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21 Sep 2021

Williams-Shapps: delivering the future railway - Non-franchised users of the network – how about freight, open access and devolved authorities?

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This article is the third in a series of five articles by the Stephenson Harwood rail team looking at the Williams-Shapps Plan for the rail industry and what implementation of that plan could look like.

It is easy for non-franchised users of the network to be forgotten when considering the rail industry, given that, since privatisation in the 1990s, most operators on the railway have been passenger operators operating under a franchise agreement with the Department for Transport (DfT) – or, more recently, Transport Scotland (TS) or Transport for Wales (TfW). This is still the case today, with seventeen franchise operators versus four open access operators, two Transport for London (TfL) concessions, one Merseytravel concession, one Nexus concession and four main freight operating companies operating in Great Britain.

Although the industry is on the brink of major changes, as the Williams-Shapps Plan for Rail (the Williams-Shapps Plan) is implemented, the focus of the Williams-Shapps Plan is clearly still on franchised passenger operations, with mere acknowledgments given to other users of the network. As readers will be aware from earlier pieces in this series, the intention is for the majority of passenger operators to operate under new contracts with Great British Rail (GBR) known as 'Passenger Service Contracts' (PSCs). The PSCs will follow the current tranches of directly-awarded National Rail Contracts (NRCs) which the DfT heralded as "the end of franchising" and which replace franchise agreements.

While it is perhaps understandable that the focus of the Williams-Shapps Plan is on franchise operators, other non-franchised users of the network should not be forgotten. In this piece, we explore the role of freight operators, open access operators and operators of contracts awarded by other devolved authorities. What is the approach to these non-franchised users in the Williams-Shapps Plan? What needs to be taken into account in setting up GBR to ensure that the interests of these users of the network are properly protected?

Freight

Freight has been a big success story of the pandemic. Initially, COVID-19 had a negative impact on freight, as movement around the world was heavily restricted, leading to shortages of food and medical supplies. The rail freight industry responded, playing a key role in ensuring that food and medical supplies kept moving. The freight industry as a whole then quickly recovered and has continued to grow since. This could be because we're consuming more goods, or just because more and more goods are ordered online and delivered directly to the end consumer rather than being purchased from high street shops, or a combination of both.

Rail freight has had a key role in this growth and will continue to do so: with climate change being a key challenge for the world, environmental factors will continue to drive rail freight usage. Each freight train removes up to 76 lorries from our roads and every tonne carried by rail instead of road reduces carbon dioxide emissions by 76%. Rail is the only form of transport currently capable of operating in a net zero way, so rail freight is crucial to meeting the ambitious decarbonisation targets that have been set. We discussed some of these points in our recent series of articles on decarbonisation of the industry for Rail Professional.

Readers will be aware that rail freight is a commercially driven service provided by privately-owned freight operating companies (FOCs). These companies have access agreements with Network Rail (NR) giving them rights to operate on NR's tracks in exchange for access charges. The Office of Rail and Road (the ORR) regulates these access agreements and associated charges, as well as granting the operating licences that FOCs are also required to hold. FOCs may receive some grants or subsidies from the DfT, particularly for projects relating to moving freight off the roads and onto the railways for environmental reasons. However, as FOCs do not have franchise agreements, they are not controlled by the DfT to the same level of control and instead have much more flexibility to, for example, set their own timetables and routes. Equally, however, there is no protection offered by the DfT: the FOC has to generate enough revenue to cover all of its costs and make a profit as there is no fallback to the DfT.

Freight – the Williams-Shapps Plan

There are quite a few references to freight in the Williams-Shapps Plan, but many of these are just a mention of freight customers alongside passengers when promises are made that apply to the railways as a whole. However, Commitment 45 is about freight more specifically: 'The economic and environmental benefits of rail freight will be supported by a new, customer-focused approach, modern track access rights and new safeguards.' The key changes proposed are the new rules-based access system, new safeguards and increased co-ordination between GBR and FOCs. The things that will not be changing are that freight will continue to be operated by the private sector and the existing access arrangements that FOCs have will continue to be honoured.

Access to the network is one of the essential requirements of FOC businesses. The Williams-Shapps Plan proposes a new "rules-based access system, underpinned by legislation, and other rail processes" for which GBR will be responsible. A new form of contract is envisaged, which will be more closely controlled by GBR. We are, however, perplexed by what this means and the implications for non-franchised users of the network. To suggest that the current access system is not rules-based is incorrect: the decision to grant access in the first place, including the role of NR's Sale of Access Rights Panel, the role of the ORR in approving access contracts, plus the contractual protections such as the Decision Criteria in the Network Code are all examples of rules.

What is needed, however, is consistency in decision-making: one arm of GBR should not be setting a passenger service specification which another arm of GBR is not able to deliver when the needs of other users of the network are factored in. This is something we mentioned in the first piece in this series. We agree that a simpler, more accountable system and the delivery of high quality freight access is key within this system and the ORR will have an important role to play in delivering an access regime that is fair for all users of the network. We also agree that there is a need for GBR to have a broader view, taking into account the network as a whole, although this aspiration does have the potential to somewhat diverge with the Williams-Shapps Plan's aspirations to involve local leaders in drawing up contracts. How the local and the national view should be balanced against each other is an important detail for FOCs which will no doubt emerge as the development of GBR progresses.

