Passenger rail franchising in Great Britain
Passenger rail franchising in Great Britain is the system of contracting out the operation of the passenger services on the railways of Great Britain to private companies through a system of franchising.
The system was created in the 1990s as part of the privatisation of British Rail, the former state owned railway operator, and involves franchises being awarded by the government to train operating companies through a process of competitive tendering. Franchises usually last for a minimum of seven years and cover a defined geographic area or service type; by design, franchises are not awarded on an exclusive basis, and day-to-day competition with other franchises and open access operators is possible, albeit occurring on a limited number of services. Over the years, the system has evolved, most notably reducing the initial total of 25 franchises down to 17 through a series of mergers, but it still continues to be the main form of passenger rail service provision in terms of route miles. A limited number of urban services are privately run, but are awarded by the local authority.
The system only covers the railways of Great Britain ; the railways in Northern Ireland are owned and operated by the state-owned company NI Railways.
Process
Tendering, monitoring and termination
are decided by the UK Government's Department for Transport, who design the boundaries and terms of service, and award contracts to the train operating companies. Under the devolved administration arrangements, franchises for ScotRail and Caledonian Sleeper are awarded by Transport Scotland and the Wales & Borders franchise is awarded by Transport for Wales.Prior to formally tendering a specific franchise, the DfT publishes a Prior Information Notice outlining the basic details, and opens a consultation with relevant transport authorities, devolved administrations and the Transport Focus watchdog. At the end of this process, a formal Invitation To Tender setting out the detailed terms of the proposed franchise agreement is sent to the three to five prospective bidders who have been identified as pre-qualified. ITT's may include a range of variations for consideration by the prospective bidder, who may also submit variations themselves. The franchise is awarded to the bid which is deemed most viable, and which offers the best value and reliability. If relevant, bidders' past performance is also considered.
Performance is monitored throughout the contract period.
In contrast to earlier bail-outs, following the 2004 changes in approach to cost/revenue risk, unless there are exceptional circumstances, the DfT's policy toward failing franchises is not to rescue them with further financial assistance. Instead, DfT will hold them to the agreement and terminate the franchise early, and then run the franchise directly as an operator of last resort, pending a re-tendering. Agreements also contain a cross-default clause, which allows other franchises also held by the company or an affiliate to be terminated.
Financing
Rail franchise holders in Great Britain accept commercial risk, although there are clauses in newer franchises which offer some compensation for lower-than-expected revenue.The main costs incurred by franchisees are track access charges ; other significant costs come from staffing, leasing stations and rolling stock. Franchisees also pay for light maintenance of stock, with heavy work being done as part of the ROSCO lease. The main revenue stream is from fares, supplemented by the franchise subsidy in cases where there is a shortfall. In addition, franchisees are allowed to sub-let commercial units directly in leased stations.
Franchises and concessions
Current franchises
Concessions
A small number of urban railway systems are not franchised but are contracted out as a concession instead. Concession holders are paid a fee to run the service, which is usually tightly specified by the awarding authority. They do not take commercial risk, although there are usually penalties and rewards specified in the contract for large variations in performance.;Examples
| Concession | Operator | Start date | End date | Authority | Notes |
| TfL Rail | MTR Corporation | May 2015 | TfL | ||
| Docklands Light Railway | Keolis Amey | 7 December 2014 | TfL | ||
| London Overground | Arriva Rail London | 13 November 2016 | 2023 | TfL | |
| Manchester Metrolink | Keolis | 15 July 2017 | 14 July 2024 | TfGM | |
| Merseyrail | Serco-Abellio | 23 July 2003 | 2028 | Merseytravel | |
