Franchising financing

[whole diary]

[MarkRanger]

Hello all!

Although I am an East Anglian, my wife comes from Swindon, so that gets me more or less in territory! I am also involved with the CAST.IRON campaign to stop the Cambridgeshire Guided Busway (yes, I know that it's a done deal now, but we reckon that time may tell a different story).

But that's not the reason for this. I have never understood the way the franchise financing works.

As I see it, company gets franchise, commits to a kickback (or bung, as the more cynical amongst us may suggest) to government in return.

But government then pays them a subsidy to operate the trains.

Am I entirely wrong in spotting a merry go round of money here?

Then there's the vexing question of revenue. In any business that I have been involved with, increased passengers equates to increased revenue and more profitability, as your load factor increases. If that's the case, how then can you claim that you need to increases fares by more than inflation to handle the increased demand?

I'd love it if someone could enlighten me as to what is in the public interest here.

Mark

[Lee]

Welcome to the forum, Mark. Good to have you on board.

As I see it, company gets franchise, commits to a kickback (or bung, as the more cynical amongst us may suggest) to government in return.

But government then pays them a subsidy to operate the trains.

In simple terms, the franchise is designed so that the profit making services subsidise the loss-making services. However, Network Rail also gets a grant from government to keep track access charges lower than they might otherwise be, which is a form of subsidy.

The government did start off by paying FGW^▸ (First Great Western) a subsidy, but this has now turned round to FGW having to pay the government a premium.

It is, of course, far more complicated than that, as I'm sure members are about to testify....

[Tim]

A franchise is either recieving a subsidy or paying a premium.  Never both at the same time (although the DfT^» (Department for Transport - about) tries to reduce the subsidy/increase the premium year on year so the "profile" willchange with time).  Additionally, as Lee says, all services are effectively subsidied by the grant given to NR^» (Network Rail - home page) which means that the TOCs^▸ (Train Operating Company) pay NR less than the full cost of infrastructure provision.  This hidden subsidy is typically  a quid or two per journey. 

more passengers = more profit, but only to a point.  If the passengers increase on peak time trains, then they get more crowded and so the TOC puts up fares to choke off demand.  This avoids the cost of hiring / buying more coaches  and avoids the issue that even if there was an economic case for renting more stock, there simply isn't the spare stock lying arround (and franchises are too short for the TOC and the ROSOCs to take the risk of financing new built - because they are affraid that the trains may not get a full 30 to 40 years). 

The whole system is a mess.  Neither run as a public service nor in the best interests of the tax payer.

[Lee]

A franchise is either recieving a subsidy or paying a premium.  Never both at the same time (although the DfT^» (Department for Transport - about) tries to reduce the subsidy/increase the premium year on year so the "profile" willchange with time).

The link below illustrates how the profile changes from subsidy to premium.
http://www.dft.gov.uk/pgr/rail/passenger/franchises/franchisepaymentprofilesa

There are also examples on the network where local councils subsidise some rail services, such as on the Barnstaple and Severn Beach lines.

[MarkRanger]

That set of figures is interesting, if nothing else because it shows what appears to be almost a random payment schedule. Why would one TOC^▸ (Train Operating Company) pay less when they get towards the end of their franchise than another?

And as for TOC's pricing commuters off peak services, the words, 'public' and 'transport' come to mind, loosely coupled with 'congestion' and 'pollution'. It seems that the rail companies have provided a service that more and more people want - or need. When that happens, they tell us that we are travelling at the time they do not want us, so they will price us off their trains - and the cycle of people resorting to their cars happens again. Their revenue dips and they then start to cut services, which reduces demand.

It really is time that all concerned got a grip.

I'm not normally as miserable as this by the way!

[MarkRanger]

Sorry, replying to my own reply now, how sad is that?

Regarding extra carriages - could their not be some kind of strategic reserve, perhaps government owned, to pad out the services as and when required? A bit like Thunderbird locos, but with coaches/units.

I got one of the wonderful British Transport Films DVD for Christmas. Lovely nostalgia, but in one sequence, they needed additional coaches on a service, so they added them. Okay, so with multiple units, that is not so flexible - but why is there so little flexibility in our system? Maybe there is something to be said for a more flexible train make up on key services?

Again, the model I am used to is that if you get additional demand, you adapt your product to accommodate that demand - it is sometimes referred to as success!

