Franchising faces an uncertain future as ‘the clock is ticking’ on emergency agreement

first_imgThe government would need take on a high level of revenue risk whilst creating a reward structure that incentivises operators to grow revenue and, eventually, ridership.One senior insider suggested to Rail Business UK that it was hard to see any owning group being willing to take any revenue risk for the next two years. ‘It would be guesswork, and you’d be gambling with your parent company support. In the current environment, you are not in control of policy or the pandemic.’Recalling the view expressed by former Strategic Rail Authority Chairman Richard Bowker that ‘there are only two sources of income for the rail industry: the fare payer and the taxpayer’, the insider suggested that ‘the taxpayer element will have to be significantly increased to make the finances balance. The alternatives are that you reduce services or increase fares, or do something else that changes the nature of the industry.’Long-term clarity neededWhile governments around the world will find themselves in a very difficult financial position as they emerge from the crisis, it seems inevitable that the affordability of the UK railway is going to come into question once again, and costs will have to be reduced. The Williams Review has already concluded that different types of contract will be needed, but there is growing uncertainty over whether its recommendations will ever be released.#*#*Show Fullscreen*#*# If the political will is for private operators to continue playing a part in running rail services, the key players are clear that it will be necessary to support the market in the short term. As one well-placed observer commented, ‘you cannot suspend the market for three years and then bring it back. Maintaining market interest and keeping people in the game would seem to be logical, but everybody has pressure to deliver growth so it would have to be worthwhile. Risk and reward will need to be carefully calibrated to make it work for everybody.’Summing up the challenges facing the government, a senior director asked ‘how do you incentivise the exit [from the EMAs], and what do people want from the railway going forward? It would make sense to incentivise operators to grow revenue and reduce costs; the franchise system was designed to do that, but there are other ways of course without handing the revenue risk to operators. You could create a concession structure with a revenue incentive or a revenue share mechanism, but it comes back to “what is the model going to be in the future?” We haven’t got that clarity.’ One told Rail Business UK ‘it’s very difficult for EMAs just to finish, because given the revenue profile, what’s happened with demand, and what will continue to be the demand in September, It’s going to be nigh on impossible just to switch the franchises back on in their original form. All we will have done is postpone the disaster for six months.’Whilst the EMAs are restricted to a maximum duration of six months, there is reportedly no limit to the number of EMAs that can be agreed. TOC insiders anticipate that new agreements on the same or modified terms will be put in place after September.‘Nobody is getting rich off the EMAs, and neither should they as the taxpayer is taking all the revenue and cost risk’, commented one insider. ‘However, DfT will need to advise soon if they are to be renewed. We are certainly asking the question, the industry as a whole and the owning groups. We will need to know soon, as the clock is ticking.’Exiting the EMAs is expected to be ‘very delicate and very tricky’ as there is no certainty about either the length of time that social distancing requirements will remain in place or the level of demand that will be seen as the economy starts to return to some form of normality.Revenue lines were tight before the Covid-19 crisis, and several operators were experiencing financial difficulties. One senior insider explained that ‘if we only get 85% of people coming back, even in the normal situation, then most franchise revenue lines are bust on that basis. It’s difficult to see a sustainable exit from the EMAs.’There is also a concern that any new agreements should not be used to ‘bail out’ companies that had been expected to follow Northern into the control of the Operator of Last Resort, although the general feeling is that the current government would be reluctant to take all of the operators under OLR control. Given that Section 30 of the Railways Act requires a plan to be in place, the setting up of sufficient OLR companies to make this possible has been described as ‘a sensible Plan B’.Rethinking franchisingWhether the future is some form of modified franchise agreement or a move to a concession model as reportedly envisaged by the Williams Rail Review, industry insiders are clear that revenue projections will have to be rebased as a minimum.#*#*Show Fullscreen*#*#center_img UK: The only certainty in the UK rail sector at the moment is that the future is uncertain, particularly as the government’s long-term message is still to avoid using public transport if at all possible, whilst encouraging people to return to work. The Department for Transport’s Emergency Measures Agreements with train operating companies are due to expire in September, but senior industry insiders are making it clear that a return to previous franchise agreements will not be possible.#*#*Show Fullscreen*#*#last_img


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