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Experiences with franchising of, and open access for, passenger rail services in Great Britain John Preston Urbanet Conference, Oslo 8 September 2016
Outline Update papers in Research in Transportation Economics in 2008 and 2016 (pending). • A Brief History of Franchising (and Open Competition) • Key Trends.
• Key Issues: Competition, Objectives, Overoptimistic bids. • Franchising Futures. • Conclusions.
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A Very Brief History of Rail Franchising in Britain • First phase. 1996/7 – c2000. Associated with OPRAF. 25 TOCs franchised. Moderation of Competition Phase I. • Second phase. c2001-2004. Associated with SRA. 9 TOCs (re)-franchised. Moderation of Competition Phase II. Hull Trains. • Third phase. 2005-12. Associated with DfT. 13 TOCs (re)franchised. Moderation of Competition Phase III. Grand Central. • Fourth phase. 2012-13. ‘Failure’ of West Coast Franchise and instigation of the Laidlaw Enquiry and Brown Review.
• Fifth phase 2014-. 7 (re-) franchises so far.
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Regulatory Structures V
4
Open Access 2015/16
Passenger Train Kms (millions)
Franchised Market
57.3
Non Franchised Market
4.6 (0.9%)
Total
521.8
5
The Evolution of Franchising
6
Franchise Schedule
7
Trends: Passenger Kms (Billion) 70,0 60,0 50,0 40,0 30,0
1995/6 – 00/1 +31% 2001/2 – 04/5 +7%
20,0
2005/6 – 11/12 +34%
10,0
2012/13 – 14/15 +10%
0,0
Total
Source: Syarifuddin, 2016, based on data from ORR National Rail Trends http://dataportal.orr.gov.uk/
+108%
Trends: Train Kms (Millions) 600
500
400
1995/6 – 00/1
+21%
2000/1 – 04/5
+7%
2005/6 – 11/12 +11% 2012/13 – 14/15 +1%
300
200
100
0
Total
+46%
Trends: Unit Costs (I) 40
Passenger Service Costs per TKm
35
1995/6 – 00/1 +20% 2001/2 – 04/5 +18%
25
2005/6 – 11/12
20
2012/13 – 14/15 +5%
Total
15
+2%
+52%
10 5 0
1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
£/TKm
30
TOC Operating Costs per TKm (£/TKm)
Rolling Stock Costs per TKm (£/TKm)
Total Passenger Service Costs per TKm (£/TKm)
Total Industry Costs per TKm (£/TKm)
Source: Syarifuddin, 2016. Main growth in Renewals Costs 10
CF Renewal Costs per TKm
Source: Syarifuddin, 2016. Note importance of the counterfactual. 2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
1992/93
1991/92
1990/91
1989/90
1988/89
1987/88
1986/87
1985/86
1984/85
1983/84
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1982/83
1981/82
1980/81
1979/80
£/TKm
Trends: Unit Costs (II) Actual & Counterfactual Infrastructure Renewal Costs per TKm
12
10
8
6
4
2
0
Renewal Costs per TKm (£/TKm)
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1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Trends: Government Support (£ Million 2014 prices)
8000
1994/5 – 00/1 -38%
7000
2001/2 – 04/5 +185%
6000
2005/6 –11/12 0%
5000
2012/13 – 13/14 +1%
4000
Total +79%
3000
2000
1000
0
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Estimated Welfare Effects (£ B) Overall
Increase in Net Effect Infrastructure Costs
1995/6 – 2000/1
+2.2
+1.4
+3.6
2001/2 – 2004/5
-11.7
+12.1
+0.4
2005/6 – 2011/12
-8.0
+13.0
+5.0
2012/13 2014/15
-1.9
+6.4
+4.5
Total
-19.4
+32.9
+13.5
Based on Syarifuddin (2016). Update of Robins (2012). If each franchise had bidding costs of £22.5M then the net benefits of £13.5B are offset 13 by transaction costs of £1.2B.
Issue (I) Level of Competition and the Winning Bid Franchising has been competitive, but competition declining over time: • First phase:
5.4 bids per franchise
• Second phase:
4.2 bids per franchise
• Third phase:
3.8 bids per franchise.
• Fourth and fifth phases Down to 2 bids per franchise, although current pool of 10 active bidders. High bidding costs (£5M per bidder in 2006, £10M in 2012). Are rail franchises a common value auction – so as the number 14 of bids goes down prices go up?
Issue (I) Level of Competition and the Winning Bid
Only 3 out of 55 franchises have failed. However, 13 franchises renegotiated after Hatfield 2000 and 12 direct awards after 2013. Serial failure to meet financial targets. Winner’s curse or strategic game playing? 15
Issue (II) Objectives What is franchising trying to achieve? (i) To harness private sector commercial judgement and innovation to reduce the net cost and increase the value for money achieved from the Government’s overall support for passenger rail services. (ii) To improve passenger services, commensurate with funding available. (iii) To set the level of service needed and to vary specifications to reflect changing market needs and accommodate future passenger growth. (iv) To protect passengers from the power of unregulated monopolies. (v) To maximise the benefits of the network as a whole. (vi) To fit rail within Government’s wider public transport objectives.
