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Extension not competition as franchise replacement stalls

01 Sep 2001

INTRO: With Railtrack unable to commit to major schemes which have proved difficult to finalise, government policy has switched from letting new 20-year franchises through open competition to negotiating two-year extensions, writes Robert Preston

CONFIRMATION that the government had lost patience with the slow pace of franchise replacement came on July 16 this year when Secretary of State for Transport Stephen Byers announced that he wanted the Strategic Rail Authority 'to concentrate on improving services for passengers within existing franchises, or by negotiating short two-year extensions'. This new approach outlined in a draft policy statement will not apply to replacement franchises where SRA has already invited 'best and final offers', and Byers still expected early replacement of short-term franchises to go ahead 'in selected cases where the benefits cannot be obtained in other ways'.

The core of SRA's strategy had been to secure investment by train operators and Railtrack, drawing on both public and private finance, through 'long-term operating franchises committed to major enhancement'. Specifically, it was hoped to replace seven-year franchises with 20-year terms that would provide the security of tenure necessary for the private sector to fund major rolling stock and infrastructure investment programmes. Out of the 25 franchises let in 1996 and 1997, 17 had been awarded for a period of seven years.

Writing in his foreword to the authority's annual report for 2000-01, outgoing SRA Chairman Sir Alastair Morton said that delivery of this strategy 'slowed and fell into doubt' when it proved 'impossible' to achieve consensus with transport ministers and the Treasury over the selection of a preferred bidder for the replacement InterCity East Coast franchise. 'The principal issue is the scale of investment', said Sir Alastair, writing before Byers announced on July 18 that he had 'invited' SRA to negotiate a two-year extension with incumbent GNER as development work continued on the associated upgrade of the East Coast Main Line. 'The SRA believes that this could take up to two years', said Byers, who added 'we will return to this when the upgrade is further advanced'.

Virgin Rail Group had been shortlisted alongside GNER Holdings back in March 2000 for ICEC, which operates between London, Leeds, Newcastle and Edinburgh and is one of three existing franchises in the first tranche of SRA's replacement programme (see box). Heads of Terms were signed in August last year with incumbent M40 Trains for Chiltern Railways, where Go-Ahead Group also made the shortlist. In October SRA selected GOVIA as its 'preferred counterparty' for South Central, where incumbent Connex Rail had been the other shortlisted bidder.

For both of these franchises mainly serving the London commuter market, SRA is looking to secure major investment in return for a 20-year franchise term, with £370m to be spent at Chiltern and £1·5bn at South Central. But in both cases developing firm prices and timescales for upgrades on the Railtrack network has proved to be a protracted business. Bringing forward as a one-off payment £2·4m in subsidy due to be provided under the new and as yet unsigned franchise agreement, SRA agreed with M40 Trains in April this year an interim package of 'passenger benefits' for Chiltern in 2001-02, including the acquisition of seven DMU cars.

Although hoping to take over South Central from Connex on August 18 under the current terms, GOVIA does not expect to sign the new franchise agreement much before the end of 2002, as development of the 'Special Purpose Vehicle' of Bechtel, GOVIA and Railtrack that will fund and deliver infrastructure upgrades has proved no easy task. Keith Ludeman, Chief Executive, Rail, at Go-Ahead Group and leader of the GOVIA bid for South Central, says that the SPV started with 'a clean sheet of paper'. Commercial issues and the allocation of risk in particular have caused the most difficulty, and with a large project team now at work on developing the upgrades, there are 'many tens of millions of pounds at risk' until the new franchise agreement is signed. Go-Ahead has a 65% stake in GOVIA; the 35% share formerly owned by VIA GTI is now held by Keolis, itself owned by Paribas Affaires Industrielles (48·7%), SNCF Participations (43·4%) and Connex-Vivendi (7·8%).