| Sheffield Supertram | Stagecoach | December 1997 | 2024 | SYPTE |
Open-access operators
In addition to franchises and concessions, an open-access operator is a train operating company that is not subject to franchising, but instead purchases individual slots on the mainline from a railway infrastructure company. These include Pre Metro Operations, Eurostar, Grand Central, Heathrow Express and Hull Trains.Former franchises
Prior to privatisation, the passenger services of British rail were organised into three units:- InterCity for long distance express services
- Network SouthEast for the commuter services from South East England into the various London termini
- Regional Railways for services in all other areas
| Franchise | Initial TOC | Start | Finish | Comment |
| Anglia Railways | GB Railways | 5 January 1997 | 31 March 2004 | Created from RR unit on privatisation. Franchise won by Anglia Railways Train Services Ltd. Parent company sold to First Group. Merged into the new Greater Anglia franchise |
| Central Trains | National Express | 2 March 1997 | 11 November 2007 | Created from RR unit on privatisation. Awarded to Central Trains Ltd. 2-year extension pending recasting. Further short term extension. Parts transferred to new East Midlands franchise along with Midland Main Line services, and parts to new West Midlands franchise. Parts transferred to existing CrossCountry, being recast as 'New CrossCountry' |
| CrossCountry | Virgin Rail Group | 5 January 1997 | 11 November 2007 | Created from InterCity unit on privatisation. Won by CrossCountry Trains Ltd, owned by Virgin Trains Group. Stagecoach acquired 49% of VRG. Renegotiated as a rolling year-on-year management contract. Continued until expiry after failure to renegotiate franchise. |
| Gatwick Express | National Express | 28 April 1996 | 21 June 2008 | Created from InterCity unit on privatisation. Merged into the South Central franchise. |
| Great Eastern | FirstBus | 5 January 1997 | 31 March 2004 | Created from InterCity unit on privatisation. From 1 April 2004: merged into the new Greater Anglia franchise |
| Great Western | Great Western Holdings | 4 February 1996 | 31 March 2006 | Created from InterCity unit on privatisation. Amalgamated with Thames Trains and the Wessex to form new Greater Western franchise |
| InterCity West Coast | Virgin Trains West Coast, part of Virgin Rail Group | 9 March 1997 | 8 December 2019 | Created at privatisation and won by Great West Trains Ltd, owned by Virgin. Stagecoach acquire 49% stake. Renegotiated as a management contract. Subsequently subject to various Direct Awards. Replaced by West Coast Partnership on 8 December 2019. |
| Island Line | Stagecoach | 13 October 1996 | 3 February 2007 | Created from NSE unit on privatisation. Merged with South West Trains franchise to form new South Western franchise. |
| London, Tilbury & Southend | Prism Rail | 26 May 1996 | 6 November 2014 | Created from NSE unit on privatisation. Won by c2c Rail Ltd, owned by Prism Rail. C2C sold to National Express. Rebranded. Two year extension. 2 year direct award. Extension option. Awarded to NXET Trains Ltd and rebranded as Essex Thameside. |
| Mersey Rail Electrics | MTL | 19 January 1997 | 20 July 2003 | Created from RR unit on privatisation. Won by Mersey Rail Electrics. Converted to Merseyrail concession managed by Merseyside Passenger Transport Executive |
| Midland Main Line | 28 April 1996 | 11 November 2007 | Created from InterCity unit on privatisation. Won by National Express. Transferred to new East Midlands franchise along with parts of Central Trains | |
| Network SouthCentral | 14 October 1996 | 24 July 2015 | Created from NSE unit on privatisation. Won by Connex. Franchise discontinued, | |
| North London Railways | National Express | 2 March 1997 | 11 November 2007 | Created from InterCity unit on privatisation. Franchise discontinued with country services transferred to new West Midlands franchise along with parts of Central Trains and urban services transferred to London Overground a concession. |
| North West Regional Railways | 2 March 1997 | 11 December 2004 | Created from RR unit on privatisation. Won by Great Western Holdings, owned by North Western Trains. Parts transferred to Wales & Borders franchise. Express services transferred to ne TransPennine Express. Remaining services transferred to new 'Northern' franchise and franchise discontinued. | |
