Passenger rail franchising in Great Britain

Tendering, monitoring and termination Railway franchises are decided by the UK Government's Department for Transport (DfT), who design the boundaries and terms of service, and award contracts to the train operating companies. Under the devolved administration arrangements, franchises for ScotRail and Caledonian Sleeper are awarded by Transport Scotland and the Wales & Borders franchise is awarded by Transport for Wales. Prior to formally tendering a specific franchise, the DfT publishes a Prior Information Notice (PIN) outlining the basic details, and opens a consultation with relevant transport authorities, devolved administrations and the Transport Focus watchdog. At the end of this process, a formal Invitation To Tender (ITT) setting out the detailed terms of the proposed franchise agreement is sent to the three to five prospective bidders who have been identified as pre-qualified. ITT's may include a range of variations for consideration by the prospective bidder, who may also submit variations themselves. The franchise is awarded to the bid which is deemed most viable, and which offers the best value and reliability. If relevant, bidders' past performance is also considered. Performance is monitored throughout the contract period. In contrast to earlier bail-outs, following the 2004 changes in approach to cost/revenue risk, unless there are exceptional circumstances, the DfT's policy toward failing franchises is not to rescue them with further financial assistance. Instead, DfT will hold them to the agreement and terminate the franchise early, and then run the franchise directly as an operator of last resort (OOLR), pending a re-tendering. Agreements also contain a cross-default clause, which allows other franchises also held by the company or an affiliate to be terminated. Financing Rail franchise holders in Great Britain accept commercial risk, although there are clauses in newer franchises which offer some compensation for lower-than-expected revenue (and also claw back some excess profits, should these occur). The main costs incurred by franchisees are track access charges (paid to Network Rail); other significant costs come from staffing, leasing stations (from NR) and rolling stock (from ROSCOs). Franchisees also pay for light maintenance of stock, with heavy work being done as part of the ROSCO lease. The main revenue stream is from fares, supplemented by the franchise subsidy in cases where there is a shortfall. In addition, franchisees are allowed to sub-let commercial units directly in leased stations. ==Operators==

Privately operated The following national rail contracts are operated by private companies. Government operated The following services are operated by the UK, Welsh or Scottish governments. Concessions A small number of urban railway systems are not franchised but are contracted out as a concession instead. Concession holders are paid a fee to run the service, which is usually tightly specified by the awarding authority. They do not take commercial risk, although there are usually penalties and rewards specified in the contract for large variations in performance. The South Yorkshire Supertram was operated under a concession by Stagecoach until March 2024, when it was taken back into public control by the South Yorkshire Mayoral Combined Authority. Open-access operators An open-access operator is a train operating company that is not subject to franchising or concessions, but instead purchases individual train paths from a railway infrastructure company such as Network Rail. These operators include Eurostar, Grand Central, Heathrow Express, Hull Trains, Lumo and Pre Metro Operations (providing a shuttle service on the Stourbridge Town branch line). Former franchises Prior to privatisation, the passenger services of British Rail were organised into three units: • InterCity for long-distance express services • Network SouthEast (NSE) for commuter services across East and South East England into the various London termini • Regional Railways (RR) for services in all other areas They then underwent further reorganisation in preparation for franchising, being split up into 25 train operating units (TOUs) that were gradually incorporated as separate businesses. These operated as 'shadow franchises' that negotiated contracts individually with regulators, Railtrack (the infrastructure and major station owner) and ROSCOs (the rolling stock leasing companies) before being sold off in 1996 and 1997. ==History==

