Posted 19th October 2020 | 7 Comments

Monday essay: A new era?

THE Department for Transport has awarded a three year contract to Arriva to continue running CrossCountry until October 2023, and this new deal will not include significant commercial risk. Sim Harris asks if this is the way forward.

THE reform of the passenger railway was supposed to await the publication of Keith Williams’ review of the railway industry, which is now running almost a year late and is still discreetly stored inside a Whitehall cupoard. But the Covid-19 pandemic has forced the Department for Transport’s hand, so that the English franchises were replaced at a stroke by Emergency Measures Agreements in March this year.

The EMAs meant an end of risk taking, by the operators at least. The DfT now collects the revenue and pays the bills, and pays each operator a management fee.

The EMAs were set to last until 20 September when – just possibly – the franchise contracts could have been restored. But Covid-19 remained a stumbling-block, and as these words are written tighter controls are reappearing in parts of the country. Running public transport will continue to be a challenge, especially financially, for some time yet.

When the EMAs ran out, they were replaced in September by ERMAs – Emergency Recovery Measures Agreements – which pay the operators 25 per cent less and could last for up to 18 months. (The Scottish franchises have a similar arrangement, but it currently lasts only until the end of this year.)

The situation appeared to be stable, up to a point, but the franchise which Arriva had held to run CrossCountry ran out this month.

The DfT has chosen to take a different direction, by replacing the CrossCountry franchise with a new contract which will last for three years.

As with the ERMAs, commercial risk is virtually absent. The DfT will pay the bills and collect the revenue, and pay Arriva something which it is rather coyly describing as a ‘performance-linked’ fee. There are no further details.

This new deal is essentially a type of management contract, and these have been awarded a number of times since the early 2000s, usually when a conventional franchise toppled for one reason or another. Holders of such contracts have included GNER, Virgin West Coast and National Express East Coast.

But management contracts have usually been deployed to rescue a struggling franchise, and CrossCountry was not struggling any more than the other holders of ERMAs.

We cannot know if the new contract – however it is described – offers terms which are better or worse than Arriva would have received under an ERMA. Perhaps the terms are the same.

What is not clear is what we should be calling this new deal. Even the DfT does not seem sure. 

Its written statement to Parliament dated 16 October is called: ‘Direct award of the Cross Country rail franchise to Arriva until October 2023’, and in the statement transport secretary Grant Shapps says: ‘The new agreement means Arriva CrossCountry, which has run the service since 2007, will continue to operate the franchise for three more years … The contract will see the Government take on the revenue and cost risk associated with the franchise and pay Arriva a performance-linked fee to operate the service,  incentivising the company to deliver improvements to operational performance, passenger experience and service quality.’

So it is a ‘franchise’, although unlike all its predecessors dating back to 1996 (management contracts excepted) it includes virtually no commercial risk for the operator.

But here is rail minister Chris Heaton-Harris, as quoted in the parallel press release: ‘The deal announced today reaffirms our commitment to ending the complicated franchise system …’.

So it isn’t a franchise? Or, at least, not a ‘complicated’ franchise? Is this the future?

In short, we need the advice of Keith Williams more than ever. High time to unlock that cupboard.

The current print edition of Railnews, RN284, was published on 1 October. The new edition and some previous issues can be obtained by calling 01438 281200 from UK numbers or +44 1438 281200 internationally, and selecting Option 2.

Reader Comments:

Views expressed in submitted comments are that of the author, and not necessarily shared by Railnews.

  • david c smith, Bletchley

    Yes, road transport has marginal costs low, whilst fixed costs are high. The low marginal costs give rise to what the economists might call perverse outcomes

    One or two measures round the World to alleviate this are to charge road vehicles on a per- mile basis ( road metering) for road use, instead of through annual charges. In one case, the State provides third party insurance , paid for through extra on fuel tax.

