How To Reform The Franchise Tendering System

[tbtc]

If you accept that we are going to have private companies running franchises on fixed terms (we've had the BR/ nationalisation argument plenty times; I don't need to have it again), what is the best way for the DfT/ Government to deal with tendering for new franchises?

AIUI the current arrangement is that you need to promise to match the minimum level of service (both in terms of number of trains/ quality)... if the DfT agree that your innovations (new services, new trains etc) are "deliverable" then you win as long as your bid is at least 10% higher than the next highest (?)

If you've only marginally outbid the second best then the two can be assessed on "quality" etc.

Is there really an alternative?

Could the Government insist on inflation linked "level" premiums during the life of a franchise? (so that if First think that they want to "back end load" the premiums then they'd have to arrange private loans with their bankers)

Are the lengths correct? I'd like to see longer franchises, to encourage long term investment, but then that runs the risk of being left with a "mediocre" operator unwilling to risk anything (like the frustration some have with ATW/ Northern for being "no growth" franchises)

How do you cut down on the alleged £10m-£15m cost of submitting a bid? (since private companies will want to recoup that in profits)

If people think that "quality" should matter more, then how do you assess this? Is there a trade off that the Government can actually measure? And shouldn't "quality" be part of the DfT's minimum specifications (ensuring that operator improvements cannot undercut this)?

Can you insist on all bids being open to the public? Or should it all be properly sealed bids?

(Rather than derail the Virgin/ First/ WCML thread further, I thought I'd put this in a separate thread)

 

[SkinnyDave]

I like the idea that First have brought where they are setting up a shared dividend for excess profits to come back to tax payer over and above premiums.
I don't think customers are represented enough and would like to regular customers of that franchise encouraged to take part more in consultations to advise what works well for them in current franchise and what they would like to see improved etc etc.

 

[tbtc]

I don't think customers are represented enough and would like to regular customers of that franchise encouraged to take part more in consultations to advise what works well for them in current franchise and what they would like to see improved etc etc.

I think that passenger involvement would be better in terms of stipulating the minimum levels of service/ quality etc that form the baseline for bids - since passengers would have a vested interest when selecting one bid against another, depending on whether it was their line that one bidder was planning to improve or not.

Having regular passengers voicing their concerns/ suggestions to the DfT would be a good way of deciding what the minimum specification should be, but (at the risk of sounding patronising) I'm not sure that passengers would be able to give much opinion over the benefits of back ended premiums etc.

 

[SkinnyDave]

I agree with the latter point, but I do feel that passengers/customers views on how their services are shaped are not taken into account during the process enough..

I also think the DFT and other government departments ie defence should have to put tenders to an independent panel before award.
Cheers

 

[Pen Mill]

Could the Government insist on inflation linked "level" premiums during the life of a franchise? (so that if First think that they want to "back end load" the premiums then they'd have to arrange private loans with their bankers)

This was the one obvious flaw that I saw in the result but even then the playing field was level although I think one party couldn't find it !

Fair dos to First for publishing their schedule of premiums though , I notice that VT's schedule is conspicuous by its absence.
I think the idea of an annual rate of increase (inflation is fine) is the way to go. Allowance should be made for adjustments in early years as First have detailed for capital expenditure.

As long as it's the same for all parties and fair to me and Joe Public then I'm happy.

Are the lengths correct? I'd like to see longer franchises, to encourage long term investment, but then that runs the risk of being left with a "mediocre" operator unwilling to risk anything (like the frustration some have with ATW/ Northern for being "no growth" franchises)

It also runs the risk of rattles being thrown out of prams even more violently

How do you cut down on the alleged £10m-£15m cost of submitting a bid? (since private companies will want to recoup that in profits)

I've worked in a 4 man team preparing haulage quotes of the order of £10-30 million turnover and we'd typically be on it for a few weeks.
Can you imagine the size of the project team to put this together, mindblowing!. However let's say 60 people varying from junior accounting & marketing staff on say £30kpa + employing costs upto middle management on £60k + and a couple of top liners on £250k +
Let's call it £3.5 million of annual people costs for say 3 months ?
£900k sound about right ?

Oops seem to have a bit of loose change out of £10 million

If anyone could enlighten me on any costs other than employee related (pensions/cars/NI) which would be incurred then it would help to clarify the alleged figures.
Even a bunch of consultants couldn't roll up a bill like that.