However you look at it though, there needs to be a legal relationship between GBR as track owner, maintainer and operator and users of the railway. We agree that it could be simpler in the new world, but the interests of non-franchised users of the network still need to be protected. If GBR fails to deliver the infrastructure which it is being paid access charges to deliver, then those operators whose businesses may be impacted as a result should properly be recompensed.

Safeguards for freight

Speaking of protecting freight operators, the Williams-Shapps Plan is clear that the ORR will continue to play a key role in the new safeguards proposed for freight, as well as other non-franchised users. This is set out in Commitment 17: 'Performance and efficiency will be independently scrutinised by the statutory regulator, the Office of Rail and Road'. The Williams-Shapps Plan envisages legislation that will give the ORR the powers to act as an appeals body for operators, ensuring that GBR applies its policies fairly and transparently, including on track access and charging.

It is interesting to note that the ORR already has a role as an appeals body, whether in relation to access and the terms of access to the network under the Railways Act 1993, or more generally in relation to particular decisions of an infrastructure manager under the Railways (Access, Management and Licensing of Railway Undertakings) Regulations 2016. So, again, the devil will be in the detail, although we wonder whether this new legislation will actually seek to constrain the ORR's existing powers.

We entirely agree that there is a need to have an arbiter in the industry: an independent body who ensures that everyone plays by the rules – including those set out in licences – and who can act as a decision maker between competing interests. This is particularly important for freight and open access operators who might otherwise be overlooked in a world where GBR manages the infrastructure and procures passenger services. A truly proactive regulator could also drive real benefits for the industry, although again we wonder whether the new legislation will seek to curtail some of the ORR's existing responsibilities.

Positively, there are a number of specific safeguards for freight mentioned in the Williams-Shapps Plan, which are intended to ensure freight operators receive fair access to the network and are considered in strategic decision making. They include a statutory duty on GBR to promote rail freight, a national freight co-ordination team within GBR, government guidance on its priorities for rail freight in each funding settlement and a government growth target for rail freight. There are many positives in the Williams-Shapps Plan about how freight will be protected and considered through the implementation of reform and the safeguards are intended to support the growth of the freight industry. It will be essential to ensure that in implementing the new structures and decision making processes contemplated by the Williams-Shapps Plan, the freight sector is properly recognised in practice.

Open access operators

While freight has been a success story of the pandemic, unfortunately the same cannot be said of open access operators, which have not received any support from the government during the past eighteen months. While passenger franchise operators were supported by the government through a series of emergency agreements to make sure services kept going, open access operators were forced to mothball their services during lockdowns, as passenger numbers dropped to 4% of pre-pandemic levels in April 2020.

By May 2021, passenger numbers had only returned to 65% of pre-pandemic levels and most franchise operators were still operating under the emergency contracts. The amount the government has paid to keep rail services going during the pandemic is now around £12 billion, but open access operators haven’t benefitted from any of this.

Open access operators do not have a contract with the government to run services, which explains why they have not benefitted from any government funding during the pandemic. They are reliant on their own revenue, but also don’t have the commitments to the government that franchise operators have. This gives open access operators more flexibility with regards to the services they run within the constraints of the network, as well as their ticket prices. As such, open access operators have been credited for driving up standards where they compete with franchise operators – and will often offer new journey opportunities not available in the franchise market.

Whilst clearly they are different types of business, there are also many similarities between freight and open access businesses in terms of revenue generation to cover costs and interfaces with other industry bodies. As franchise operators move to the transitional NRCs and eventually to PSCs, ensuring open access operators' interests are carefully considered when delivering the Williams-Shapps Plan will be key.

Open access operators – the Williams-Shapps Plan

We wrote above about how that there are not many substantive mentions of freight in the Williams-Shapps Plan. There are even fewer mentions of open access operators – only nine in total – and there is even less detail.

The main changes proposed for freight will also apply to open access operators – namely the new rules-based access system, new safeguards and increased GBR co-ordination. Existing open access operators will continue to have access to the tracks to provide their existing services and new open access services may be "explored" in future where there is spare capacity. This does not bode well for the future of open access services in the UK, especially new ones. With GBR granting access to the track, setting franchise service specifications and potentially holding revenue risk, open access services are unlikely to be high up the agenda. This is why it will be even more important for the open access community to be actively involved in implementing the future railway.

The role of the ORR will be vital here as well: whilst the Williams-Shapps Plan does not specifically mention safeguards for open access services as it does for freight, it is essential that GBR can be held to account and imperative that GBR facilitates fair and non-discriminatory access to the network for all of its users. This is a role best given to an independent regulator. To date, the ORR's "not primarily abstractive" test has been adopted when it decides whether to grant access for open access services. The ORR balances the potential impact of extra services, the potential advantages of increased competition and the generation of new revenue – such as encouraging lower fares and innovation – against the potential losses to the current franchise operators if revenue is simply abstracted from franchisee to open access operator. Open access operators are now required to pay more than they did in the past to access the network through an infrastructure cost charge, theoretically in exchange for a higher possibility that access rights will be granted. The jury remains out on whether this theory is actually the reality.