1996–1997: Genesis to sale The franchising system was created by the Railways Act 1993 as part of the privatisation of British Rail by the Government of John Major, and the first franchises came into effect in 1996. Prior to this, the railway system had been owned and operated by the government-owned corporation British Rail (BR), which has since been wound up. Prime Minister John Major envisaged splitting up the railways and returning ownership to an equivalent of the Big Four railway companies that had existed before the creation of British Rail. The Treasury advocated an alternative plan put forward by the Adam Smith Institute which separated railway infrastructure from train service operation and contracted out passenger services to seven-year franchises. This scheme formed the basis of the system which was implemented, which saw the creation of 25 shadow franchises, to be sold off in a process managed by the Director of Passenger Rail Franchising, which specified service levels and public subsidies that were to be paid to operators. The legislation allowed BR to bid for franchises, if the DPRF agreed, but in practice he never did. As the program progressed, all franchises had been awarded and commenced by 1 April 1997, the last being ScotRail. OPRAF was initially criticised for taking too long, but answered that most of the delays were outside of their control, and were indeed caused by the government itself. The first four franchise competitions only attracted four bidders each, well below government expectations, although competition increased as the program went on and investors gained more surety over the way the system was to operate as a whole. Ultimately, although there were 25 franchises, the eventual buyers came from only 13 different companies. Many were bus companies, with the hoped-for interest from airlines and shipping groups failing to be converted into solid bids. In addition, despite several bids, due to difficulties in raising finance, only three bids from management buyout groups had been successful. In the end, most of the franchises were awarded for lengths from 7 to years. Only seven franchises were longer – two for 10 years (Great Western and Midland Mainline), and five for 15 years (LTS, Gatwick Express, South Eastern, Cross Country and West Coast). Only one was shorter, the 5 year award for Island Line. In 2000 the shadow SRA announced plans to use the re-franchising of the 18 shorter term (7-year) franchises expiring by 2004 to make various changes aimed at improving service grouping and lengthening franchises, with the aim of making them more robust and better able to invest in services. It aimed to have these proposals agreed by Autumn 2001, and published a timetable for the letting of 9 franchises in three tranches. By the end of 2002, the SRA had also changed its policy on Franchising Agreements to introduce various other performance criteria in addition to keeping to the PSR, aimed at raising the overall quality of passenger journeys. Franchise lengths would be kept to between five and eight years, but extensions would be permitted if Key Performance Indicators (KPIs) were met. It also changed the approach to risks in costs and revenues, and introduced incentive payments for performance and long-term investment. The changes took effect after the awards for the Transpennine and Wales & Borders franchises, which were already too advanced. The tendering process was also simplified, giving more details up front in order to speed up the process and make bid assessment more robust. Through the use of tactical short-term extensions, the SRA planned to achieve the changes in franchise redesign and smooth out the timetable for re-franchising, aiming for two or three awards per year. In February 2002, the Chiltern franchise became the first to be awarded for a 20-year duration, the winning bidder being Chiltern Railways, the incumbent franchisee since privatisation. In August 2003, FirstGroup purchased GB Railways, the first time since privatisation that a TOC had been bought by another TOC. 2005–2009: Direct government responsibility The Railways Act 2005 abolished the SRA and transferred the responsibility for franchises in England and Wales directly to the government through the Secretary of State for Transport, with the Welsh Government being given a direct role over services in Wales. Responsibility for the ScotRail franchise was passed to the Scottish Government. By 2007 the Labour government was happy with how the franchise system was leading to improvements in customer satisfaction and better trains, crediting TOC's use of their freedoms under the system to deliver passenger growth. The 2008 recession sparked fears over franchisees' ability to survive, although the government allayed these fears in 2009. Passenger Rail Franchising has been examined by the National Audit Office and a report was published on 15 October 2008. In response to continuing criticism, changes in how franchises were agreed and monitored continued; by 2010 agreements contained penalties for failure to increase reliability, and the number of KPIs had been reduced. In 2012 the franchising system essentially collapsed in the wake of the West Coast controversy (see below). As a result of the crisis, the government commissioned two inquiries, an inquiry to look into the cause of the West Coast failure, undertaken by Sam Laidlaw, and a review undertaken by Richard Brown of the wider franchise system. The Laidlaw report was published in December 2012, and found the DfT to be primarily responsible for the West Coast failure, having made several errors in its financial modelling. In 2014, the DfT