 

[PHILIPE]

That 's it. Based on how the beans add up for the counters and not on the quality or Track Record of the outgoing Company.

 

[Pen Mill]

That 's it. Based on how the beans add up for the counters and not on the quality or Track Record of the outgoing Company.

Put another way , if both of the final contestants have equal cost bases and contestant A bids £1 billion more than contestant B then contestant B makes a £1 billion more profit.

Nobody seems to have spotted that one.

 

[tbtc]

This was the one obvious flaw that I saw in the result but even then the playing field was level although I think one party couldn't find it !

I was thinking that it'd avoid any argument over "walking away" and would make it more transparent if the premium/subsidy was flatter - not a lot of other suggestions that I can make though

I've worked in a 4 man team preparing haulage quotes of the order of £10-30 million turnover and we'd typically be on it for a few weeks.
Can you imagine the size of the project team to put this together, mindblowing!. However let's say 60 people varying from junior accounting & marketing staff on say £30kpa + employing costs upto middle management on £60k + and a couple of top liners on £250k +
Let's call it £3.5 million of annual people costs for say 3 months ?
£900k sound about right ?

Oops seem to have a bit of loose change out of £10 million

If anyone could enlighten me on any costs other than employee related (pensions/cars/NI) which would be incurred then it would help to clarify the alleged figures.
Even a bunch of consultants couldn't roll up a bill like that.

I'd hope that the DfT would specify so much (and be able to provide evidence of income/ costs over previous years etc) that bidders wouldn't be starting from a blank sheet of paper, you'd be fairly secure over the parameters? It'd need some work, of course, and I've worked on small tenders for things in the past, but... over £10 million? surely that can be cheaper?
--- old post above --- --- new post below ---

Put another way , if both of the final contestants have equal cost bases and contestant A bids £1 billion more than contestant B then contestant B makes a £1 billion more profit.

Nobody seems to have spotted that one.

i.e. First's "large premiums" were supposed to Virgin's "large profits"?

I wonder why Branson is so eager to win the franchise back...

 

[Pen Mill]

i.e. First's "large premiums" were supposed to Virgin's "large profits"?

I wonder why Branson is so eager to win the franchise back...

I never said that all circumstantial evidence your honour !

 

[tbtc]

I never said that all circumstantial evidence your honour !

Sorry, that was me putting two and two together and getting a number bigger than Branson got

 

[dosxuk]

If we were reforming the franchise system, I'd run it similar to TfL, with a single, non-profit corporation contracting the usual suspects to run the services. Short term contracts, made on a service (or service group) basis rather than complete regions, with upgrades / stations / stock decisions all being made by the non-profit corp rather than distributed around lots of little private companies.

The operators of the services get paid a flat rate for their services, and have the opportunity to earn higher profits by meeting set targets for punctuality, provisions and customer satisfaction. Fare income goes directly to the non-profit corp.

Yes, it's a more complicated arrangement, but it's fairer and less risky for the operators, and fairer on the public purse which ends up having to pay for most of it anyway.

 

[WestCoast]

If we were reforming the franchise system, I'd run it similar to TfL, with a single, non-profit corporation contracting the usual suspects to run the services. Short term contracts, made on a service (or service group) basis rather than complete regions, with upgrades / stations / stock decisions all being made by the non-profit corp rather than distributed around lots of little private companies.

The operators of the services get paid a flat rate for their services, and have the opportunity to earn higher profits by meeting set targets for punctuality, provisions and customer satisfaction. Fare income goes directly to the non-profit corp.

Yes, it's a more complicated arrangement, but it's fairer and less risky for the operators, and fairer on the public purse which ends up having to pay for most of it anyway.

Basically that's gross tendering, where the operators are paid to run the service - the not for profit organisation or Government department does the rest. Most of the rail franchises on the continent are arranged on this basis, with the state/regional Government contracting the TOCs. I'd be tempted to adopt this arrangement on franchises like Northern and ATW.

 

[Pen Mill]

The operators of the services get paid a flat rate for their services, and have the opportunity to earn higher profits by meeting set targets for punctuality, provisions and customer satisfaction.


Fare income goes directly to the non-profit corp.