| Regional Railways North East | 2 March 1997 | 11 December 2004 | Created from RR unit on privatisation. Won by Northern Spirit Ltd. Express services were transferred to new TransPennine Express. 12 : Remaining services transferred to new 'Northern' franchise. | |
| SouthEastern | Connex | 13 October 1996 | 31 March 2006 | Created from NSE unit on privatisation. Won by Connex South Eastern Ltd. Recast as the new Integrated Kent franchise. Franchise discontinued. |
| South Wales & West Railway | Prism Rail | 13 October 1996 | 13 October 2001 | Created from NSE unit on privatisation. Split in two, with part of it going to new Wales & Borders franchise. Remainder forming new Wessex franchise |
| South West Trains | Stagecoach | 4 February 1996 | 3 February 2017 | Created from NSE unit on privatisation. |
| Thameslink | Govia | 2 March 1997 | 31 March 2006 | Created from NSE unit on privatisation. Merged with the remainder of the West Anglia Great Northern franchise to form the new Thameslink Great Northern franchise |
| Thameslink Great Northern | 1 April 2006 | 13 September 2014 | Incorporated into the new Thameslink, Southern and Great Northern franchise, in anticipation of the merger of the South Central franchise. New franchise retaining both Southern and Gatwick Express as separate brands | |
| Thames Trains | Go-Ahead Group | 13 October 1996 | 31 March 2006 | Created from InterCity unit on privatisation. Amalgamated with Great Western and the Wessex to form new Greater Western franchise |
| Valley Lines | 13 October 1996 | 13 October 2001 | Created from RR unit on privatisation. Awarded. Merged into a new Wales & Borders franchise. | |
| Wessex | 14 October 2001 | 31 March 2006 | Amalgamated with Thames Trains and the Great Western to form new Greater Western franchise | |
| West Anglia Great Northern | Prism Rail | 5 January 1997 | 31 March 2006 | Created from InterCity unit on privatisation. From 1 April 2004: Parts transferred to new Greater Anglia franchise. 1 April 2006: remainder transferred to new Thameslink Great Northern franchise |
History
1996–7: Genesis to sale
The franchising system was created by the Railways Act 1993 as part of the privatisation of British Rail by the Government of John Major, and the first franchises came into effect in 1996. Prior to this, the railway system had been owned and operated by the government-owned corporation British Rail, which has since been wound up.Prime Minister John Major envisaged splitting up the railways and returning ownership to an equivalent of the Big Four railway companies that had existed before the creation of British Rail. The Treasury advocated an alternative plan put forward by the Adam Smith Institute which separated railway infrastructure from train service operation and contracted out passenger services to seven-year franchises. This scheme formed the basis of the system which was implemented, which saw the creation of 25 shadow franchises, to be sold off in a process managed by the Director of Passenger Rail Franchising, which specified service levels and public subsidies that were to be paid to operators. The legislation allowed BR to bid for franchises, if the DPRF agreed, but in practice he never did.
Under the original 1993 legislation, the Franchise Director set out the minimum service levels of a franchise in a Passenger Service Requirement, being the current BR timetable in the case of the first sell-offs, and put this out to competitive tender. Winning bidders were decided on a pure cost basis – those who offered to pay the highest premium, or receive lowest subsidy, would run the franchise. Once signed, franchise agreements could only be terminated under certain conditions, namely not meeting the PSR, although fines were available as an intermediate step.
The Treasury had initially envisaged franchises to be around 3 years long, to promote sustained competition, however as it became clear that potential buyers were not interested in such short terms, it was announced in 1995 that franchises would be around 5 to 7 years long, or longer if major investment was required. The first franchise agreements to be signed were for the South West and Great Western franchises, on 19 and 20 December 1995 respectively. The first passenger train service operated by a privatised franchise was the South West Trains 05;10 Twickenham to Waterloo on 4 February 1996, although this came after the first privately run service, which ironically was a rail replacement bus service covering the early morning Fishguard to Cardiff journey in South Wales, due to engineering works.