SWT leads Tranche 2

Progress has been equally mixed with SRA's second tranche of replacement franchises, which in contrast to Tranche 1 will require the restructuring of existing operating networks. At South West Trains, a London commuter franchise that was the busiest in Britain with 4·16billion passenger-km in 2000-01, incumbent Stagecoach beat off GNER Holdings and a partnership of FirstGroup and Netherlands Railways to emerge as SRA's preferred counterparty in April this year. The £1·7bn investment package proposed by Stagecoach includes up to 1201 Siemens Desiro UK EMU cars (RG 6.01 p370), and platform lengthening throughout the suburban network. Due to be transferred to the new Wessex franchise, SWT's London - Exeter and Reading - Brighton diesel services will be worked by Stagecoach until February 2003 at the latest.

Four bidders were shortlisted in November 2000 for the new Trans Pennine Express franchise that will operate inter-regional services across northern England, linking Liverpool and Manchester with Leeds, Sheffield and Newcastle. Serco Rail later withdrew, leaving Connex and a consortium of VIA GTI (now Keolis) and FirstGroup in the running against Arriva, which through its subsidiary Arriva Trains Northern currently operates most of the future TPE routes. Having evaluated best and final offers, SRA made a recommendation to the government before the general election in June, but a decision is still awaited. As with ICEC, the principal issue has been the scale of investment.

Incumbent National Express and Group 4 pre-qualified in April 2000 for Central Trains, once part of British Rail's Regional Railways business and combining Birmingham commuter services with local routes across the Midlands, East Anglia and in Wales. In February this year SRA called a halt to negotiations with the bidders as it was unsatisfied with the value of the proposals submitted. There were also 'a number of policy issues' relating to franchise replacement to be resolved with West Midlands Passenger Transport Executive, which paid Central Trains £28·7m during 2000-01 for its operations within the West Midlands.

The last franchise in Tranche 2 is Thameslink, which will combine the existing Bedford - Brighton and Luton - Sutton routes operated under this name with new services to Cambridge, King's Lynn and Peterborough once the Thameslink 2000 project to upgrade this cross-London route is completed. In September last year a record total of eight bidders prequalified: Connex, FirstGroup/NS, GB Railways, GNER Holdings, GOVIA (which holds the current franchise), National Express, SJ International and Stagecoach. Although the project dates back to 1989, powers to undertake the Thameslink 2000 works have yet to be granted, and Railtrack's poor financial health has prompted a 'procurement review' with SRA. Implementation is not foreseen until 2007, and SRA expects the joint review to further delay replacement of the Thameslink franchise.

Redrawing the map

Tranche 3 comprises two new networks that have emerged from a recasting of the franchise map announced in June last year. Reflecting the creation of the National Assembly for Wales, which first met in May 1999 and has been closely involved with developing SRA's proposals, the Wales & Borders franchise will incorporate Cardiff Railway as well as routes currently operated by Central Trains, First North Western and Wales & West. Arriva, FirstGroup, National Express and Serco were shortlisted in February 2001.

W&W routes in the west of England and SWT's diesel services form the core of the future Wessex franchise, which may also involve the creation of separate local business units for Bristol and Cornwall & Plymouth. In March this year SRA announced that seven bidders had prequalified for Wessex. Established franchise holders Connex, FirstGroup, GB Railways, National Express and Stagecoach were joined by Group 4 and SBB Laing, a joint venture of Swiss Federal Railways and John Laing Investments Ltd which partners Chiltern Railways managers in M40 Trains. The current operators of inter-city services to the west of England, Virgin Trains and FirstGroup, were to submit proposals for adding the Cornwall & Plymouth Business Unit to their respective CrossCountry and Great Western franchises 'in competition with the Wessex propositions'.

National Express currently operates the Cardiff Railway and Wales & West franchises under an agreement running until April 30 2004, which provides for early termination should the new Wales & Borders and Wessex franchises be awarded before then. Under the same agreement, Great Northern commuter services operated by National Express out of London King's Cross as part of the West Anglia Great Northern franchise will be transferred to Thameslink. The West Anglia component is expected to be combined with the Great Eastern commuter services that also operate from London Liverpool Street.