Once granted access by the ORR, open access operators then enter into access agreements with NR for use of the track and with NR/other operators for use of stations, under which they pay track and station access charges. These access arrangements are regulated by the ORR, like they are for freight. Open access operators are well-established and successful, they also have an important role in the industry to encourage competition and foster innovation, which benefits passengers: a point recognised by the Competition and Markets Authority when considering how to drive competition on the railways. They can't just be allowed to fall out of the system.

Safeguards for open access

Questions remain about how open access operators will fit into the new industry structure. How do open access operators ensure that they have the appropriate level of influence in an industry dominated by operators with contracts with GBR? GBR needs to be set up in a way that it facilitates access to the network for all users and allows open access operators to have a seat at the table when it comes to strategic decision making, so the "one industry" approach is not simply a "one franchise industry" approach. If – as has been suggested – all passenger ticket revenue is paid to GBR through the centralised ticketing retail system, how do open access operators ensure they are paid their fair share?

Under the current Ticketing and Settlement Agreement, the vast majority of tickets are sold through the Rail Delivery Group's industry ticketing systems. Revenue is then allocated between the operators entitled to it once the seller has taken their commission. There needs to continue to be some kind of settlement system to ensure that non-GBR operators, including open access operators, receive the share of revenue they are entitled to. There must also be a way of ensuring that GBR, as holder of franchise revenue risk, operates the industry systems on a fair and non-discriminatory basis, so that it does not put itself in a better position.

Devolved authorities

The Williams-Shapps Plan contains a number of references to 'devolved authorities', which covers the franchising or concessioning authorities that have devolved powers from the DfT to enter into contracts for the provision of railway passenger services by private operators in Great Britain. The starting point is of course Scotland and Wales with their own franchising authorities, TS and TfW respectively. As part of the industry system established by the Williams-Shapps Plan, it is likely to be democratically important to ensure that the roles and responsibilities of TS and TfW are equivalent to those of the DfT for England.

How might GBR be impacted by that? For example, TS and TfW are likely to have different priorities for GBR and the network in Scotland and Wales, respectively – and the legislative framework will need to ensure that those priorities are given equal weighting. Equally, revenue generated by services awarded by TS and TfW should be directed back to those bodies – although this is not so easy in relation to cross-border services.

Revenue retention will also be important for concessioning authorities for specific areas of the country, which tend to be large metropolitan areas, such as Merseytravel (for Merseyside), Nexus (for Tyne and Wear) and TfL (for London and the surrounding area). A principle of devolution is to allow a closer focus on passenger requirements in a certain area, which may be different to those of passengers in other parts of the country. This has generally been perceived as successful; in fact, there are references in the Williams-Shapps Plan to the success of the London Overground concession model, as well as similar structures in other European countries, so much so that the new PSC is likely to be based on this model. But will GBR truly be for all of Great Britain, including these devolved authorities? How will these concessioning authorities and the operators of the concessions fit within the new model proposed by the Williams-Shapps Plan? Much like a concern of open access operators, how will devolved authorities ensure they continue to receive their fair share and what protections will be available to ensure GBR does not prefer the franchise market? In particular, how will the bespoke London Oyster ticketing arrangements, including zonal fares, interface with the fares system of the future?

The Williams-Shapps Plan confirms that the existing devolved authorities will continue to exercise their current powers to award contracts, set fares on their services and continue to own the infrastructure, including track and stations, that they currently own. Commitment 12 of the Williams-Shapps Plan specifically relates to devolved railways: 'Devolved railways will be strengthened, with closer collaboration with Great British Railways improving services, consistency and co-ordination across the country.' On the face of it, strengthening devolved railways seems positive, but we need to remember that GBR's role of national coordinator will not always align with the perspective or geography of particular devolved railways, so the reality could be different.

For example, a focus on national consistency could mean a lot less freedom at the local level. A national website and app with consistent branding and passenger standards, such as on accessibility and compensation, could clash with existing local propositions. GBR is also planning to put in place working agreements and strategic partnerships with devolved authorities. So the balance between local and national is likely to continue to be a theme as we move into the world contemplated by the Williams-Shapps Plan.

Conclusion

One of the themes from our previous pieces is particularly relevant here: successful delivery of the Williams-Shapps Plan for all users of the network will really be in the detail. It is positive to see that there are a number of references to freight, open access and devolved authorities in the Williams-Shapps Plan. Whilst there is an apparent commitment to support these non-franchised users of the network, it will be incumbent on non-franchise users to ensure that as the plans for GBR are delivered, there are appropriate protections in place to protect their interests. Non-franchised users of the network must not be forgotten and it is important to ensure that GBR is not simply there to deliver a franchised railway.

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