Rail Franchises to be Replaced with Fixed Fee Contracts

[Tetchytyke]

I suspect that the reason is that it is cheaper and more flexible not to.

Perhaps, but I doubt it. The on-costs for staff- HR, etc- are pretty fixed really, regardless of who does the paper shuffling.

You can't now because TOCs are supposedly independent businesses.

If the DfT hires in a bogeyman it can play the blame game. Not so if it's personally responsible for operating services.

Bingo. ALMO arrangements exist purely so that no politician can ever be held accountable for their failures. See Grenfell Tower for more details.

It isn't "cheaper" or more "flexible", it's hiring in a scapegoat.

It's ironic that this fragmentation actually increased costs because TOCs could be played off against each other when negotiating wage rises.

 

[dctraindriver]

Admittedly a lot of that has been achieved via race to the bottom conditions for staff.

My concern for the future.

 

[Tetchytyke]

Admittedly a lot of that has been achieved via race to the bottom conditions for staff.

It can go either way. In the bus market it's driven wages down as it's relatively quick and cheap to train a bus driver, so there are few barriers to the employment market.

In the railways, it's actually driven wages up, because TOCs have found it's usually cheaper to poach than train up.

If you have penalty clauses in regarding staffing, I think you might actually see more inflation, not less. But it'd be interesting to see if DfT revisit their DOO obsession.

 

[Clarence Yard]

Talking about turnover is a red herring when it comes to profit. What you need to look at is investment and risk.

If you don't invest a single penny of your own money, and you don't have any revenue risk, then a profit of £40m is great news. It is as close as you'll ever get to free money.

DfT will be taking on revenue risk, the concession operators won't have any risk at all. So margins compared to turnover are meaningless.

Not if the cash flow goes through your books on it's way to the DfT. You still have to fund that aspect - if you are a british plc you don't take that all on from your existing balance sheet- only Governments can do something like that.

People think that profit on a TOC is just free money. Not if you are operating on thin margins - it can get very risky. The initial franchises were a licence to print money but the potential rewards have been a bit low recently.

If Government wants to keep margins very low, then it should really stop and think if it is all really worth it.

It may have already decided this and the management contracts are going to be just a stepping stone to gather together the necessary expertise (through regional NR VI organisations?) to do it themselves. They certainly haven't got that expertise at the moment!

 

[RT4038]

Bingo. ALMO arrangements exist purely so that no politician can ever be held accountable for their failures. See Grenfell Tower for more details.

Blimey. That's a big assumption. 'exist purely' - I think you are getting a little carried away in your quest for conspiracy theory.

 

[Tetchytyke]

People think that profit on a TOC is just free money. Not if you are operating on thin margins - it can get very risky.

We're talking about concessions, though, where the revenue risk remains with DfT. That's what the proposed change is all about.

There are very few risks to operating a concession. It's not risk-free, but it is about as close as a business will ever get. And without the requirement to front up capital investment or take on revenue risk, any profit really is free money.

Returns won't be amazing but it's a steady income stream.

Blimey. That's a big assumption. 'exist purely' - I think you are getting a little carried away in your quest for conspiracy theory.

Conspiracy theory? Hardly. ALMOs and QUANGOs were invented purely to deflect blame, that was expressly stated as a benefit to them!

We can euphemistically refer to this as "effectively managing reputational risk" if you'd prefer?

 

[DorkingMain]

One mans 'race to the bottom conditions for staff' is another mans 'finding the market level for staff conditions'

The market level being a small shade above the minimum wage for some operators, with terrible working conditions. Not exactly something to aspire to.

 

[SteveM70]

DfT has also published a spreadsheet of transport usage figures, daily since the start of Covid in February.
They show that the railway was down to 4-5% of normal during lockdown, and is now stuck at the 30% level.

No it isn’t. The number of passengers travelling for free without tickets has gone through the roof for journeys to and from non-barriered stations. I collect my son from the station most days and it’s clear that people just aren’t buying tickets because they know they won’t be checked

(I’m assuming the DfT numbers are based on ticket sales)

 

[DorkingMain]

But it'd be interesting to see if DfT revisit their DOO obsession.

I'm still of the belief a great part of that was to accelerate pitting unions and the public against each other.

