Franchising is dead; long live, er, franchising.
That’s because the law says the passenger operations taken over from British Rail must be franchises unless ministers produce secondary legislation exempting operators from this legal requirement. Or ministers can take direct control with their ‘operator of last resort’ powers, as they did at LNER and Northern following the failure of Stagecoach and Arriva subsidiaries respectively.
So when ministers claim they have replaced franchising they are merely reaching for a quick headline. Which is not to say the changes they have brought in under their new ‘emergency recovery measures agreement’ are insignificant. These ERMAs radically change the risks and rewards of running trains.
On the face of it, ministers take all the risk by directly funding operations, pouring millions of taxpayers’ money into pretty empty trains. That doesn’t mean the operators take the rewards. Far from it, they – or really their owners – stand to lose too.
Franchising in trouble
ERMAs provide a fee for train operators that is 1.5% of the cost base of their franchises. That seems reasonable at first glance. But, according to First Group’s shareholder briefing, train operators are negotiating with DfT how much they need to pay to leave their franchise deals.
These negotiations will concentrate on how much support the operators’ owners would have needed to put in had Covid-19 not happened. For First, we already knew that South Western Railway and TransPennine Express were not doing as well as First hoped. It’s reasonable to assume both might have needed more cash from their owner (called ‘parent company support’ or PCS in the world of franchising).
But there’s a world of difference between generalising and producing a payable figure. Strip Covid-19 from the equation and you’re left wondering what effect Brexit might have. And from where I’m sitting, no-one seems to know. Still, it’s good work for lawyers.
First helpfully provided some figures. It reckons its maximum remaining cash exposure for SWR is £44.4m and for TPE is £143.4m. (Avanti West Coast’s figure is £106.4m but that franchise was performing as expected so it’s very debatable how much of this figure First would need to put forward.)
So let’s be generous and say that First is in for £294.2m if it wants to leave its franchise deals. In the year to March 2020, its rail revenue was £3,159m and its operating profit £69m (a margin of 2.2%). Logic suggests this equates to operating costs of £3,090m. Take that as the cost base, apply 1.5% and you get an annual fee of £46m. Compare that with cash exposure for SWR and TPE of £188m.
Difficult negotiations
Yes, I’ve grossly simplified this calculation. (Not least by including Great Western Railway in the operating costs figure which increases the potential fee). But it shows the scales weighed heavily against train operators’ owners. Now consider what happens if owners and DfT can’t agree what hypothetical figure represents future PCS payments. First explained: “If the termination sum for a TOC cannot be agreed by mid-December then the DfT has the right to terminate that ERMA early, with the TOC reverting to substantially all of the pre-existing franchise terms, from mid-January 2021.” I reckon that means paying the full PCS and handing the keys back.
So it’s hardly a negotiation, it’s a fire sale. All DfT needs do is refuse any sum lower than the total PCS and it gets the full PCS. What happens after the owning groups have posted their cheques? According to First: “Assuming the termination sums are agreed, the DfT intends to negotiate a new direct award contract under which the TOC will deliver passenger rail services following the end of the ERMA.”
That’s right, after taking the operators to the cleaners, DfT expects them to sit down and thrash out new deals. Many will shed no tears having railed against franchising for years. Fair enough. Had Britain elected a socialist government last December, I’d expect ministers to push owning groups over the cliff. But I’m surprised to see it from the so-called party of business. I guess that’s politics.
Franchising gave money for Network Rail
At least this situation provides an answer to the question of what rail franchises are for. The aim of rail franchising has for years been to help DfT shovel more cash into Network Rail’s bottomless pit.
Network Rail can sail on with its five-year funding package. And that’s after missing efficiency targets contained in previous packages and with rising staff numbers. Yet I don’t believe it’s so politically deaf as to continue unchanged. It must now look for ways to cut its costs. I’m sure it is.
But cuts are emotive. They’re bound to prompt a sharp response from the trade unions, chiefly the RMT because it’s a vocal union. Its members lose if ministers push on with driver-only operation or hasten the switch to on-line ticketing and cut booking offices.
Yet the RMT is mired in problems which became apparent recently when General Secretary Mick Cash returned from illness. Cash put his period off sick down to “a breakdown in my health due to work-related stress and depression”.
He went on to describe the hostility he’d received from the RMT’s national executive committee. He said that some NEC members saw it as their job to oppose him. Their behaviour made Cash feel “bullied and harassed”.
Addressing union members, Cash said: “We cannot waste our time or energy on obscure internal differences – the whole union must be ready to campaign and fight against whatever the employers and the government brings against us.”
On a personal level, I wish Cash well because bullying and harassment have no place in any organisation. That’s despite my disagreeing with the RMT on just about everything.
The union is now balloting members at ScotRail over a likely pay freeze. It’s recommending that members vote for strike action and I’ll be surprised if they don’t.
I hope the RMT uses any strike mandate wisely. A pay rise can only come from taxpayers because rail ridership in Scotland is just 30% of what it was. Meanwhile those same taxpayers are seeing redundancies in other sectors as the pandemic wreaks economic havoc. They may ask why rail deserves to be protected from the troubles blighting everyone else.
Fewer trains might save money
Not that strikes would be effective with so few people travelling. With Transport Scotland bearing ScotRail’s operating costs, it might save money by not running trains and not paying striking staff. That general blunting of the unions’ key weapon leaves them vulnerable. If ministers are pushing train operators into a corner over PCS payments, what’s to stop them pushing the unions likewise over DOO? Or a host of other cuts in staffing or services?
On current ridership there’s certainly scope to cut timetables. Whether it’s worth the effort depends on when you think passenger demand might recover. If you think recovery will be quick, perhaps by next spring, then it’s not worth the effort of cutting services, rewriting timetables, making staff redundant and mothballing stock. If you think it will take years to bring numbers back to last February’s level, then perhaps cuts now will save money overall.
Cuts could and perhaps should fall on many upgrade projects. If we’re going to see lower demand for several years, then cuts to services across Manchester, for example, could remove the need for major surgery on Castlefield Corridor (RAIL 906). If working from home cements itself for even a couple of days a week, then Network Rail need not deliver its massive Croydon remodelling project. And having seen the introduction of longer trains boost capacity, what’s the case for upgrading the Leeds-Manchester route which is currently the subject of a patchwork quilt of improvement projects?
But, as I’ve noted before, it’s worth switching the service mix to terminate CrossCountry’s diesel services at York and use TPE as the alternative to LNER for travellers heading further north. That’s because TPE’s uses bi-mode trains that can run on electricity (all the way to Edinburgh when NR finishes its power upgrade in 2024).
Perhaps the answers to these and other questions will come from DfT’s negotiations of direct awards next year? For the moment, ministers are keeping their cards close to their chests. Either that or they’re hiding entirely blank cards and don’t know what to do.
This article first appeared in RAIL 915, published on October 7 2020.