02/11 Rail franchising Q&As

The Department for Transport's consultation response on Reforming Rail Franchising was published on 19 January 2011 and has raised a number of questions in the rail industry. The Rail Team at Stephenson Harwood has produced answers to a dozen of the more popular questions that are being asked, such as flexibility over the scope of services and changes in passenger and other requirements. The new longer franchises and requirements for investment will no doubt create a challenge that the industry will rise to, given sufficient time for bidders to understand what is required and how best to deliver it.

We hope that you find the information below useful. If you have a question not covered in our list, please e-mail it to us.

Q&As

1

Will franchisees have greater flexibility over the services they run?

 

2

How will longer franchises allow for changes in passenger and other requirements?

 

 3

Will there be requirements to upgrade infrastructure during the franchise term?

 

4

What will replace the "cap and collar" support mechanism for franchises?

 

5

What happens to investments in assets with a longer life than the franchise term?

 

6

How long will it take to negotiate a new franchise?

 

7

How will overcrowding be dealt with?

 

8

How will service quality be measured?

 

9

What effect will the McNulty Rail Value for Money Study have on franchises?

 

10

Will there be a new profit sharing mechanism for franchises?

 

11

How can franchisees assess the longer term maintenance liabilities for stations?

 

12

What changes will there be to performance bonds?

 


1 Will franchisees have greater flexibility over the services they run?
  The DfT is proposing a balance between a minimum specification of services e.g. first and last train services, station stops and some off-peak requirements, and greater flexibility being given to franchisees to meet passenger and economic requirements. The specification should not dictate a detailed timetable and would appear to be closer to the "public service requirement" provisions used in the first round of franchises. There are likely to be local consultation requirements for certain changes.


2 How will longer franchises allow for changes in passenger and other requirements?
  A franchise review mechanism is likely to be introduced to allow certain elements to be re-set, such as risk and revenue assumptions. Review points could also provide scope for franchise reforms such as introducing new industry efficiency provisions as and when devised. A new independent arbitration process would be introduced (possibly using the ORR) to deal quickly with any disputes between the operator and the DfT.


3 Will there be requirements to upgrade infrastructure during the franchise term?
  The franchise length is being set to encourage investment in the franchise businesses. Some infrastructure upgrades will be part of a franchisee's bid and may affect the length of the franchise award. Control over stations (apart from major stations) and station lands is expected to transfer under a long lease to the main user of those stations, with protection for minor users. The main user will have full repairing obligations but more flexibility over retail lettings and may also have the redevelopment rights.


4 What will replace the "cap and collar" support mechanism for franchises?
  Some franchises will take full revenue risk with no support and others may be subject to a risk sharing mechanism related to factors such as GDP and Central London Employment. Any support will be provided on a franchise-by-franchise basis tailored to the potential risks and service and fare flexibility.


5 What happens to investments in assets with a longer life than the franchise term?
  When a franchisee invests in new assets for a franchise, the pay back period may be longer than the remaining term of the franchise. In such a case the franchise agreement is to have a mechanism for working out a residual value which will be paid to the outgoing franchisee at the end of the franchise. Mechanisms for assessing and agreeing residual value amounts are well understood within the PFI and PPP industry. It can be paid for in a number of ways. The DfT could purchase the asset and require the incoming franchisee to factor the cost into its premium/subsidy bid, or the new franchisee could pay for the asset on taking over the franchise as the asset should generate income or reduce costs for the new franchisee.


6 How long will it take to negotiate a new franchise?
  The Dft has set itself a target of around 14 months to procure its first new franchises. Once the Invitation to Tender is issued there will be about 11 months, including discussions with the DfT on the new form of franchise agreement, award of franchise and completing the handover period. For franchises with a greater investment element it is anticipated that the Dft will provide bidders with more time between the Invitation to Tender and selection of preferred bidder to work up plans and negotiate positions with the DfT.


7 How will overcrowding be dealt with?
  It is likely that all commuter franchises and potentially some others will have contractually binding requirements to keep overcrowding below agreed limits and PIXC measures are likely to be applied to all franchises with significant commuter flows, but without the DfT necessarily having to cover the cost of overcrowding measures. However, franchisees are likely to have more flexibility than in the past over service specification and therefore scope to allocate existing resources to better control overcrowding.


8 How will service quality be measured?
  Service quality for Intercity franchises will be incentivised by the opportunity to earn revenue although it is likely that some service levels such as onboard and station environment may be specified. Regional and commuter franchises will have a set of contractually binding service quality benchmarks focusing on stations, trains, customer service and information. Failure to meet the relevant quality levels may lead to a franchise being terminated.


9 What effect will the McNulty Rail Value for Money Study have on franchises?
  The DfT has indicated that it will take account of the conclusions of the study and may amend its franchising policy. It is expected that some changes will be made before the first franchises are let but others may be introduced by the start of CP 5. The review mechanism could be used to make further changes.


10 Will there be a new profit sharing mechanism for franchises?
  Profit sharing mechanisms will be introduced which are designed to allow the DfT to share in greater than expected profits (super profits), which generally occur due to events outside the franchisee's control. Above a certain limit (which may have been part of the bid) the DfT will receive a share of the additional profit. Such mechanisms are common in PFI and PPP contracts.


11 How can franchisees assess the longer term maintenance liabilities for stations?
  In some PFI and PPP contracts the private sector takes on the long term maintenance liability for existing buildings. A condition survey at the outset is usual and would form part of the assessment of maintenance requirements and costs. The risks associated with the maintenance of buildings (including listed building) are well understood within the property and facilities management industry and their techniques can be used as part of the tender risk assessment for franchise bidders.


12 What changes will there be to performance bonds?
  Bonds will generally be needed to cover the higher of franchise replacement costs (a minimum of £10-15m) and 6% of annual passenger revenue. However, specific franchises may require a different level in of support. Over a 15-22.5 year period bonds will also need the flexibility to cover increases in e.g. fares revenue. Franchisees and bonds providers already have experience of changing bond values in connection with ticketing. The DfT will also retain the right to require parent company guarantees in order to ensure that an owning group is responsible for its train operator.

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