Similar restructuring has been agreed at First North Western, whose local services in northwest England are to be combined with those currently operated by Arriva Trains Northern (the former Regional Railways North East) to form the new Northern franchise. As this will be operating services to the specification of PTEs in Greater Manchester, Merseyside, South Yorkshire, Tyne & Wear and West Yorkshire, its gestation is not likely to be rapid. SRA has been 'particularly concerned' to have consistent franchise agreements both within and without the PTE areas, where balancing local and national objectives while striving to make the best use of limited network capacity can prove difficult.

Even before the government announced its change in policy, Railtrack's inability to take on new infrastructure schemes once the financial impact of Hatfield became apparent had forced SRA to review its franchise replacement programme.

Plans for the seven-year franchises not included in the three tranches described above were still at an early stage, but SRA expected the inner-suburban Metro services of London commuter operator Silverlink (formerly North London Railways) to form part of a new 'Orbirail' franchise bringing together routes around the capital. One option for the West Coast Main Line commuter services between London and Birmingham marketed as Silverlink County was merger with a neighbouring franchise.

Responsibility for funding the ScotRail franchise passed to the Scottish Executive on April 1 2001. SE will determine future policy, with SRA conducting negotiations as its agent.

'The whole issue of the financing of Railtrack's activities and the major consequences for the industry of the sad events of Hatfield have necessitated a very careful review of the funding needs of the industry and the structures best suited to delivering the required investment.'

SRA Annual Report 2000-01

TABLE: Table I. Mixed progress with franchise replacement

Tranche 1

Chiltern Railways Selected

South Central Selected

InterCity East Coast Deferred

Tranche 2

South West Trains Selected

Trans Pennine Express Shortlisted

Central Trains Deferred

Thameslink First bids in

Tranche 3

Wales & Borders Shortlisted

Wessex Prequalified

Further down the list

SRA's franchise replacement programme has focused on those deemed to be in need of major investment in rolling stock and infrastructure, such as South Central and South West Trains where all slam-door MkI EMUs will have to be withdrawn by December 31 2004 to comply with government safety regulations. The replacement process has also involved some redrawing of the franchise map based on former British Rail business units, but the future of other seven-year franchises where the need for major investment is deemed to be less pressing still remains to be determined.

When SRA unveiled its new franchise map last June (RG 8.00 p459), it was expected that Central Trains routes in Lincolnshire would be combined with Anglia Railways to create a new Anglia/Humber grouping. This may reflect the fact that the Anglia franchise, comprising London - Norwich inter-city services and local routes in Norfolk, Suffolk and Cambridgeshire, is currently held by GB Railways which owns 80% of Hull Trains, Britain's first open access passenger operator providing London - Hull services on the East Coast Main Line. Similarly, London suburban services provided by Thames Trains could be combined with Chiltern Railways and other routes transferred to Wessex.

The Merseyrail Electrics franchise operating commuter services on a self-contained network serving Liverpool has been proposed for transfer to Merseyside Passenger Transport Executive, while Isle of Wight Council could become the franchising authority for Island Line. As consultants examine options for this franchise, which recorded 5·92million passenger-km on its 18·5route-km network in 2000-01, SRA has agreed a two-year extension of the existing franchise held by Stagecoach to September 2003.

CAPTION: Connex Rail has ordered four batches of Class 375 Electrostar EMUs from the former Adtranz UK plant at Derby; the first units have now entered service on the SouthEastern network. Later builds will be transferred to GOVIA when it takes over the South Central franchise

CAPTION: M40 Trains has signed Heads of Terms for a 20-year franchise to run Chiltern Railways, but Managing Director Adrian Shooter (centre) cannot finalise the £340m deal because of uncertainties over the cost of planned infrastructure works

CAPTION: South West Trains has introduced a new build of Class 170 Turbostars to boost capacity on its diesel routes, but control of these will pass to the new Wessex franchise under the SRA's planned redrawing of the franchise map

Photo: Brian Morrison

CAPTION: Cardiff Railway's local services in South Wales will be merged with part of neighbouring Wales &West to form the new Wales &Borders franchise; at present both are operated by National Express