As the program progressed, all franchises had been awarded and commenced by 1 April 1997, the last being ScotRail. OPRAF was initially criticised for taking too long, but answered that most of the delays were outside of their control, and were indeed caused by the government itself. The first four franchise competitions only attracted four bidders each, well below government expectations, although competition increased as the program went on and investors gained more surety over the way the system was to operate as a whole. Ultimately, although there were 25 franchises, the eventual buyers came from only 13 different companies. Many were bus companies, with the hoped-for interest from airlines and shipping groups failing to be converted into solid bids. In addition, despite several bids, due to difficulties in raising finance, only three bids from management buyout groups had been successful.
National Express was the winner of the most franchises, with five. Prism Rail came next, with four. Connex, Virgin Rail Group and MTL all captured two each, with the franchises they won being closely related. Stagecoach also won two, although the second was the tiny Island Line, which would eventually be merged with their main win, South West Trains. Great Western Holdings also won two, on opposite sides of the country – Great Western and North Western; FirstGroup, who had won a single franchise in Great Eastern, were a minority partner in GWH. Their March 1998 buyout of the other GWH partners increased their total to three.
In the end, most of the franchises were awarded for lengths from 7 to 7 and a half years. Only seven franchises were longer – two for 10 years, and five for 15 years. Only one was shorter, the 5 year award for Island Line.
1997–2005: Strategic Rail Authority
The Labour government elected in 1997 chose not to reverse the privatisation process, although they set out a number of reform proposals, including the setting up of a new Strategic Rail Authority, whose functions would absorb the responsibilities of the Franchising Director, as well as some duties previously performed by the Rail Regulator and the Department of Transport's Railways Directorate. Since this would take time as it involved legislation, in the meantime the SRA was established in 'shadow' form, in June 1999. Part of their brief was to ensure the railways operated as "a coherent network, not merely a collection of different franchises". Their goals were closely aligned with the government's wider objectives, set out in July 2000 as the ten-year plan, Transport 2010.In 2000 the shadow SRA announced plans to use the re-franchising of the 18 shorter term franchises expiring by 2004 to make various changes aimed at improving service grouping and lengthening franchises, with the aim of making them more robust and better able to invest in services. It aimed to have these proposals agreed by Autumn 2001, and published a timetable for the letting of 9 franchises in three tranches. These long-term plans were disrupted in 2001/2 by the impact of the Hatfield rail crash, which led to the nationalisation of Railtrack, the owner of the railway infrastructure, to create Network Rail. On 1 February 2001, the position of Franchising Director was abolished by the Transport Act 2000 and the passenger rail franchising functions were formally transferred to the SRA.
The SRA began to doubt its new long-term strategy as it failed to negotiate a 20-year franchise for the East Coast due to uncertainty over Railtack's ability to finance planned upgrades, and abandoned bidding negotiations in July 2001 after 21 months. Instead it elected for a short 2-year extension, hoping the situation would be clearer by then. Short-term extensions were also to be considered for other 7-year franchise renegotiations facing similar issues, which had not yet reached a finalised agreement.
By the end of 2002, the SRA had also changed its policy on Franchising Agreements to introduce various other performance criteria in addition to keeping to the PSR, aimed at raising the overall quality of passenger journeys. Franchise lengths would be kept to between five and eight years, but extensions would be permitted if Key Performance Indicators were met. It also changed the approach to risks in costs and revenues, and introduced incentive payments for performance and long term investment. The changes took effect after the awards for the Transpennine and Wales & Borders franchises, which were already too advanced. The tendering process was also simplified, giving more details up front in order to speed up the process and make bid assessment more robust. Through the use of tactical short-term extensions, the SRA planned to achieve the changes in franchise redesign and smooth out the timetable for re-franchising, aiming for two or three awards per year.
In February 2002, the Chiltern franchise became the first to be awarded for a 20-year duration, the winning bidder being Chiltern Railways, the incumbent franchisee since privatisation.
In August 2003, FirstGroup purchased GB Railways, the first time since privatisation that a TOC had been bought by another TOC.
