Great Western Coffee Shop

DfT considering a 5 year direct Great Western award to FirstGroup, ending in 2020, according to this article - http://www.railwaygazette.com/news/passenger/single-view/view/five-year-direct-award-great-western-franchise-proposed.html

An alliance with Network Rail is also apparently under consideration.

Great news!

For FirstGroup shareholders.  ::) >:(

Depends on the deal.

Whatever you think of FGW at least this would provide some continuity in franchise operator over a period of change.  Trying to re-let the franchise from 2016 with the wires still going up, new IEPs being tested and commissioned and ERMTS on the horizon would represent too big a commercial risk for the DfT to hope to get a decent deal for taxpayer.

For all their faults I would prefer First group to the likely alternatives.

And as posted previously there is going to be a lot of disruption and potential diversions and c**k ups with electrification and the new trains, not a good time to make other changes as well.

Also I see another very good reason to keep First group.
I and others have expressed concerns about the internal fit out of the new trains, and it has been stated that the design is not set in stone, but can be customised according to the wishes of the TOC.
A cynic like me forsaw First group choosing an inferior layout and then loosing the contract to run the trains. The new TOC could then say "the layout is far from ideal for the prestige Inter City service that we aspire to run, but unfortunatly it was not choosen by us, and we have to make do with what we have"

If however First group are to run Western services for another 5 years, then they can hardly object to the internal fit out of the new trains, into which they had some input.

This would be against EU laws to award it. So expect legal challenges.

Should go back into public ownership!!!!!!

Things are very rosy in franchise land. For the franchisees and their owners that is. Certainly not the passenger or taxpayer. Since franchising began, only 9% of TOC profit has been reinvested in the industry or returned to government. 91% of TOC profits have gone to shareholders, if the TOC is part of a PLC, or to the state. But not the UK state you understand. Nope. To Germany, France and the Netherlands, who have realised that the UK's bonkers franchising system is an ideal source of income to subsidise their own railways.

I don't buy the argument that this direct award is necessary now because of infrastructure and rolling stock changes in the coming years. More reason, in my book, if we must have franchising, to put Greater Western out to tender now. A competition where each company tendering can offer its plans for the transitional period. That was what was supposed to happen anyway until someone at the DfT forgot how to use a calculator when awarding ICWC to FirstGroup.

The one part of franchising that should keep franchisees on their toes and offering best value? Re-tendering. That is just being ignored at the moment.

What's the point of franchising on a fixed term basis if that fixed term can just be ignored by government in collusion with the TOCs? FirstGroup seem to be playing the politics very well at the moment with a Government seemingly scared that owning groups will walk away. So it seems that Government, because of their political hue, are colluding in private with TOCs to present these Direct Awards (full details of a third DA will be announced soon - Northern's franchise expires 31st March - no re-tendering in place) as a fait accompli.

Stinks.

Possibly part of the reason why DfT would consider the direct award is through lessons learnt on the Capital Connect franchise while the Thameslink works are being done the franchise TOC errrrrrrrrrrrr First have take full commercial advantage of the fact the Thameslink project needs extra possessions and track access outside that agreed by DfT, with all the work on the GW franchise area in the next 5 years it may be a difficult franchise to safely tender.  A deep alliance with NR will force a closer working relationship   

Certainly First Group shares have been on the rise over the last few days.  Closed at 143.4 on Tuesday - their highest since May last year.

Glad I bought the maximum I could during the 85p 3for2 rights issue. I have a just under a few thousand 'liquid' shares plus some BAYE shares I cant touch for 4-5years due to tax issues.

Apparently the Telegraph has made FGP.L one of its tips for 2014.

Cant wait for the dividend to be finally re-instated.

To be fair, a minor drop in mid-jan aside, they have been steadily rising since December.

Labour take issue with the prospect of 5 year direct award - http://www.theguardian.com/uk-news/2014/mar/14/first-group-great-western-dft-second-award

As I've already said. Stinks.

What was the Railways Act 1993 for if it can just be ignored wholesale?

I don't agree with franchising - we should have concessions - but that doesn't mean I agree that the franchising legal framework should be ignored just because it suits the politicians of the day.

Backroom deals between Government and suppliers of public services are never good or acceptable. The only winners from this are FirstGroup shareholders. 