 

[BostonGeorge]

Are we likely to see fairly significant timetable cuts? Surely this seems like the perfect opportunity to overhaul the fares system, too. I get on plenty of trains, both pre and post-COVID and it never ceases to amaze me how content the DfT is for trains to run at anywhere from 10-50% capacity and leave ticket prices at unaffordable levels. Genuinely affordable off-peak ticket prices are definitely something worth looking into. If we can get people back to the office a couple of days a week and stagger their start times, the train network really has to do its bit. Simply being content with running empty trains and giving themselves a pat on the back for doing so isn’t good enough at this moment.

 

[Meerkat]

Outsourcing- which is all a concession is, really- rarely saves money compared to doing it yourself. And given DfT micro-management, it seems daft to hire a dog then bark yourself.

Got any evidence for that? Logically it is pretty unlikely

There's no reason why TOC staff, including management- who generally TUPE between franchises anyway- couldn't just be on civil service contracts.

The last thing you want is to have higher levels on CS contracts! That’s why there are so many agencies such as Highways England these days. You won’t be able to pay enough and the best people will go abroad/out the industry, and you will be exposed to the ”gets paid more than the PM!!!” nonsense.

DfT will be taking on revenue risk, the concession operators won't have any risk at all. So margins compared to turnover are meaningless.

If there is no risk then the DfT has really screwed up the penalty clauses! As there is so much easy money to be made were there huge lists of bidders for the current concessions?

There are very few risks to operating a concession

How did the security contract for the Olympics go for G4S?

 

[LNW-GW Joint]

Are we likely to see fairly significant timetable cuts? Surely this seems like the perfect opportunity to overhaul the fares system, too. I get on plenty of trains, both pre and post-COVID and it never ceases to amaze me how content the DfT is for trains to run at anywhere from 10-50% capacity and leave ticket prices at unaffordable levels. Genuinely affordable off-peak ticket prices are definitely something worth looking into. If we can get people back to the office a couple of days a week and stagger their start times, the train network really has to do its bit. Simply being content with running empty trains and giving themselves a pat on the back for doing so isn’t good enough at this moment.

The Treasury view is that DfT can do what it wants on fares as long as the overall subsidy to rail does not rise (ie "revenue neutral").
That has always got in the way of "fares reform" which most people think of as lower fares.
Covid has now heightened that issue as the current railway subsidy has just gone up by the odd billion or so.
The key levels are season ticket prices and peak business fares.
Off-peak fares are generally "affordable" already (relatively speaking), and some Advance fares are stupidly cheap.

 

[Tetchytyke]

As there is so much easy money to be made were there huge lists of bidders for the current concessions?

There are two current concessions in England- London Overground and Merseyrail- and both were very competitive at tender.

If there is no risk then the DfT has really screwed up the penalty clauses!

There is no risk (if you achieve a base level of competence that you should be achieving anyway).

You mention G4S. The Olympics issue barely dented their bottom line, and they've certainly had no issue getting further contracts. Heck, negligently killing asylum seekers hasn't affected their bottom line!

Got any evidence for that? Logically it is pretty unlikely

Why is it "logically unlikely"?

Logically it's more likely. For a rail concession, most of the costs are pretty fixed, really. Track access costs, rolling stock leasing costs, staff wages, HR and regulatory on-costs, all pretty much fixed. £x we'll call it. Revenue is irrelevant as DfT are responsible for that.

So if you manage it yourself it costs you £x. If you pay a contractor A to do it, it costs you £x+profit, unless contractor A are working for free (which they're not). The only other ways outsourcers can make money is a) cut corners or b) stick rigidly to a contract, hope the contract has been procured badly, and rinse the contractee when any amendments are required.

 

[GRALISTAIR]

We can euphemistically refer to this as "effectively managing reputational risk" if you'd prefer?

I can go with that!

 

[Clarence Yard]

Revenue isn't irrelevant if you are collecting it on behalf of someone else. Do you know what financial guarantees come with such a contract? Do you know what funds you have to put up as an initial working balance?

These type of contracts are not usually ones where the bills are sent to the DfT to pay and the revenue automatically goes into a DfT account. You still have to fund your operations somehow even if the P&L risk goes to the DfT.