If the Operator gets paid a flat rate surely the Fare revenue goes into the public purse ?
Otherwise the operator gets all of the revenue plus a flat fee , sorry you've lost me all together.

Edit , are you saying the Non-profit Corp IS the Govt ?

 

[WestCoast]

If the Operator gets paid a flat rate surely the Fare revenue goes into the public purse ?
Otherwise the operator gets all of the revenue plus a flat fee , sorry you've lost me all together.

Gross tendering involves flat fee contracts, not sure what dosxuk is proposing. It does work well on the continent but only on regional rail. I don't know who would manage such a system in the UK, I don't see the DfT wanting to get hands on with running stations, setting all fares e.t.c....

I'm sure TfGM and other PTEs would embrace it.

 

[Pen Mill]

Gross tendering involves flat fee contracts, not sure what dosxuk is proposing. It does work well on the continent but only on regional rail. I don't know who would manage such a system in the UK, I don't see the DfT wanting to get hands on with running stations, setting all fares e.t.c....

I'm sure TfGM and other PTEs would embrace it.

In haulage , we used to call it cost plus. IE the owner (NR/Dft) pays all the costs and the operator gets a flat fee or percentage for his troubles (5 to 7% was typical).

I know at least one supermarket chain who works on that basis.

 

[WatcherZero]

I like the idea that First have brought where they are setting up a shared dividend for excess profits to come back to tax payer over and above premiums.
I don't think customers are represented enough and would like to regular customers of that franchise encouraged to take part more in consultations to advise what works well for them in current franchise and what they would like to see improved etc etc.

Thats just the replacement for the old cap and collar system where if revenue fell below what was 'promised' by the Government they would get subsidy and if revenue exceeded expectations they would see the Government taking the majority cut. Naturally this meant if you invested and boosted revenue you were penalised and if you just cruised you were rewarded.

The new system is a bit more flexible and works off GDP rather than gross revenue, the Government promises a certain level of economic growth, if GDP falls below that promised growth subsidy goes up, if GDP exceeds the 'promised' value the Government claws back the profits. As it doesnt work off gross revenue rather the national economic performance then theoretically any swings in revenue both positive or negative that exceed or fail to meet national economic performance are due to the companies performance and the company gets to keep (or recieve less subsidy despite falling revenue) as a result.

 

[Metroland]

Countries in mainland Europe have had a lot more success with reducing costs with franchising than the UK.

We need to recognise that there are several different types of railways. In Europe, most intercity trains are expected to run subsidy free. There is no reason why that cannot apply here. And freight is usually open access.

A public body usually owns the track and infrastructure, the extent of which is a political not a commercial question.

A typical arrangement is regional franchises there are run on the basis that an overall transport authority, sets the timetables and what service it wants to run. There are some lines that are fully vertically integrated.

Forms of franchising vary but the key difference is between ‘net’ and ‘gross’ cost contracts. An increasing number of transport authorities favour gross contracts, allowing them a greater degree of control, with the operator purely providing a service for an agreed price and all revenue going to the public body. This is, of course, quite different from the UK model which is based on net cost franchises with the operator having a greater degree of risk.

In Sweden Regional Transport Authorities have responsibilities for all modes of transport and are able to ensure a very high level of integration between bus and rail, with buses providing feeder services to rail station hubs. Regional rail is financed by the RTAs, whose parent regional councils are responsible for raising most of the finance through local and regional taxation. The state itself provides very little funding.

In Switzerland a contract (service level agreement) between the canton and the local railway is normally negotiated very four years with ‘net cost’ contracts awarded. In other words, the operator is given a baseline of funding and any extra revenue goes to the company, whilst it has to bear any loss.

In Germany the Rail Passenger Transport Authorities’ (PTAs) normally require bidders to provide rolling stock to precise specifications inthe tender document. Exceptions are Niedersachsen and parts of Hessen that have ‘rollingstock pools’ owned by the Rail PTAs in a similar way to the Swedish PTAs. Rail PTAs have chosen different solutions regarding fare structures, timetable design, vehicle design, etc.

Net agreements are the most common type but mixes of net and gross agreements also exist where the revenue risk is shared by the operator and the Rail PTA.

http://www.hitrans.org.uk/Documents/Regional_Rail_in_Europe.pdf

 

[ian959]

Reform the tendering system? Simple, get rid of the tendering system! Yes I know that governments "have" to do it to get the best price but in reality it rarely works that way.

