UK



Rail Franchising in Britain



After nearly 40 years in the public sector as British Rail (BR), the British railway industry was completely transformed over the period 1994-1997, with the separation of infrastructure from operations, franchising of passenger services, and selling off freight operations.183 BR’s passenger rolling stock was divided into three rolling stock leasing companies (ROSCOs), which were sold in 1996. Since then, the ROSCOs have also leased most new locomotives, coaches, and multiple units to passenger train operating companies. Since privatization, passenger rail services in Britain have been operated by private sector companies mostly through franchises. Open access operators also serve some lines on a purely commercial basis. The right to run passenger train services rights were franchised to 25 (now 20) train operating companies (TOCs), creating ‘competition for the market’. To make frequent franchising competitions possible, the TOCs were privatized with no significant asset base; they buy access to infrastructure services from Network Rail under terms approved by the independent Office of Rail Regulation. Franchises were let for 7-15 years; the longer franchises were awarded in return for commitments to invest.

Virgin Rail Franchises

British bus operators won most of the franchises, in part due to their expertise in cost cutting, gained during the 1980s when they were privatized. Two franchises, West Coast and Cross Country, were awarded to the Virgin Rail Group, a private limited company that is a subsidiary of Virgin Management, another private limited company controlled by Richard Branson, who established Virgin Atlantic airlines. Virgin’s successful bid for the rail franchises was in part due to its aggressive timetable for replacing the aging fleet.

Both Virgin franchises were for long-distance intercity services that could benefit from Virgin’s expertise in marketing and customer service. The 15-year franchises began in 1997 and are scheduled for termination in 2012. They were let for 15 years184 because they were expected to involve major investments,185 which require an extended pay-back period,186 and create major disruption to infrastructure. The Cross Country agreement was terminated early, in 2007, under Government’s remapping of franchise services, but West Coast remains with Virgin until 2012.

Under franchising, the regulatory relationships between Government and private operators such as Virgin were formalized through contractual provisions specified in franchise agreements and related documents. Box 1 summarizes key elements of the West Coast Franchise Agreement.



Franchisees generally bear most revenue risk and all cost risks,187 except for changes in track access charges, which trigger an equivalent change in subsidy or premium payments.

    


183 More details on the railway reform in Britain can be found in “Reforming Railways—Learning from Experience”and “Privatizing British Railways: Are There Lessons for the World Bank and Its Borrowers?”
184 The Government decided in 2010 to increase franchise lengths to 15-22.5 years again to increase investment. See http://www.dft.gov.uk/consultations/closed/2010-28/govresponse.pdf
185 Bidders were asked to bid with and without the investments.
186 Although franchisees leased rolling stock from ROSCOs, this was not a requirement; the possibility existed for TOCs to buy rolling stock themselves.
187 Initially the franchises bore all revenue risk but the revenue is now shared with government when it differs significantly from amounts assumed at franchise award.
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