[grahame]

Mark, Welcome .... I'm being a bit slow following up here and may have been overtaken by the other posts, but I came up with this:

A tale of two trains

A London to Swindon service. Standard class fare, 53.50, first class fare 87.00, journey time 1 hour, 400 standard and 200 first class seats is taking - if full -  38,800.00 per hour.

An Exmouth to Exeter service. Fare 3.80, journey time 30 minutes 150 seats is taking - if full - 1,140.00 per hour.

Both trains require a driver and a conductor; I have not included the buffer car staff on the Swidnon service, as I haven't included the coffee revenue.  Both trains have to be leased, but there's no way that the lease costs of the 125 are over 30 times the least cost of a 142, surely?  Both trains have layover times at the end of their routes, but it's likely that the layover time will be a higher proportion of the time for the train on the shorter route.

So in essence, the long distance train makes a profit and the more of them that FGW^▸ (First Great Western) or some other operator can fill and run, the better.  The short distance train makes an operational loss and needs subsidising, so the less trains that FGW has to run (if they can't twist someone's arm to give them a bigger subsidy), the better for their shareholders.

Interestingly, you could argue that the cost per mile of a short journey, with the need to have more resourcses (such as stations) per passenger, should be higher than long distance journeys. But fares are distorted and regulated, giving rise to arithmentic such as that above.

[super tm]

Mark, Welcome .... I'm being a bit slow following up here and may have been overtaken by the other posts, but I came up with this:

A tale of two trains

A London to Swindon service. Standard class fare, 53.50, first class fare 87.00, journey time 1 hour, 400 standard and 200 first class seats is taking - if full -  38,800.00 per hour.

An Exmouth to Exeter service. Fare 3.80, journey time 30 minutes 150 seats is taking - if full - 1,140.00 per hour.

Both trains require a driver and a conductor; I have not included the buffer car staff on the Swidnon service, as I haven't included the coffee revenue.  Both trains have to be leased, but there's no way that the lease costs of the 125 are over 30 times the least cost of a 142, surely?  Both trains have layover times at the end of their routes, but it's likely that the layover time will be a higher proportion of the time for the train on the shorter route.

So in essence, the long distance train makes a profit and the more of them that FGW^▸ (First Great Western) or some other operator can fill and run, the better.  The short distance train makes an operational loss and needs subsidising, so the less trains that FGW has to run (if they can't twist someone's arm to give them a bigger subsidy), the better for their shareholders.

Interestingly, you could argue that the cost per mile of a short journey, with the need to have more resourcses (such as stations) per passenger, should be higher than long distance journeys. But fares are distorted and regulated, giving rise to arithmentic such as that above.

This is also the reason that HSS^▸ (High Speed Services) guards and drivers get paid significantly more than ex Wessex guards and drivers.

[TerminalJunkie]

London to Swindon [...] 400 standard and 200 first class seats

Are you sure about that? I thought the total capacity of a FGW^▸ (First Great Western) was around 472...

An Exmouth to Exeter service [...] 150 seats

...and a two-car Pacer seats about 106. And a significant proportion of the trains to/from Exmouth are four-car now (which will increase the lease costs but not the staff costs).

Both trains have to be leased, but there's no way that the lease costs of the 125 are over 30 times the least [sic] cost of a 142, surely? 

I doubt your '30 times' figure is particularly close to the target, both for the reasons above and because the proportion of passengers on a London to Swindon service actually going from London to Swindon (as opposed to Bristol, Cardiff or Swansea) is much lower than the number doing the a full Exeter to Exmouth trip.

The lease of a single HST^▸ (High Speed Train) carriage is slightly less than twice that of a two-car Pacer unit. Don't forget that HSTs are generally more than two cars long, and you have to add the cost of leasing and running the noisy bits at each end to physically shift them.

I also suspect the Track Access charges will add significantly more to an HST journey than a Pacer one.

