22. The estimated direct cost of the eight franchises in 2006-07 was £811 million. By 2011-12, the number of subsidised services will fall from six to three (Figure 2). The ability of these eight train operators to deliver an overall premium, instead of continuing subsidy, depends on revenue growth. The two main causes of this revenue growth are increases in the volume of passengers carried and increases in fares, together delivering between 47% and 62% growth over a five year period. Despite the economic downturn, the Department does not necessarily agree that the rail industry faces a low growth situation. It still believes that at some stage in the future it will only be subsidising the track provider, Network Rail, and not the train operators.37
Figure 2: Rail Franchises let 2005-2007 and premium or subsidy bid for 2011-12
TRAIN OPERATOR | FRANCHISE AREA OR NAME | PARENT(S) | START | EXPIRY | PREMIUM OR (SUBSIDY) £ million |
Southeastern | Integrated Kent Franchise | Govia Ltd | Apr 061 | 2014 | (65) |
First Capital Connect | Thameslink/ Great Northern | FirstGroup plc | Apr 061 | 2015 | 126 |
First Great Western | Greater Western | FirstGroup plc | Apr 061 | 2016 | 168 |
Stagecoach South West Trains | South Western | Stagecoach Group plc | Feb 07 | 2017 | 140 |
London Midland | West Midlands | Govia Ltd | Nov 07 | 2015 | (162) |
East Midlands Trains | East Midlands | Stagecoach Group | Nov 07 | 2015 | 46 |
Cross Country | New Cross Country | Arriva Group | Nov 07 | 2016 | (156) |
National Express East Coast | InterCity East Coast | National Express Group plc | Dec 07 | 2015 | 229 |
Overall premium |
|
|
|
| 326 |
Notes: 1 Franchises specified by the Strategic Rail Authority and let by the Department. The franchise expiry dates assume that any relevant extension is earned. The amount of premium or subsidy contracted will change to reflect any change in track access charges payable to Network Rail. | |||||
Source: National Audit Office analysis
23. The Department uses a 'traffic light' system to monitor the risks faced by the operators and has meetings scheduled on a small number of franchises where the current signals are at 'red'. The Department presents its tentative view at these meetings, which the train operators may validate or modify.38
24. The Department intends to hold train operators to their contract terms, although there is some scope for train operators to cut back any services that are not core requirements of the franchise. The scale of such contingency plans, however, is unlikely to deal with the adverse conditions arising from the present recession.39 If an operator fails, the Department holds performance bonds that cover about 5% of the annual cost base of the company concerned. The bonds have been issued by a number of different banks, mostly based in the UK. At present, the Department reviews the nature of these bank obligations monthly.40
25. The Department expects train operators to cope with the current recession, but has remedies that have already been tested in case a company is unable to fulfil its obligations. For example, in the case of GNER, the Department paid the management team to run the company for a period while the Department re-let the contract.41 In this case, the performance bond covered the cost of re-letting the contract. There is a risk of more than one franchise failing at a time, and that one or more might have to be re-let at an adverse price compared with the original transaction. The Department would not be bound to intervene immediately unless the company was incapable of managing the franchise.42
_________________________________________________________________
37 Qq 68-70
38 Qq 2-6
39 Qq 136-139
41 Qq 139-140