  • Richard Wheeler, Chippenham

    While we continue to heavily subsidize road transport/freight industry, public transport will never compete against the marginal cost of a road journey. So people cannot make an effective choice because they cannot see the true cost of a decision.

    if you want proof just look at the fare rises each year but Exchequer happily for goes 10 billion pounds revenue to placate the trucking industry (i.e. we could have paid for HS2 (given compound loss of revenue). Car journeys are ridiculously cheap against Rail journeys, and rail has nothing like the death and injuries we accept from our roads

  • Rail User, OXFORD

    Thanks for your comments Ed. As I understand it, serving the short-run urban commuter market is unprofitable, whereas the longer-distance business from the home counties, where the spend is £5-£6k or more per user, can break even. SWT used to just about break even serving this market, and it is an important one nationally.

    At any rate, I wasn't necessarily suggesting that the commuter market was profitable, just that it was a significant slice of the revenue pie. We go back to trying to rely on it at our peril. Now is the time to reconfigure our whole product - train layout, fares, branding and marketing - at more discretionary travel. For instance will part-time 2/3 days/week commuters be prepared to travel further and will they want more comfortable trains? What will families want? What will business travellers want?

  • david c smith, Bletchley

    It seems there is general agreement that railways appear unprofitable on a conventional narrow profit / loss basis. Maybe we need to have "hidden" costs and benefits ( what the economists would call "externalities") represented in the transport market, in which rail would generally become more attractive to users and to investors.

  • Rail User, OXFORD

    The previous model, highly reliant on commuter revenue, is dead. Even before Covid, homeworking was eroding the commuter model. To survive, he industry will have to capture discretionary travel, ie leisure travel for shopping, day trips and holidays, and long-distance non-daily business travel. To do this the industry needs to completely rearrange its offer: instead of poor, cramped conditions for commuters even on long-distance trains, we need to be providing comfortable seating around tables aligned with windows, superfast free wifi and proper catering. We also need to tear up the ticketing system and start with reasonable, cheap single-leg fares. With fewer commuters do we even need peak pricing?? THe best way to do this, now it's all under public ownership anyway, is to scrap production-led regional franchising, and go back to a sectorised model: premium InterCity product supported by regional and local urban networks, with limited open access to keep InterCity on their toes.

    As John B points out however there is an upside: lower traffic levels means less need to invest in expensive infrastructure to cope with peak demand. It also means we can spend more time maintaining the track and thin out services to reduce congestion and increase reliability.

    [I think I pointed out to John that less infrastructure is needed if peaks are less intensive! The previous model was not 'highly reliant on commuter revenue'. It is a widely-held myth. Commuters cost money.--Ed.]

  • John B, London

    There will be a new era but not the one Mr Harris imagines. Covid is changing everything, in particular the way we work. The franchising arrangements, already defective when put in place in the 90s, are based on business models which are now as dated as fax machines and payphones. We can argue all we like on the terms of concession agreements or whatever the govt want to call them but the fundamental fact remains that the majority of TOCs are now unprofitable.

    Even when passengers return, it is unlikely to be in the same numbers as before. The 2010s rise in traffic will, I predict, be compared with the late 40s, early 50s surge in traffic; the Indian summer before Beeching. The unpalatable fact is that many lines will have to survive on far less traffic than they are used to and not all will make it. Talk of opening new lines should be put on hold, with CrossRail 2 being consigned to the dustbin completely.

    [I am not sure I was 'imagining' any new era, but rather trying to work out what the new Arriva contract actually is. And, if you will forgive me, nearly all the TOCs were always unprofitable, and this fact (unrecognised by the fatuous business model introduced by Major/Parkinson etc. in the 1990s) was always going to lead to the downfall of franchises sooner or later. If the peaks are flatter in the future that will be a good thing. Providing for the peaks is an expensive business.--Ed.]

  • david c smith, Bletchley

    In some respects, this system is "the worst of both worlds" -- government controlled private monopolies ( the sort of model beloved by prewar fascist dictators) -- what a prominent rail commentator calls "pretend privatisation".

    This prevents the exercise of enterprise , innovation and adaptation , and the accompanying investment, with "power to the people (rail customers and workers) " replaced by "power to Westminster / Whitehall ",

    Yes, on a local level,such as commuters into big conurbations, public control seems much more justified, as such operations are unavoidable natural monopolies, with local democratically chosen managements being feasible. But intercity national services are much more suited to a multi operator model where interoperator competition , as well as the competition from other modes gives power to the passenger.