[MarkRanger]

I take the points about profitability of longer distance trains. Although in the aviation transport industry, it has been the (budget) short haul airlines that have shown the way, rather than long haul. I remember going to a meeting at Stansted Airport at the time when the budget airlines were starting to expand. The Airport representative went to great pains to point out that short haul traffic was far more profitable for them, as they could get twice or even three times as many flights through in the same time. Why not run a far more intensive local service? Higher utilisation of rolling stock? I suggest that if people can make use of a 'turn up' frequency for rail, it will win hand over fist. But you have to deliver what the traveller wants, not what suits your operational programme. I guess that if an ageing DMU^▸ (Diesel Multiple Unit) ran every hour, people would much prefer that to a state of the art unit three times a day - especially if the staff were coaxed into making their passenger feel wanted.

Which brings me to another vexing question. If my daughter can fly from Basel to Stansted for about ^30 on an aircraft that can take say 130 passengers, which does it cost almost as much (albeit walk on fare) to go from Stansted to London on a train that can take (I would guess) at least 400 passengers and can pick up for one or two more points en-route? Yes, I know the budget airlines often get subsidies from airports to land there, but it is nowhere near the level that the railway network gets. Staffing a plane is much more complex than staffing a train and the capital cost is huge.

Don't get me wrong, I am fiercely pro-rail, but there seem to be so many instances of the rail companies shooting themselves in the foot. Yet people love trains - this is why the guided bus will never deliver the solutions claimed for it. The TOC^▸ (Train Operating Company)'s could do well to embrace that love affair, instead of trying to making us feel like naughty teenagers who have done wrong to want to use their (our) train

[grahame]

At the risk of coming up with more "ball park" comparisons that will make TJ quake in his boots  ... have a look at what I and a knowledgable person came up with as a budget for the FGW^▸ (First Great Western)'s franchise operation for the ten years.

Turnover between 8 and 9 billion pounds.

One third of that to Network Rail
One third of that to RoSCos
One sixth of that to government in frachise payments
Final sixth for staff, salaries, shareholder profit, etc.

So train v plane.  There isn't that big franchise payment for a plane.  You don't have RoSCos with monopolies in the plane world. You don't have a track to maintain the sky all the way from Stansted to Basle ...

[MarkRanger]

I wonder what would happen in the government became a (non-profit making) ROSCO^» (Rolling Stock Owning Company - about), and the train companies paid their access charges direct to Network Rail, without the franchise payments?

And I am fascinated by the plan vs train analogy. Taking Stansted as an example, the rotation of Stansted Express unit vs budget airline is probably not far off - 45 mins fast run to Liverpool Street, 20 mins turnaround. Average budget flight 1-1.5 hours, 25 mins turnaround.

Differences? Infrastructure and operational costs (although surely an aircraft is vastly more costly to buy/lease than a train unit). No government ringfencing of what you can and cannot do.

I cannot help but wonder how many layers of interference could be stripped away and what the effect might be

[Lee]

Here's an interesting FOI^▸ (Freedom of Information) request for you (link below) :
http://www.dft.gov.uk/foi/responses/2009/jan/foi4783/

FOI Request

For all rail franchises awarded since 1st January 2005, please state:

the number of cases in which the franchise was awarded to the bidder which proposed the highest increase in unregulated fares,

the number of cases in which the franchise was awarded to the bidder which proposed the lowest increase in unregulated fares,

the number of cases in which the franchise was awarded to a bidder which proposed neither the highest nor the lowest increase in unregulated fares,

I am asking only for statistical information, not for the names of bidders, so I trust you will have no difficulty in complying with this request.

Department^s Response

For the eight rail franchises awarded since 1st January 2005:

there are two cases in which the franchise was awarded to the bidder which proposed the highest increase in unregulated fares,

there are no cases in which the franchise was awarded to the bidder which proposed the lowest increase in unregulated fares,

there are six cases in which the franchise was awarded to a bidder which proposed neither the highest nor the lowest increase in unregulated fares.

[Btline]

Seeing as it is common to board a plane >30 mins before departure, I would have thought the turn around time would be longer.

Cleaning, catering, refuelling.

And delay slack at major airports!

[MarkRanger]

>Seeing as it is common to board a plane >30 mins before departure, I would have thought the turn around time would be longer.
>Cleaning, catering, refuelling.
>And delay slack at major airports!

If you look at the low cost operator timetables, their turn around - for the aircraft on the ground - is around 25 minutes. That is the target time from the time the aircraft reaches a halt to when it is due to taxi again. Where they do build in a lot of slack is the published flying time. If it says an hour and a half, often the time in the air is little more than a hour - which I guess is designed to help them to keep to time