what is a franchise?
Most passenger trains in Britain are run by ‘franchised’ operators.
But what is a franchise?
What is a franchise?
A franchise is an operating contract between the government and an independent operator to run specified train services.
The original franchises were awarded between 1995 and 1997 for terms of between roughly five and 15 years. All those franchises have since been replaced.
The official reason for involving the private sector was to increase competition, but the reality was that almost unbridled rail passenger competition would have been chaotic and also probably damaging to the ‘government operators’ – the franchise holders. So competition was almost immediately repressed by virtually barring ‘open access’, particularly in the early years before 2000.
The underlying reason for creating the franchise system was probably to transfer commercial risk to the private sector. Another was to bring in private operators while including a mechanism for supporting unprofitable but socially and economically necessary train services.
The nature of franchises has evolved in the light of experience, and the general trend has been towards tighter state control.
For example, several major fleets of trains were specified by some of the original franchised operators, including Class 390 Pendolinos and Classes 220-221 Voyagers (Virgin Trains), Class 357 Electrostars (LTS), Class 375 Electrostars (South Central) and Classes 444-450 Desiros (South West Trains).
As late as 2002, Midland Mainline (National Express) could make the decisions about the specification and characteristics of a new fleet of Class 222 diesel-electric units for services between London, Nottingham, Derby and Sheffield and give them a brand name – Meridian.
In modern times, fleets of Hitachi Intercity Express trains (Classes 800-801) for the Great Western and East Coast Main Lines and Siemens Desiro City trains (Class 700) for Thameslink have been specified entirely by the Department for Transport, and had been ordered before the present franchise holders (who are managing their entry into service) had been appointed.
Taking the risks
Generally, a franchise holder (franchisee) takes most of the commercial risk, which can be divided into revenue and costs.
Revenue risk means that the franchisee must earn enough money to make ends meet from fares and other income (such as station car park charges).
Costs risk means that the franchisee must pay its own bills. If revenue runs short, or costs are higher than expected, the franchisee may be forced out. This has happened several times (Connex Southeastern, GNER [second contract], National Express East Coast), while Connex South Central was terminated early because it was failing to meet performance standards.
‘Performance’ is a major feature of franchise contracts, and translates into statistics of late running and cancellations. Limits to these are set out in each franchise agreement, and if these limits are exceeded the franchisee is at risk of being declared in breach of its contract.
The consequences of such a breach can be warnings, fines or ultimately termination (as in the case of South Central).
Responsibilities and costs
Responsibilities of franchisees include the management of safety, the employment and training of staff (and negotiations as required with their unions) and maintenance of trains. They also usually manage certain stations (specified in the franchise contract), although there are occasional exceptions (such as CrossCountry). Franchisees are responsible for cleaning and light maintenance of the stations and depots they manage, although the ground landlord is Network Rail.
Costs met by franchisees include the expenses of leasing and maintaining their trains and buildings, wages and salaries, access charges (below), staff uniforms and equipment, fuel, designing and printing publicity and, in many cases, the payment of ‘premiums’ to the Department for Transport. Non-payment of premiums can, of course, trigger a contract breach.
Supervision and access charges
Franchises have been supervised by three bodies since the first started operating in February 1996. The original supervisory body was OPRAF – the Office of Passenger Rail Franchising – which was replaced in 2000 by the Strategic Rail Authority. When the SRA was wound up in 2006, the Department for Transport took over direct responsibility.
Franchisees must also deal with the Office of Rail and Road (safety, train paths), the Rail Accident Investigation Branch (safety breaches) and Network Rail (which provides and maintains tracks and signalling).
Access charges for the use of the infrastructure (the track) are payable to Network Rail on scales determined by the ORR. There are several types of track access charge, including fixed charges, capacity charges (higher in peak periods), track usage (variable, depending mainly on the frequency, length and weight of trains) and, where appropriate, the cost of electricity drawn from overhead lines by a franchisee’s trains.
Franchise periods can be extended by the DfT, and potential extensions are often included in modern contracts. Neither side can insist on them. Extensions are specified in units of ‘railway periods’, which last four weeks. There are therefore 13 railway periods in a year.
Although it can be argued that all franchises are essentially management contracts, the narrower meaning of the term is an arrangement between the DfT and an operator to provide train services without taking commercial risk. Instead, the operator receives a fixed fee.
One example of this was provided by the Intercity West Coast franchise, which had been launched by Virgin Trains in 1997. It became clear shortly after the turn of the century that the franchise’s business plan could not possibly be achieved, because Railtrack had failed to modernise the West Coast Main Line sufficiently. The franchise was converted temporarily in 2002 into a management contract, and Virgin was paid 2% of gross revenue as a fee. The franchise returned to the more usual commercial terms in December 2006.
More recently, the Govia Thameslink Railway contract (September 2014) includes costs but not revenue risk, because it spans a period of major changes in connection with the Thameslink Programme.