FGW frontline staff I have a lot of time for. FirstGroup at a corporate level have no care whatsoever for passengers or the greater good. Neither does this supine Government, who appear to be bending over backward to keep a company at the helm of one of the largest rail franchises for the flimsiest of reasons. A company that has already demonstrated that they will walk away when times are bad.

We have one publicly owned TOC - East Coast - which is making a healthy return to the exchequer. Yet despite that, it is the only one that will be refranchised by the current bunch of no-mark politicians we have running this country. Why isn't East Coast being postponed while the franchising mess at the DfT is sorted out? Because it is publicly owned and the current mob on the Government benches can't stomach the idea of a public company actually making a net contribution to the public purse.

The proposed FGW 'deal' will do nothing for passengers or taxpayers. FirstGroup say it may "create better overall value", but neglect to say who for. That's very telling.

Basically the DfT is stuffed on a new competition until electrification and IEP is in place. Who would put in a decent bid for a franchise that is going to be subject to major delays due to the electrification works and introduction of a completely new set of rolling stock?

If FGW can run the system during that period with the minimum of disruption to us passengers then they would come out with a  good record that will be to their credit. The risk to them is that even if they do wonderfully other factors will make the experience so bad that they will become a toxic brand.

This is a big risk for FGW but less so for DfT

Once again The Nose hits the proverbial nail where it counts. I strongly agree with everything said in his last post.


This is also true but is a result of the rules of a flawed franchise system being made up as we go along.

Quote from BNM:

"The proposed FGW 'deal' will do nothing for passengers or taxpayers"

This suggests you (BNM) have had sight of the deal. Would you care to share it with rest of us?

I have expressed an opinion. I may be wrong. In many ways I hope I'm wrong. But at the moment this Government appear to be giving carte blanche to the operating companies. If they go with the reason that it's necessary not to have a franchise competition for Greater Western because of infrastructure work and introduction of new rolling stock, what's to stop other TOCs requesting the same? Many will face similar issues in the coming years.

This government is fast appearing to be beholden to the owning groups. That doesn't seem right or fair to me. Making direct awards is not free-market politics and it's riding rough-shod over legislation. Necessity is one thing (not that I agree with that). This appears to be making it up as you go along.

My opinions on this issue are personal ones, not endorsed by, or necessarily shared by, this forum's other moderators and its administrators.

I agree with BNM. Privatisation  is now just political dogma. If the East Coast management is doing a fine job for its users and taxpayers as owners it should have the right to compete against commercial operators, i.e. the 93 Act is all about introducing competition but this government does not want competition to operate if there is a possibility that the public sector could win a franchise against the likes of First & Stagecoach.

I don't entirely understand why bignosemac is complaining about the apparently low amounts of money the TOCs are re-investing in the railway industry. I would suggest that the model of the industry that he is using does not reflect the actual, or even the desired, situation.

As a result of increasing passenger numbers and fare increases exceeding the rate of inflation over the last few years the operating costs of the railway are nearly completely covered by income from passenger fares and freight carried. Taking financial figures published last year by the ORR for the year 2011-12 passenger income amounted to ^7.4 billion and 'other' income (freight, car parking, etc.) amounted to ^1.3 billion - a total of ^8.7 billion.

Network Rail's operating expenditure (including renewals) amounted to ^2.6 billion and the TOCs' outgoings amounted to ^6.1 billion. So the total costs for running the railway came to ^8.7 billion - essentially the same as the income.

What of course is missing in this last figure is the capital expenditure being made by Network Rail on the infrastructure - all those developments such as the Reading rebuild, electrification, the flyovers at Hitchin and Doncaster, the new chord at Nuneaton, the new platform at Gatwick and the junctions at Bicester and so on. These are covered by NR borrowing money, about ^2 billion in the year mentioned, and grants from the Government - the railway does not generate enough money (yet) to fund its own enhancements. And of course interest has to be paid on the total of the sums borrowed over the years which amounted to ^1.5 billion in 2011-12.

The TOCs make a profit of a few per cent on turnover - but to suggest they don't contribute their fair share to the railway is wide of the mark. Their investment in the system is made indirectly - via their track access and other payments to NR and via the rolling stock leasing payments to the ROSCOs.