was re-organised, with responsibility for rail franchising becoming part of the new Office of Rail Passenger Services's remit under an externally recruited chief, the ORPS itself being part of a new Rail Executive within the DfT. Suspension and abolition In response to the COVID-19 pandemic, on 23 March 2020 the UK government took emergency measures which suspended all passenger rail franchise agreements for six months. Passenger numbers had already dropped by 70% by that date, leading to a significant drop in the income of the operating companies, which responded by cancelling and reconfiguring services. The government agreed with the companies that passengers holding advance tickets would be able to get a full refund. Under the Emergency Measure Agreements (EMA), which were backdated to 1 March, the normal financial mechanisms of the franchise agreements were suspended so that operating companies would not get into financial difficulty. All revenue would be paid to the government, who would pay the operators' costs plus a management fee of up to 2% of their pre-pandemic costs. In May 2021, the public body was named as Great British Railways. On 20 September 2020, the first set of EMAs expired. They were replaced in most cases by Emergency Recovery Measures Agreements (ERMAs) with durations of between six and 18 months; under these the Department for Transport (DfT) continued to receive the revenue and pay most of the train operating companies' costs. and Arriva's CrossCountry franchise was extended to October 2023 under a direct award agreement. Commercial arrangements for all three are consistent with the ERMAs. In a further move away from franchising, in December DfT agreed a directly awarded National Rail Contract with South Western Railway to run for at least two years following the end of its emergency agreement in April 2021, similarly with Avanti West Coast for at least four years from April 2022, and GWR for three years from June 2022. • One franchise was taken into public ownership under the operator of last resort procedure in 2021: Transport for Wales Rail by the Welsh Government. • One franchise was taken into public ownership under the same procedure later in 2021: Southeastern, owned by Govia was terminated on 16 October 2021 and transferred to Southeastern owned by Department for Transport. • One franchise was taken into public ownership under the same procedure in 2022: after the Abellio ScotRail franchise finished at the end of March 2022, services were transferred to ScotRail, owned by the Scottish Government on 1 April 2022. • On 28 May 2023, FirstGroup's TransPennine Express' contract was not renewed after customer complaints of poor service and a high number of train cancellations. Operator of last resort TransPennine Express took over. Labour government (2024–present) Following the formation of the Labour government after the July 2024 general election, it was announced that franchises would be gradually phased out as train operating companies are taken into public ownership. In November 2024, the Passenger Railway Services (Public Ownership) Act 2024 brought this into effect by amending the Railways Act 1993. The first operators to be renationalised were South Western Railway and c2c in 2025. The process is expected to be complete in October 2027. The new government also confirmed that they would continue with the previous Conservative government's plans to set up Great British Railways, a publicly-owned company that will own and manage most railway infrastructure across Great Britain, taking over from Network Rail. GBR will assume responsibility for passenger services as they return to public ownership, gradually reunifying them under one entity and reintegrating them with infrastructure management. ==Competition inquiries==

Whenever there is a possibility through the franchising process for multiple franchises to come into the common ownership of a larger transport group, these can lead to referrals to the competition authorities for investigation (currently the Competition & Markets Authority (CMA)), if it is deemed there is a concern that market dominance might result in a monopoly. This can also be triggered when there is an overlap between train and bus services in a particular area or corridor (most bus and coach services in Great Britain having been privatised in the 1980s). Many investigations are cancelled without conclusion, simply because the concerning situation does not arise (i.e. a different company wins the bid). Investigations are also often closed with no action, after it is found there is little concern (such as in cases where the operator has little-to-no ability to create a monopoly situation in practice, even though they may control large areas of services). Where a concern is found to be significant, it is often resolved through the operators agreeing to certain undertakings designed to prevent the monopoly situation occurring, although in some cases investigations will conclude there is no alternative but to block the proposed contract. Investigations which resulted in undertakings are as follows: • Stagecoach / East Coast (2015) • Arriva / Wales & Borders (2004) • First / ScotRail (2004) • National Express' acquisition of Prism Rail (2000) • National Express / Midland Main Line (1996) In February 2017 the Transport Select Committee concluded that the rail franchising model was "no longer fit for purpose" and was failing passengers, and recommended that the Transport Secretary Chris Grayling should instigate an independent review. ==Controversies==