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Issue (II) Objectives Brown Review: (i) Ensure value for money by competition for the market.
(ii) Harness private sector skills and innovation. (iii) Ensure stability of service. (iv) Secure franchisees who will work in partnership. (v) Facilitate further devolution of decision making. (vi) Ensure services are delivered and managed by organisations which are attuned to local market needs.
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Issue (II) Objectives
Issue (III) Overoptimistic Bids The East Coast Franchise Date Started
Expected Duration
PVNP 1st year (£m)
GNER
April 1996
7 years
65
GNER
May 2005
10 years
(50)
(219)
National Express
Dec. 2007
7 ¼ years
7
(311)
Virgin Trains
March 2015
8 years
(198)1
(372)2
Sources: Preston (2008 and 2016) and adapted from Ford (2015) 1Based on 2015/16 premium deflated by 1.035 2Based on 2022/3 premium deflated by 1.0358 Figures in brackets denote premia paid.
PVNP Final year (£m)
0
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Issue (III) Overoptimistic Bids Cap and collar regime intended to promote efficient bidding given concern that post Hatfield bidders would be overly risk averse. Some concern that it mutes incentives to grow revenue. Front loaded subsidy may be used to finance Parent Group activity. Seems to have led to strategic behaviour, although extreme gaming behaviour should be detected at the bid evaluation stage.
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Issue (III) Overoptimistic Bids West Coast franchise replaced the cap and collar regime but with bidders required to have in place a subordinated loan facility (SLF) to be drawn upon in case of default. 21/01/12 ITT issued 15/08/12 Intention to award to First Group 03/10/12 Cancellation of franchise and suspension of programme.
Laidlaw Enquiry highlighted (i) lack of transparency with SLF process (ii) technical mistakes in the calculation of the SLF (iii) contributory factors relating to lack of planning resource. 21
Alternative Contract Specifications • ‘Commercial’ franchises (long distance services): longer length, looser specification, remain net subsidy.
• ‘Social’ franchises (short distance commuter and regional services): shorter length, tighter specification, gross cost. • Experimentation with vertical re-integration and microfranchises. • Brown favours 7 to 10 years franchises, with a 3 to 5 years continuation mechanism. Management contracts where major upheavals. Concessions where authority has marketing capabilities. Against cross default provisions. • Some calls for re-nationalisation via DOR. 22
Franchising Futures – Key components Risk allocation
Capital requirements
Revenue risk
Parent Company Support (Guarantee)
Cost risk Profit risk Regulatory risk Inflation risk Open access risk
Profit
Profit above a given level shared with DfT
Performance bond
Season ticket bond
Profit cap
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Franchising Futures: Parent Company Support (PCS) The PCS requirement will be proportional to bid “ambition” above a certain level.
In this example, a bidder would be required to provide a minimum PCS of £30m, with bids above £1.3bn requiring additional PCS at a rate of £100k for every additional £1m bid.
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Franchising Futures: Risk Allocation For some franchises, the DfT may offer to share some or all financial risk with a franchisee. The design of the risk sharing arrangement will depend on the characteristics of the particular franchise and will affect TOC financial stability and incentives. Management contract e.g. West Coast “Cap & collar” (a special case of revenue share & support) e.g. Southern
Increasing risk with the TOC
Cost risk with the TOC, revenue risk with DfT e.g. Thameslink
Revenue share & support e.g. Greater Anglia
All risk with the TOC e.g. Essex Thameside GDP based mechanism e.g. East Coast
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Revenue
Risk allocation – an illustration Revenue share line
Target Revenue Revenue support line
No revenue support for shortfall
TOC not yet eligible for Revenue Support
revenue support for shortfall
Actual revenue
TOC eligible for Revenue support
Time
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Conclusions (I) Contracting-out has proved more problematic for rail than for bus, particularly for long-distance commercial operations. Five Phases of National Rail Franchising in Britain Phase
Dates
Responsible Authority
Achievements
Assessment
1
1996 – 2000
OPRAF
25 franchises let
Initial success
2
2001 – 2004
SRA
Cost over-runs post Hatfield.
3
2005 – 20012
DfT – Cap and Collar
9 franchises relet, 1 failure, 13 renegotiated. 12 franchises relet. 2 failures
4
2012 – 2013
DfT – SLF
1 cancellation
5
2014 –
DfT – Horses for courses
7 franchises relet by summer 2016. 8 more by 2022.
Short comings in evaluation 12 Direct awards.
Revenue shortfalls.
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Conclusions (II) The DfT’s ‘horses for courses’ approach intends to address this but other important considerations. 1. Subsidy is going to be re-directed from infrastructure (Network Rail) to the operators (TOCs). 2. Network Rail to undergo internal reform as a result of the Shaw Report 3. The CMA is investigating ways of boosting on-track and/or off-track competition. Move to a two-speed franchising process with gross cost contracts for social services but more loosely specified and more highly incentivised contracts for longer distance commercial services.
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