Running a franchise, ten years on

- Christopher Garnett

It’s an uphill struggle, Christopher Garnett, Chief Executive of GNER, told the Fourth Friday Club – especially when the ORR bowls you a googly

Running a railway today is very, very different to how it was in 1996 at the start of privatisation. I think then we really did think we had a degree of freedom. I think we really did think we could make a difference, and that there was a desire to bring the private sector in.
The first four years of running Great North Eastern Railway were good fun, although even back then there were things happening that one wasn’t necessarily expecting. You bid for a franchise, you get it, and then you suddenly discover that the Government has let another franchise – the West Anglia Great Northern franchise. And you find that instead of stopping at Huntingdon, WAGN is running to Peterborough, which you didn’t know about when you bid for the inter-city franchise.
Then we had things like the broken wheel at Sandy. We had the arrival of Hull Trains. We had the Rail Regulator’s decision to get rid of our brilliant (in my view) track access agreement for the East Coast, where we measured to two minutes and used to pay Network Rail – or Railtrack as it was then – dedicated prices for getting our key trains in on time. And for the sake of standard arrangements we got rid of those good things and had to go to three minutes so all the operators would be on the same basis. It seems that no-one was interested in what was the right thing for the passengers on our route in terms of best performance.
Running on through the history of the past decade we come to the horrors of Hatfield and the demise of Railtrack, we come to Heck, we come to Potters Bar, we come to 20-year bidding for franchises (and then you knock the nought off the 20 and you get a two-year franchise extension!).
The second-round inter-city franchise on the East Coast was finally awarded in March 2005, and we the incumbents, GNER, won it.
A year on and half the franchise has been taken away from us. That is the reality of what the Office of Rail Regulation did with its announcement on 23 March 2006 awarding paths on the East Coast main line to Grand Central Railway.

 

Difficult circumstances

It is extraordinary how difficult it is to run a franchise. You always think you’re going to get a period of semi-calm. Now those of you who are old British Rail hands will say, ‘No it’s never been like that’.
However it was in the past, I do know that now it is very, very, very hard work. And every time you think that things might be getting a little easier, you can guarantee that something will happen which is outside your control.
I think it is a very different role we as franchise managers play today from the one we played ten years ago. There is an extraordinary amount of government control in what we are now doing. When we started, we could go and run more trains, we could change our timetables, we could maximise the number of trains in the timetable, we could maximise the revenue. These are all things which today have just in a sense disappeared.
Nowadays, the Government lays down the specification in the franchises; the Government buys what that specification is. If we want to influence it, I think we – and politicians and others – have to get involved much more than we have done in the consultation stage of the franchise. Because in a sense once the specification is there, that’s it, that’s what the Government has agreed to buy. You can put all sorts of other things in your franchise bid, but these are perhaps best forgotten about. It’s all about that base fee, and how low is your cost line, and how high is your revenue line, and the margin that you’re going to take. Because what the Government is interested in is premium, or the lowest subsidy.
Aspirant franchisees know that you cannot put into a franchise anything that costs money if the Government has not specified it. Against this background we have been bidding for franchises on ever tighter margins. As is commonly known, that’s around 4% return on sales. That doesn’t give you much room to manoeuvre.

 

Unforeseen events

Let us look at force majeure, circumstances beyond your control. Unfortunately, the force majeure clause in the franchise contract may not be the help you might imagine it to be, as you’ve got to lose 2% of your revenues before it kicks in.
So, take the London bombs in July 2005 as an example. Optional leisure traffic to London was hit hard. The contract says the franchisee has to swallow the first two per cent loss of revenue.
Then, in working out the revenue you’ve lost, you have to consider not only the immediate revenue loss, but the interruption to revenue growth. So first there is the immediate revenue loss which you never recover. Then, if you are in a franchise that has got revenue growth built into the projections year after year, as ours has, you may get back some of the revenue you lost in the first year after the bombs, but you will never get the multiplier on that revenue going out over the life of the franchise.
The same applies with the issue of Grand Central. If they come along and if they take the revenue we expect them to take, there is no way we can cover anything like what we are going to lose to them in revenue.