Indeed in Australia there is more than circumstantial evidence to suggest government ends up paying a higher price through the tendering process than it would if it just "bought direct" from a supplier. I imagine it is not much different anywhere else since most governments seem to use the same system.

So instead of a tendering process, the responsible organisation drafts up the minimum conditions of supply for the relevant TOC area setting out minimum service requirements etc. It has a preferred list of suppliers (First, Arriva, Virgin, etc etc who have paid a modest annual fee to be on the preferred supplier list after establishing their bona fides). It says to the current #1 on the list do you want to run this TOC. If they say no, #1 on the list drops to bottom of the list and #2 is offered the TOC etc. If they say yes, they still drop to the bottom of the list and #2 on the list is now #1 and gets offered the next opportunity.

Once accepted, the preferred supplier operates the TOC on a cost plus basis with all fare revenue going to the responsible organisation.

Supply contracts are on a rolling one year basis retained on the basis of meeting key service indicators. If a supplier does a good enough job, they can have the TOC indefinitely. If a supplier does a crap job, they are out on their ear at the end of the next twelve month period (so that they have 12 months in which to redeem themselves). If they don't redeem themselves, bye bye TOC and bye bye preferred supplier status.

Trains would have one consistent banner under which they operate and one livery (British Rail obviously) with actual branding on trains having a note under the branding saying "operated by First National" or whatever like Scotland now does. No need to change station/train/uniform colours each time a TOC changes hands (thus saving more money!).

 

[WatcherZero]

R.e. European model,

Can backfire and you have slow ghost trains stopping at the smallest of stations ala France.

You also need to distinguish cost and performance, while McNulty claimed that our trains cost 30% more to operate (though falling) they also found our trains performance in quality and quantity of services far exceeded the continent, no just 3 services a day as norm over here, thats onlythe case at the rarest of locations, the Parliamentary Services. Theres twice the quantity of rail miles in France (19,846 mi vs UK 10,072 miles) but Network Rail carries 50% more passengers (1.4bn vs 1bn) and operate twice the number of services!

 

[WestCoast]

R.e. European model,

Can backfire and you have slow ghost trains stopping at the smallest of stations ala France.

You also need to distinguish cost and performance, while McNulty claimed that our trains cost 30% more to operate (though falling) they also found our trains performance in quality and quantity of services far exceeded the continent, no just 3 services a day as norm over here, thats onlythe case at the rarest of locations, the Parliamentary Services. Theres twice the quantity of rail miles in France (19,846 mi vs UK 10,072 miles) but Network Rail carries 50% more passengers (1.4bn vs 1bn) and operate twice the number of services!

'UK vs. Continent' is a bit too generic really, there's a massive difference between the service provision in, for example, France and Switzerland. I don't know how you could even lump the two in the same category! 3 services a day on a line is certainly not the norm in the countries with higher pop. densities - Netherlands, Belgium, Germany, Austria, Swtizerland e.t.c The Netherlands only has a total system length of 1,793 mi and yet annual ridership is 438 million!

France is nothing like the UK in terms of population density either. Apples with pears.

 

[TheWalrus]

They should scrap franchising and just let private firms buy the TOCs and run services like the airlines do, which are successful privatisations.

 

[northwichcat]

AIUI the current arrangement is that you need to promise to match the minimum level of service (both in terms of number of trains/ quality)

One thing that needs revising with urgency is parliamentary or very limited services inherited from BR which just remain the same every time e.g. one northbound Stockport-Stalybridge service every week. If there's demand for an more frequent or alternative service then introduce that, if not then withdraw the infrequent service.
--- old post above --- --- new post below ---

They should scrap franchising and just let private firms buy the TOCs and run services like the airlines do, which are successful privatisations.

So if the railways worked like air routes you'd finish up with British Railways running all the Intercity services to London and a few viable connecting services in to the London services. Then a mixture of big foreign companies and low cost operators like EasyTrain, Train2 and Ryantrain running the other services. Maybe Train Lingus would run boat trains to Holyhead and the ferries.