 

[Snow1964]

Whilst I agree with most of your post, this assertion isn't true; a strong majority of British adults support nationalising the railways, at 64% of respondents (only 19% opposed renationalisation).
Source: https://fullfact.org/economy/do-public-want-railways-renationalised/

The problem with these sort of percentages, is it depends on how the question is asked. If you precede it with “British Rail used to have a simple fares system and Railway was much simpler, and nationalisation would return to those good old days” then going to get completely different answer to if you precede question with “would you like to pay extra £100 in tax to pay for nationalisation of railways”

I suspect most people don’t care who the ultimate owner is, just want the functioning bit to work on time and not rip them off.

 

[The Ham]

Query the figures if you like but the point still stands. For a long time rail franchising made companies a lot of money: here's Northern making almost £40m two years running not so long ago.

Profit nears £40m for Northern Rail

Northern Rail has paid dividends of more than £28m to its two shareholders Abellio and Serco after the train operator's pre-tax profit neared the £40m mark.

www.insidermedia.com

"Northern, which operates services linking Manchester, Liverpool, Leeds and Newcastle and includes about 20 per cent of the UK's stations within its portfolio, has posted a pre-tax profit of £39.4m for the year to 4 January 2014. This is up from £38.5m in the previous year."

In recent years that income has turned to losses in many cases but the DfT didn't force anyone to bid.

I think we can all agree that, good times or bad, the system needs redesigning.

Conversely in more recent years Northern have seen their profits fall, with 2018/19 figures being £12.7 million:

Northern: Rail firm receives millions more in subsidies as profits fall

The RMT's claim that Northern received an extra £31m from the taxpayer is rejected by the government.

www.bbc.co.uk

However others, like Virgin East Coast made a significant payment to the government (which had to come from their business) when they stopped running the trains.

 

[WatcherZero]

Revenue isn't irrelevant if you are collecting it on behalf of someone else. Do you know what financial guarantees come with such a contract? Do you know what funds you have to put up as an initial working balance?

These type of contracts are not usually ones where the bills are sent to the DfT to pay and the revenue automatically goes into a DfT account. You still have to fund your operations somehow even if the P&L risk goes to the DfT.

Indeed if your fee is fixed at 2% of collected revenue then you are still vulnerable to wild swings in revenue taking your fee below what it costs you in non-toc resources to operate (financing costs, head office costs, concession specific staff and legal fees), in addition it doesnt give you much room to operate your own overheads as the salaries of every non-franchise employee has to be paid for from the same pot, so you still have to be as efficient as possible and your actual profit might be something like 0.5% of revenue.

 

[tbtc]

Query the figures if you like but the point still stands. For a long time rail franchising made companies a lot of money

How much profit did they make from a £10 return fare though?

That's what matters. Rolling up regional/national figures and doing so over a number of years is meaningless - if someone is "profiting" by pounds of my tenner then that's significant - it someone is "profiting" by pennies from my tenner then I'm not going to lost much sleep.

Is your amazing new railway going to make a difference that passengers would notice, or are you only doing it for reasons of political dogma. e.g. a 3% figure, often quoted on these threads, is less than a typical annual wage rise for staff, so it'd soon get swallowed up.

It's like the "Doctor" Gillian McKeith scam of showing you an entire family's food for a month stretched out over trestle tables to make it look gluttonous - round anything up and it'll look like a "big" number, but doesn't mean it's meaningful/ significant.

Completely agree with this. Greater Anglia another example, deciding to replace its entire fleet for the sake of it

Just for the sake of it?

Rather than, say, the complications of running eleven types of EMU, three types of DMU, loco hauled stock (some of which dated back to the 1960s)?

We should ban any reference to a "Fat Controller" role within a future industry structure.

4 years of watching Thomas just demonstates Sir Topham Hatt's ridiculous micromanagement, lack of strategic view, lack of standarisation or effeiciency, and autocratic management style. Not to mention the lack of diversity within his workforce.

It's amazing that he's not been sacked by now, and is held up as a hero by rail enthusiasts - there's a serious lack of investment on the Island - Sodor it makes the Isle of Wight look like a progressive modern train set!

 

[Meerkat]

There are two current concessions in England- London Overground and Merseyrail- and both were very competitive at tender.

excellent - a competitive tender should result in lower costs than begging a nationalised monopoly to do what you want, rather than what they want to supply.