 

Fares policy

The last point I want to raise on franchising is about fares. Those of us who are seeking to win franchises ask ourselves the question, how do we maximise the returns for government? And the answer is, we increase revenue with fare rises.
Thus the new Greater Western franchise sees some pretty chunky increases built into it, and there will no doubt be increases in unregulated fares at South West Trains when that is relet – and so it goes on. There will be a backlash from passengers about this because they’re going to see fares going up quite heavily in the next few years.
We franchisees make no secret of the fact that we make about 4% on sales. The additional money raised by fares increases is not going to franchisees, it is going to the Government in the shape of lower subsidies / higher premia.
The pressures we are under mean we are filling up our trains all the more. There are going to be fewer and fewer spare seats on trains. In the light of these trends, it is going to be fascinating to see what is going to come through in the SWT franchise about size of trains.

 

Planning for increased capacity

I think that one of the really good things that’s happened in recent years is that responsibility for the RUS (route utilisation strategies) has been transferred from the Strategic Rail Authority to Network Rail. Frankly, the RUS produced by the SRA for the Midland main line was a joke. Anyone who believes you are going to get just 1% annual growth in passenger volume on a route like that is deluding themselves, so taking that as a starting point meant that the Midland RUS was bound to disappoint.
By contrast, I think that Network Rail is to be congratulated on the RUS it has done for South West Trains. It has confronted the issues, raised the problem of the overcrowding at Waterloo, and is coming up with solutions. Whether these solutions get carried into the franchise, how they’re going to get done, we wait to see.

 

What does the future hold?

This approach to route utilisation strategies gives me hope. But I am at the same time really very worried about how the whole franchised railway operation is going. The margins are getting tighter. The Government is holding the reins ever closer, and making us accountable for what takes place.
So at the back of my mind all the time is a slight feeling of: ‘Is this system going to last for long?’ Are we going to see a different system of franchising?
Are we going to see a system whereby we remove risk from the politicians in some future franchising programme?

 

The Grand Central decision

So much for the big picture. I’d now like to explain why, in my view, what the ORR has done in granting paths to Grand Central is so damaging to the railway.
This question needs to be addressed in two parts. The first is the issue about an open access operator coming on to the route to take the revenue from the existing franchisee. This is nothing to do with extra services to Leeds – we’ll come to that in a moment.
When we bid for East Coast, the DfT/SRA said to all aspirant franchisees: ‘Ignore any extra paths for open access operators’. So all of us did. But then an open access operator came along. And I have no criticism of what Grand Central has done – it has exploited an opportunity in the marketplace.
When we bid, all aspirant franchisees were first of all asked to bid to go Leeds half-hourly. And then we were asked: where else could you go and produce an economic case? So we looked at Sunderland, we looked at Lincoln, we looked at other places, and we could not make – and as I understand it, no bidder could make – the case to go to any of these places.

Then an open access operator comes along and says I can go to Sunderland. And he only has to pay the variable charge. By contrast, we at GNER have to pay the fixed charge, the premium and the variable. My pricing policy to passengers has to reflect the recovery of fixed and variable and premium.
So I say to the Office of Rail Regulation, how is this fair competition? I cannot drop my prices to compete with what an open access operator is doing.
We bid on 4% margin. That’s all franchises go for these days. You can work out what our revenue is, you can work out what our profits are, and you can work out what you think Grand Central is going to take. It comes straight out of our profit.

As the major operator on the route, we’ve got to fund the premium to government. We’ve got to fund the station investment. We’ve got to fund the refurbishment of the HSTs – we have just decided that our HST power cars will be fitted with new engines from MTU. All this has to be paid for, and the basis on which we bid was that there would be no more open access operators on the route. But things are not turning out that way: the ORR statement is not the basis on which the Department told us to bid.