 

[deltic]

I've worked in a 4 man team preparing haulage quotes of the order of £10-30 million turnover and we'd typically be on it for a few weeks.
Can you imagine the size of the project team to put this together, mindblowing!. However let's say 60 people varying from junior accounting & marketing staff on say £30kpa + employing costs upto middle management on £60k + and a couple of top liners on £250k +
Let's call it £3.5 million of annual people costs for say 3 months ?
£900k sound about right ?

Oops seem to have a bit of loose change out of £10 million

If anyone could enlighten me on any costs other than employee related (pensions/cars/NI) which would be incurred then it would help to clarify the alleged figures.
Even a bunch of consultants couldn't roll up a bill like that.

Most of the staff working on a bid will be consultants - at present some companies are bidding for 2-3 franchises at the same time. Not unusual for teams of 20 consultants working flat out for 6 months at £1000 a day - average bid costs tend be around £3-4m.

 

[Metroland]

They should scrap franchising and just let private firms buy the TOCs and run services like the airlines do, which are successful privatisations.

It won't work, the intercity city lines and some of the commuter lines in the SE would remain, the rest would close. Airlines don't provide late night services in low population areas, they also don't have to cater for heavy flows into cities at certain times, and cope with the much quieter off peak! It's doubtful for congestion, environmental, social inclusion and town planning reasons this is good transport policy.

You could sell off just the intercity lines, but the private companies would just extract and much as they could in profits and not cross-subsidise. Like other utilities and the internet, you have to think of the railways as a network.

It's because of this trains are like airlines thinking we have the mess we do. Intercity rail can be, the rest just isn't.

The nearest you are ever going to get free markets on the railway is a completely standardised signalling across the whole of Europe, open up supply of equipment and recruitment of staff to the free market, and run completely open access with local councils providing subsidy on a net cost basis to socially necessary services like buses. Gone are the days that the railways can cross subsidise from freight and other very profitable flows, thanks to competition from other forms of transport, plus fragmentation at the time of privatisation.

 

[Tiny Tim]

I think the present model of franchise has been tweaked about as much as it can be. It doesn't seem, at least to me, to represent good value for money. I know that the costs and revenues since privatisation don't tell a clear story, but McNulty didn't get it all wrong. Any new type of franchise needs to be radically different, some of the suggestions made in this thread sound more credible than our present system. Straying slightly onto another thread, the ROSCOs are by far the most inflexible and restrictive part of the privatised railways and need to be drastically remodelled even more so than the franchise system.

 

[WatcherZero]

Would you like the French system where the local authorities own the rolling stock? To me that sounds kind of attractive as they would be motivated to provide quantity and to maintain them to a decent standard.

 

[Tiny Tim]

Would you like the French system where the local authorities own the rolling stock? To me that sounds kind of attractive as they would be motivated to provide quantity and to maintain them to a decent standard.

I know it's a negative point of view, but I'm pretty certain that almost anything would be better than the ROSCOs. Essentially, they make money by restricting the supply. They aren't likely to invest in new rolling stock without a firm commitment from a TOC. There's almost no risk involved and a guaranteed income. It's claimed that there isn't any idle rolling stock and that's efficient, but when does efficiency become a shortage?

 

[HSTEd]

If you insist on keeping this ridiculous system anywhere like it is now.

Standardise liveries a la London Buses (set colour with little vinyl logos on them) across franchises and/or sectors and then cut the franchises down to less than five years a time.

The only practical way to reduce the cost of bidding for franchises would be to shrink the franchises so the season ticket/other bonds could be shrunk down as well, and we all know that is a bad idea for other reasons.

The system is inherently going to favour small oligopolies, just like the "deregulated" and "regulated privatised" systems we have in buses and the utilities.

 

[cjmillsnun]

I like the idea that First have brought where they are setting up a shared dividend for excess profits to come back to tax payer over and above premiums.

I'd rather see those excess profits come back to tax payers as cheaper rail fares!

 

[HH]

The current franchising process isn't actually that broke IMO. The one major thing the DfT have gotten wrong is the element of risk, where they are just not disincentivising bidders from taking a chance on the late premiums by pushing revenue growth.

Of course they still over-specify, which is particularly heinous as they can be easily swung by political pressure groups, but any system will still be subject to this. There is no going back to the days where the railway ran largely free of government interference.