revenue; like VTEC they had a lot of new revenue generated by marketing. "What marketing?" I hear you say. Quite.

They do sponsor the ITV weather for the Anglia region....

Nothing new in those that know how to operate the GE not being involved in the bid, it's happened every time.

It will also be interesting to compare the board of directors come Christmas with that of a year ago.

 

[F Great Eastern]

They do sponsor the ITV weather for the Anglia region....

Nothing new in those that know how to operate the GE not being involved in the bid, it's happened every time.

It will also be interesting to compare the board of directors come Christmas with that of a year ago.

I would suspect in a couple of years time there will be a better balance of operational and commercial staff in the future, never thought that the make-up of the GA management team has been the best since the last franchise win.