 

The Leeds half-hourly issue

Let us turn to Leeds and the wider issues of what the ORR has done. The question of going half-hourly to Leeds is a massive issue for the Government and the industry. Let me try to explain why.
For a long time on the East Coast, we have wanted to go to an even interval timetable. This is not possible with four inter-city trains an hour, because to apply an even interval you would slow down your Edinburgh and Newcastle trains so much by putting stops in that you would destroy the revenue. So you need five paths an hour, and the Allington chord that was completed last year made five paths feasible.

Adrian Caltieri, one of those really clever railway guys, built on this by coming up with the idea of the electric horseshoe. That meant that we could run five trains an hour and introduce an even interval timetable, and all without increasing the number of trains of fleet. This trick would be achieved by cutting out turnback time in Leeds and running round in a horseshoe on a stretch of newly-electrified railway back to the main line (see map, p61).
So our franchise bid was predicated on no new rolling stock. But the open access operator is not similarly constrained. If further paths become available, he can say ‘I can provide this rolling stock, and by the way, I can stop at Peterborough, I can stop at Newark, I can stop at Grantham’. In this way he would get access to all the GNER revenue that we have worked so hard to build up – 40% growth in ten years.

Now were this to happen, the loss to government is that they don’t get premium from us, and the value of the franchise when they come to relet it would be devalued. And they wouldn’t get the electric horseshoe.

 

Inconsistency

We in this industry have a real dilemma, in that the DfT is letting franchises on the basis of saying to bidders ‘ignore open access’, yet the Government’s own White Paper said there is open access. And the debate between the ORR and the DfT about what is open access and what price you pay for open access has got to be resolved.
This is going to become a real issue with South West Trains, because we all know the SWT timetable has got padding, so anyone can come along and argue that you can create an extra path. It is odds-on an open access operator will come along and pursue that argument.
So we have an inconsistency in that the access is controlled by the ORR, but that is totally at variance with how franchises are let. This issue will need to get resolved through the courts, and we certainly are taking legal advice.
We have built up a railway of which I am incredibly proud. It is a railway that stands for customer service. It is a railway that has expanded the market. It is a railway that is operating better now than it has ever done in terms of punctuality.
I am not being over-dramatic when I say that this accomplishment is seriously threatened by the decision which the ORR made on 23 March. I hope the ORR understands the decision it has made, but I am not sure that it does. MR

 

Attendees, Fourth Friday Club meeting addressed by Christopher Garnett, Chief Executive of Great North Eastern Railway on 24 March 2006

 

Stuart Holland, ABB

Phil Malen, ABB

Dave Angove, Advantage

Lawrence Roberts, AEA Technology Rail

Andrew McConnell, Airport Express

Bill Brown, Alcatel Telecom UK

Haydn Abbott, Angel Trains

Jane Vincent, Angel Trains

Simon Charlesworth, Alstom

Julian Garratt, Areva T&D

Chris Loder, Arriva Trains

Keith Pym, Arriva Trains

Nick Higton, Arup

Raymond Beven, Ashurst

Terence van Poortvliet, Ashurst

Phil Evans, Atkins Rail

Douglas Chisholm, Atkins Rail

Hassard Stacpoole, ATOC

John Dennis, ATOC

David Taylor, Atos Origin.

Vernon Murphy, BAA
Andy Holt , Bailey Rail
Frank Le Duc, Bircham Dyson Bell
Ted Stephens, Bentley Systems
Jane Clarke, Blue Sycamore Ltd
Jeremy Lovell, Bombardier