A better model by which to judge the TOCs is the consider them in the same light as a retail outlet in a shopping mall. Its rent covers its proportion of the costs of maintaining and enhancing the mall - but these activities are carried out by the mall owner, in our case NR. The shop's investment is limited to the fixtures and fittings in the shop and in the capital tied up in stock - it does not cover the fabric of the building. The shop pays directly for its own staff, cleaning and power and it makes a profit, it is to be hoped, on its sales.

My point is you cannot criticise the TOCs for not spending money, or even of not spending enough money, on renewals or investment in the system because they do, it's just one step removed. The question of ownership of the TOCs, or even where their dividends are paid, is irrelevant. There has been foreign ownership of UK companies, and UK ownership of foreign companies since time immemorial - did you know that the HSTs are Rolls-Royce powered?

Well made points, 4064.

One I will pick up on though is track access charges. These have fallen sharply in real terms since the formation of Network Rail from the ashes of Railtrack. The shortfall was meant to be made up by increased premiums to Government paid by the TOCs. Those increased premiums would offset the shortfall at Network Rail, whose debt is ultimately underwritten by the Government.  And with accounting changes will actually show up on Government books later this year.

However, Government has not received anything like the forecasted premium payments since the last round of franchise awards. Skillful manoeuvering, defaulting or walk away threats from TOCs have put paid to that. Recession may be blamed, but the passenger rail industry as a whole was hardly affected by that - passenger mileage increased throughout the recession. Virgin negotiated out of their premium profile during the WCML upgrade. FGW walked away from their backloaded premium profile by exercising a contract termination clause. Other TOCs have not come anywhere near paying back to Government their forecasted premiums. National Express just walked away the moment the premiums kicked in.

The net result of this is that TOCs are having their cake and eating it. Greatly reduced track access charges and no repayment to Government to offset this. Hence only 9% of TOC profit returned to the public purse to pay for investment. 91% to shareholders. All allowed for and overseen by Government. And the Operating Companies are further rewarded for this collusion with Government, at the expense of taxpayers and Network Rail debt, with management contracts. Nice work if you can get it.

We need, with urgency, a return to an independent franchise/concession awarding body. Not the continued cosy arrangement between Government (via a grossly understaffed/unmotivated Rail Group at the DfT) and Operators.

You're not suggesting a return to a grossly underfunded, ideologically bereft, and atrociously led SRA, are you  ???

East Coast is dinging a fine job on an operational level, but it is not operating under quite the same constraints as would be laid on a privately owned TOC.  For instance it did not have to put up a performance bond (to cover the DfT's costs in finding a new contractor if it failed to fulfil its contract) as this cost would fall on the DfT anyway. As several tens of millions of pounds has to be tied up in the bond for the duration of the franchise (and is first released by the DfT six months after the end of the franchise) the TOC, or its owning group, has to have some seriously deep pockets.

So, if the existing management were to bid for the franchise it would have to find about ^50 million it was prepared to lock away for 7 or 10 years. And if it raised the money by buying an insurance it would still need to be able to pay the premiums and I can't see any insurer taking on that type of risk without the putative TOC putting at least some money on the table.

What might happen is that a company such as First or Stagecoach or a finance company of some sort might attempt a bid for East Coast and take on the existing management to run it. What cannot happen is that the East Coast management would just continue unchanged - it needs a backer.

And, yes, the 1993 Act is all about competition. It mostly happens between bidders at the franchising stage.

But doesn't happen at all when Government decides to ignore the legislation and award contracts to incumbents.

Heck no. One of the worst people ever to grace the upper levels of the privatised rail industry was Richard Bowker.

Properly funded, independent and forward looking. Beyond my ken as to how that's achieved, but anything is better than what we have now.

Here is a Transport Committee transcript from November 2003 that may be of interest - http://www.publications.parliament.uk/pa/cm200304/cmselect/cmtran/145/3110511.htm

Come back Tom Winsor, all is forgiven.

I love the part where Richard Bowker admits that (Virgin) CrossCountry got the introduction of their Operation Princess timetable wrong. "There was a degree of over-ambition with that timetable."

A timetable long in the planning at Virgin to purportedly take advantage of the new Voyager rolling stock. Much of that planning done when the co-Chairman and Commercial Director at Virgin Rail Group was... guess who?

Yep. Richard Bowker.

And who signed off on this timetable, that could never work, the following year?

Yep. Richard Bowker. Now at the SRA.