2005–2009: Direct government responsibility
The Railways Act 2005 abolished the SRA and transferred the responsibility for franchises in England and Wales directly to the government through the Secretary of State for Transport, with the Welsh Government being given a direct role over services in Wales. Responsibility for the ScotRail franchise was passed to the Scottish Government. The 2005 Act also gave local and devolved administrations the ability to alter fares up or down, provided they funded the extra cost, or used the savings on other transport modes. In a move designed to make them accountable for their decisions in this new role, English passenger transport executives were no longer direct parties to franchise agreements, instead gaining a role in long-term planning and a statutory right to consultation over franchises in their areas. In London, the Act required the DfT to consult Transport for London on any franchise with services to, from or within London. In July 2007, these powers were extended, with measures designed to protect those outside London, with the DfT as the arbiter of disputes.In October 2007, the European Union set the maximum length of a rail franchise at 22.5 years: 15 years initially, with a 50% extension in certain circumstances.
By 2007 the Labour government was happy with how the franchise system was leading to improvements in customer satisfaction and better trains, crediting TOC's use of their freedoms under the system to deliver passenger growth. The 2008 recession sparked fears over franchisees' ability to survive, although the government allayed these fears in 2009.
Passenger Rail Franchising has been examined by the National Audit Office and a report was published on 15 October 2008.
In response to continuing criticism, changes in how franchises were agreed and monitored continued; by 2010 agreements contained penalties for failure to increase reliability, and the number of KPIs had been reduced.
2010–2012: Pauses and reviews
The coalition government elected in May 2010 paused re-franchising pending a review, which was published in January 2011. As a result, they reformed the system further to increase operators' flexibility, with greater incentives for cost reduction by operators, and franchise terms dealt with on a case-by-case approach. They extended the standard franchise term to between 15 and 22.5 years, ending the Cap and Collar approach to risk which provided for risk-sharing with government regarding future demand, and introducing profit sharing and review points. The new system, to be applied first with the InterCity West Coast bid, also took a less prescriptive approach to service specification and introduced measures to tackle crowding and changes to the way quality measurement was approached. Because of the increased future risks carried by operators, the government required a large financial surety to discourage early contract default.In 2012 the franchising system essentially collapsed in the wake of the West Coast controversy. As a result of the crisis, the government commissioned two inquiries, the Laidlaw inquiry to look into the cause of the West Coast failure, and the Brown review to investigate the wider franchise system. The Laidlaw report was published in December 2012, and found the DfT to be primarily responsible for the West Coast failure, having made several errors in its financial modelling. All three outstanding franchise competitions – Great Western, Essex Thameside and Thameslink – were paused pending the outcome of the Brown review. It was published in January 2013, and concluded there were no fundamental flaws in the system, but made 11 recommendations on how it could be improved. One recommendation was to spread out the re-franchising schedule to avoid bunching, which the government acted upon in committing to holding no more than four competitions per year, and staggering the East and West coast awards. Another of Brown's recommendations was the breaking up of the standard franchise period into two terms: an initial term of between 7 and 10 years, followed by an automatic extension of a further 3 to 5 years, should performance criteria have been met. It also recommended further transfer of powers to local and devolved administrations.
The West Coast controversy led to the introduction of the Direct Award concept, whereby the government can award a franchise that is up for renewal directly to the incumbent rather than through a tendering process, but only if the operator's proposed terms match the government's projected expectations of future performance based on its past record. If a reasonable contract cannot be drawn up through negotiation, the franchise is then re-let as normal. In the following few years, most franchises were renewed as Direct Awards, in part to achieve the smoothing-out of the schedule recommended by Brown.
2013–present: Direct awards
Following the pause for the Brown report, the system resumed in 2013; the DfT published a revised timetable in March 2013, with the first tender being concluded in May, the direct award for the Essex Thameside franchise.In 2014, the DfT was re-organised, with responsibility for rail franchising becoming part of the new Office of Rail Passenger Services's remit under an externally recruited chief, the ORPS itself being part of a new Rail Executive within the DfT.