Leila Frances, c2c

Adrian Shooter, Chiltern Railways

Trevor Whelan, CILT UK

Bill Clarke

Ian Stelfox, Corus Rail

Matt McInnes, Cubic

Richard Stone, Cummins

Jason Versluys, Curzon & Company

Phill Rutter, Curzon & Company

Suzanne Whalley, CWA

Matthew Hanslip-Ward, Denton Wilde Sapte

David Sanders, Docklands Light Railway

John Stout EDS
Jim Newsom, Ellis Fairbank
Mike Simms , Faber Maunsell

Dennis Ciborowski FBM International

Tony Maguire, Financial Dynamics

Mike Horne , Fifth Dimension Associates

David Burton, Fifth Dimension Associates

William Barter, First Class Partnerships

Chris Loder, First Group

Andy Lynch, FM Rail

Phil Amos , GB Railfreight

Alex Hynes, Go Ahead

Christopher Garnett, GNER

Alan Hyde, GNER

Richard Sumner, Halcrow

Chris Heaps

Don Heath

Stephen Hewitt

Hirofumi Ojima, Hitachi Europe Ltd

Paul Sheaf, HSBC Rail

Steve Parker, Hornagold & Hills

Andy Norris, Hornagold & Hills

Tony Teague, Human Systems Europe Limited

Graham Taylor††Hunslet Barclay

Victoria Snelling, IEE

Andrew Evans, Imperial College

Robin Hirsch, Imperial College

Mark Hughes Interfleet Technology

Martin Ward, Interfleet Technology

Stuart Calvert, Jacobs Babtie.

Gary Cooper, Joint Rail Performance Plan

Patrick Ropert, Keolis

Jean-Christophe Foucrit, Keolis

Colin Porter , Lloyd's Register Rail

Mark Hopwood, London Lines

Robert Woolley, LUL

Richard Malins

James Abbott, Modern Railways

Ken Cordner, Modern Railways

Paul Edwards, Modern Railways

Roger Ford, Modern Railways

Alan Williams, Modern Railways

Tony Walker, Mott MacDonald.

Tony Glazebrook, Mouchel Parkman

Jeremy Long, MTR Corporation

Chris Meakin

Duncan Cross, MVA

Mary Bonar, Nabarro Nathanson

Richard Talbot, National Car Parks

David Franks, National Express

Tex Bennett, Network Rail

Michael Purcell, Network Rail

Caroline Donaldson, Network Rail

Jon Elliott, Network Rail

John Mottershead, Network Rail

Tom Johnson , Norton Rose

Paul Hadley, ORR

John Orchard, Orchard Consulting

Richard King, Osborne

Martin Gray, Ozelearn (UK) Ltd

John Parker

Henry Parker

Philip Isgar, Pell Frischmann

Paul Banham, Petards Joyce-Loebl

Gordon Pettitt

Diane Whiteford, Praxis

Ben Blackwall, Praxis

Jonathan Tyler, Passenger Transport Networks

Rupert Brennan-Brown, Rail PR

Neil Stephens, Rail Freight Group

Stephen Wallace Jones, Rail Gourmet

Steve Holmes, Railtech

Andy Parsons, Railtech

Michael Woods, RSSB

Adrian Lyons, The Railway Forum

Peter Loosley, Railway Industry Association

Peter Staveley, Railway Operations Consultant
Graham Ransome, Ransome Engineering
Sam Smith , Resourcing Solutions Ltd

Ken Wells, Ridge and Partners LLP

Kate Carter, Scanmoor

David Walker, Scanmoor

Graham Hewett, Scott Wilson Railways

John Campbell, Seco Rail

Simon Ball, Seco Rail,

John Self

Deborah Risby, Siemens

Piers Wood, Siemens

Adrian Sinfield

John Ellard, Shearman & Sterling

Michael Holden, South Eastern Trains

Jane Lee, South West Trains

Julian Garratt, T&D UK

Tony Telford

David Taylor, Thales

Jan Chaudhry, Thameslink

Kevin Lane, Transys Projects

Tim Shoveller, Virgin Trains

Anthony Cuming, Up & Cuming

Alastair Morrison, Vossloh Information Technologies

Peter Davies, Vossloh IT

Ivor Warburton

Tom Winsor, White & Case

Iain Court, WYG