Move forward a few years. The SRA has been abolished and Richard Bowker is now at National Express Group. He oversees the bid for the East Coast franchise, promising the earth to Government with woefully inaccurate revenue projections and thus premium payments. As soon as those premiums kick in and aren't matched by the revenue projections, Bowker and National Express just walk away.

Well. MTU powered. With MTU only now being jointly owned by Rolls Royce Holdings and Daimler AG.

When the current FGW HST engines were built, MTU were not even part-owned by Rolls-Royce. At the time of build the MTU business was owned by a Swedish investment company, EQT Partners (later trading as Tognum AG), having been spun of from the DaimlerChrysler group in late 2005.

Bit of a stretch to say HSTs are Rolls-Royce powered. With Rolls-Royce only becoming co-owner of the the MTU business in 2011, long after the MTU engines were built, and with Tognum AG being renamed Rolls-Royce Power Systems (50/50 split ownership between Rolls Royce Holdings/Daimler AG) only in 2014.

The MTU business continues, with diesel engines still badged as such.

I could equally (but erroneously) say that HSTs are Daimler powered.

Rolls-Royce are buying out Daimler's share in Tognum so MTU, which will continue to trade under its own name, will be 100% owned by Rolls-Royce.

See http://www.reuters.com/article/2014/03/07/us-daimler-rollsroyce-idUSBREA2619520140307

FGW Response here: http://www.firstgreatwestern.co.uk/About-Us/Media-Centre/2014/March/fgw-welcomes-government-decision-to-explore-franchise-options

Basic details of the tender as registered with the Official Journal of the European Union:

https://www.publictenders.net/node/2513479

Presumably, lodging this with the EU now allows them to award beyond a further 23 months....

Sorry to keep on harping about this issue, but the story of the evolution of the track access charges and the Network Grant is a bit more nuanced than you make out. And I still don't understand the point about the percentage of the TOCs' profits which go towards investment in the railways.

The TOCs, on average, make less than 5% profit on their turnover, as I wrote earlier, and profit is generally taken to the the amount of money left over when the costs of operating the business are deducted from income. In the case of the TOCs the costs include staff costs, rolling stock leasing charges (which, depending on whether it is a 'wet' or 'dry' lease, will include various levels of payment for maintenance, repair and enhancement), fuel, oil, brake pads, office cleaning, train cleaning, stationery, insurance, rail replacement buses, the fixed and variable track access charges, rent, building maintenance, any interest due on monies borrowed, web site hosting services, fees payable to ATOC for the ticketing system, its share of the costs of the BT Police and so on.

As I wrote in an earlier post, the rolling stock leasing charges include sums for the capital expenditure on renewals and the capital expenditure on enhancements. The track access charges also include sums to cover capital expenditure on renewals of the network and a contribution to the capital expenditure on enhancements to it. I really do not understand your position where you claim that only 9% of profit goes in re-investment in the industry. The monies for investment in rolling stock and the infrastructure renewals have already been paid before the profits are declared. Even if your figures are correct, the 91% of the profits which you claim go to the shareholders is therefore 91% of less than 5% of turnover, in other words about 4% of turnover. Any anyway, aren't the shareholders exactly the people who should receive the profits - in fact the only people who are legally entitled to receive the profits?

And the fact that management contracts are being awarded at all has nothing to do with the TOCs or the rail industry generally, but is all due to the incompetence of the DfT which is a second rate, under-staffed, innumerate ministry which can't manage its franchising programme.

Apropos of nothing above, I understand that there's a 12 month period after the contract appeared in the Euro Journal before this can be made - so no holding of ones breath I suggest in anticipation...

Expressing profits as a return on turnover is not a valid measure for most comparative purposes. An outside investor usually looks at return on capital of the company. Some business has by its nature a low profit return on turnover simply because of the high turnover relative to capital employed. Others may have for a given level of capital a much higher return on turnover but because capital employed may be higher, a similar return on turnover. The figures are often used to tell the story that the writer wants to show and are often biassed so have to be read with caution.

No investor will make a decision on the basis of one factor. The significance of the various measures of return (investment, capital or turnover) depends on the structure of the business and its products. For example a traditional manufacturing company owning its own plant and buildings will have a higher ratio of capital to turnover than a computer software company in the games business delivering its products by the internet.

The TOCs were deliberately structured to have low capital requirements (hence, for example, the ownership of the rolling stock was invested in the ROSCOs) in order to attract new entrants into the railway industry. They have to be judged on this basis.