Public/private ownership According to the Railways Act 1993, the public sector cannot bid for rail franchises in Great Britain, although some rail franchises in the past have been taken on temporarily by a state-owned operation following an unsuccessful private franchise. Some critics of the franchising system have suggested that state-owned organisations, such as the Government-owned holding company set up to take temporary ownership of franchises, Directly Operated Railways, should be allowed to tender for rail franchises on a permanent basis. They highlight the fact that many of the current rail franchise holders are actually joint ventures involving subsidiary companies of the state-owned railways of other countries, such as SNCF of France or the German Deutsche Bahn. Some commentators have criticised the re-franchising deals by comparing the performance of the private-sector franchisees unfavourably with the public-sector operators. Advocates of the franchising system contrast public-sector operations with commercial operators, citing their ability to invest private capital into the franchises, financial returns to the Treasury and customer incentives such as free on-board Wi-Fi and loyalty card schemes. West Coast upgrade delay In the wider context of the controversy over Railtrack's failure to upgrade the West Coast Main Line, there was criticism of the SRA for failing to ensure the Cross Country and West Coast franchises transitioned from subsidised to premium-paying franchises. This had been anticipated in the initial 15-year franchise agreement that ran from 1997 to 2012; but depended on Railtrack delivering the upgrade on time. Instead, the delays meant the contracts had to be renegotiated early as management contracts, and continued to be subsidised for several years until they could be re-let, which was seen as a cost to the public purse, adding millions to the billions run up in over-spend on the upgrade itself. The initial management contracts came into effect on 22 July 2002, and were to see the West Coast franchise supported by the SRA until March 2003, and if agreement on a new franchise terms was not reached by then, the management contract would continue, in return for a fee of 2% of revenue. Similarly, Cross Country would be supported until March 2004, and then by a 1% fee if not renegotiated, but with the option of the SRA putting it out to tender. Unhappy with Virgin's proposal for terms of the remainder of the original 15-year Cross Country franchise, the SRA terminated negotiations on 6 August 2004 and the temporary arrangements continued until the franchise was re-let in a revised form, announced in October 2005. Although Virgin was shortlisted as a bidder for this revised franchise, it lost out to Arriva, who took over as the new franchisee from 11 November 2007. West Coast re-tendering (2012) In 2012 the franchising system ran into some difficulty; the Department for Transport awarded the InterCity West Coast franchise to FirstGroup, but in October the Secretary of State for Transport reversed this decision after significant technical flaws had been revealed in the way the franchise process was conducted. Virgin Trains was given a temporary management contract to run the franchise until a fresh competition could be run. InterCity East Coast franchise failures In December 2006 Sea Containers, which had held the InterCity East Coast franchise through its Great North Eastern Railway TOC since 1996, was stripped of its contract six years before it would have expired, due to financial difficulties. Services duly transferred to the new, publicly owned East Coast TOC in November 2009. The franchise was eventually re-tendered and awarded to a joint venture between Stagecoach and Virgin in November 2014, with services transferring to the new Virgin Trains East Coast TOC in March 2015. In May 2018 it was announced that the franchise would return to state ownership again, with services duly transferring to the new, publicly owned London North Eastern Railway TOC the following month. Bidding process (2003) The 2003 purchase of GB Railways by FirstGroup was seen by some as an attempt by First to bypass the franchising system: GB were the holders of the Anglia Railways franchise, which was being re-tendered at the time. First had already been rejected for the shortlist of three bidders, which included the incumbent. Responding to media criticism that he had been "outmanoeuvred" by First, the head of the SRA argued that he could not decide who would become a preferred bidder based on what might happen in future regarding mergers and acquisitions. ==See also==