You mention G4S. The Olympics issue barely dented their bottom line, and they've certainly had no issue getting further contracts. Heck, negligently killing asylum seekers hasn't affected their bottom line!

It went from an expected £10m profit to a £88m loss and a third drop in profits

So if you manage it yourself it costs you £x. If you pay a contractor A to do it, it costs you £x+profit, unless contractor A are working for free (which they're not). The only other ways outsourcers can make money is a) cut corners or b) stick rigidly to a contract, hope the contract has been procured badly, and rinse the contractee when any amendments are required.

Why is £x fixed, particular over time as you can select a cheaper supplier if your current one can’t reduce costs?

 

[StephenHunter]

Greater Anglia could have retained the 360s and 379s, but the rest of the fleet was frankly getting a bit old.

 

[DB]

Greater Anglia could have retained the 360s and 379s, but the rest of the fleet was frankly getting a bit old.

170s weren't that old.

 

[crablab]

There's no reason why TOC staff, including management- who generally TUPE between franchises anyway- couldn't just be on civil service contracts.

Outsourcing and contractors in government are very common (and getting morso) for various reasons.

Think about how much professionals in certain industries are paid, within industry, and then go and map that to the civil service pay scale.

 

[StephenHunter]

BR was outsourcing various works related to electrification for example.

 

[Tetchytyke]

Revenue isn't irrelevant if you are collecting it on behalf of someone else.

The railway operates a clearing-house method of dealing with revenue, so it is less relevant than in other types of contracting. But it is irrelevant in terms of contracting when you don't take the revenue risk.

Indeed if your fee is fixed at 2% of collected revenue then you are still vulnerable to wild swings in revenue taking your fee below what it costs you in non-toc resources to operate

A fixed percentage fee keeps the revenue risk with the operator, which the article explicitly states will not happen because of what's happened with Covid.

A cost-plus contract doesn't give the contractor the same risk. Nothing is risk-free, but cost-plus is as close as you'll ever get to it.

It went from an expected £10m profit to a £88m loss

If you believe that you'll believe anything.

Why is £x fixed, particular over time as you can select a cheaper supplier if your current one can’t reduce costs?

Track access charges are fixed, train leasing costs are largely fixed, and unless you reduce headcount staff costs are largely fixed.

You might save a bit of money buying cheaper coffee for the mess room coffee machine I suppose?

You see the same in contact centre outsourcing, outsourcers drive down wages as the main expense they control, which, in turn, drives down the calibre of staff. And then the contractee wonders why customer service ratings have gone down the toilet (yes, John Lewis, I'm looking at you).

I'm yet to see evidence of outsourcing genuinely saving money. I did see plenty of the opposite with IT support contracting though!

BR was outsourcing various works related to electrification for example.

Contracting in specialist expertise makes lots of sense and is good business.

I'm not sure I'd be rushing to call Arriva or GoVia a source of specialist expertise though!

suspect most people don’t care who the ultimate owner is, just want the functioning bit to work on time and not rip them off.

I'd completely agree with that.

It's nothing dogmatic for me. I just have never been able to see what the TOCs *do* for their money. I have never seen what they bring to the table that state operators didn't/don't, other than the extra cost of a middle man's cut.

 

[notadriver]

It can go either way. In the bus market it's driven wages down as it's relatively quick and cheap to train a bus driver, so there are few barriers to the employment market.

In the railways, it's actually driven wages up, because TOCs have found it's usually cheaper to poach than train up.

But yet Ask any bus driver and they will say their job is far harder than a train driver. Bus driver turnover is high - surely there is an incentive to keep good bus drivers ?

 

[LowLevel]

170s weren't that old.

There weren't really enough of them to be worth keeping as an anomaly. It was alright with the 153s and 156s too as they could all work together etc though they were permanently short handed. Having 8 x 3 car and 4 x 2 car 170s in a fleet of 755s would have been daft.

 

[Bald Rick]

BR was outsourcing various works related to electrification for example.

And signalling, and bridge works, and all sorts of things!

 

[Meerkat]

Track access charges are fixed, train leasing costs are largely fixed, and unless you reduce headcount staff costs are largely fixed.

So what was the difference between the various LO and Merseyrail bidders then?

 

[Tetchytyke]

So what was the difference between the various LO and Merseyrail bidders then?

Very little?