In January 2015, as part of its statutory duty to promote competition, the Competition & Markets Authority launched a policy review to determine if there were opportunities to improve the current system outside the established areas of competition, namely the bidding process and the open access operators. In July 2015 it identified four possible areas for reform: an increased role for open access operators, having two successful bidders for each franchise, having more overlapping franchises and having multiple operators with licences on each route. The regulator evaluated the CMA's options, leading to a final report in March 2016.
Suspension during 2020 pandemic
In response to the coronavirus pandemic, on 23 March 2020 the government took emergency measures which suspended all passenger rail franchise agreements, initially for six months.Passenger numbers had already dropped by 70% by that date, leading to a significant drop in the income of the operating companies, which responded by cancelling and reconfiguring services. The government agreed with the companies that passengers holding advance tickets would be able to get a full refund.
Under the emergency arrangement, the normal financial mechanisms of the franchise agreements were suspended so that operating companies would not get into financial difficulty. All revenue would be paid to the government, who would pay the operators' costs plus a management fee of up to 2% of their pre-pandemic costs.
Competition inquiries
Whenever there is a possibility through the franchising process for multiple franchises to come into the common ownership of a larger transport group, these can lead to referrals to the competition authorities for investigation, if it is deemed there is a concern that market dominance might result in a monopoly. This can also be triggered when there is an overlap between train and bus services in a particular area or corridor.Many investigations are cancelled without conclusion, simply because the concerning situation does not arise. Investigations are also often closed with no action, after it is found there is little concern. Where a concern is found to be significant, it is often resolved through the operators agreeing to certain undertakings designed to prevent the monopoly situation occurring, although in some cases investigations will conclude there is no alternative but to block the proposed contract.
Investigations which resulted in undertakings are as follows:
- Stagecoach / East Coast
- Arriva / Wales & Borders
- First / ScotRail
- National Express' acquisition of Prism Rail
- National Express / Midland Main Line
Controversies
Public/private ownership
According to the Railways Act 1993, the public sector cannot bid for rail franchises in Great Britain, although some rail franchises in the past have been taken on temporarily by a state-owned operation following an unsuccessful private franchise.Some critics of the franchising system have suggested that state-owned organisations, such as the Government-owned holding company set up to take temporary ownership of franchises, Directly Operated Railways, should be allowed to tender for rail franchises on a permanent basis. They highlight the fact that many of the current rail franchise holders are actually joint ventures involving subsidiary companies of the state-owned railways of other countries, such as SNCF of France or the German Deutsche Bahn.
Some commentators have criticised the re-franchising deals by comparing the performance of the private-sector franchisees unfavourably with the public-sector operators. Advocates of the franchising system contrast public-sector operations with commercial operators, citing their ability to invest private capital into the franchises, financial returns to the Treasury and customer incentives such as free on-board wi-fi and loyalty card schemes.
West Coast upgrade delay (2012)
In the wider context of the controversy over Railtrack's failure to upgrade the West Coast Main Line, there was criticism of the SRA for failing to ensure the Cross Country and West Coast franchises transitioned from subsidised to premium-paying franchises. This had been anticipated in the initial 15-year franchise agreements, but depended on Railtrack delivering the upgrade on time. Instead, the delays meant the contracts had to be renegotiated early as management contracts, and continued to be subsidised for several years until they could be re-let, which was seen as a cost to the public purse, adding millions to the billions run up in over-spend on the upgrade itself.The initial management contracts came into effect on 22 July 2002, and would see the West Coast franchise supported by the SRA until March 2003, and if agreement on a new franchise terms was not reached by then, the management contract would continue, in return for a fee of 2% of revenue. Similarly, Cross Country would be supported until March 2004, and then by a 1% fee if not renegotiated, but with the option of the SRA putting it out to tender. Unhappy with Virgin's proposal for terms of the remainder of the original 15-year Cross Country franchise, the SRA terminated negotiations on 6 August 2004 and the temporary arrangements continued until the franchise was re-let in a revised form, announced in October 2005. Although Virgin was shortlisted as a bidder for this revised franchise, it lost out to Arriva, who took over as the new franchisee from 11 November 2007.