The Williams-Shapps Plan for Rail confirms the end of rail franchising and provides greater certainty for investors

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The long awaited white paper following the Williams review of British railways was published yesterday (20 May 2021). The white paper proposes the end of the franchising model and a significant overhaul of the UK rail sector. While increased state participation in the industry and the potential implications for ticket prices have drawn public interest, many participants and investors in the sector will be relieved to have some clarity on the proposed rail operating model after a prolonged period of uncertainty.

It has been long suspected that the output of the Williams review would be a move from the existing franchise model to a passenger service contract based model. Under such a system TOCs (train operating companies) would receive payments from Great British Railways (a new government entity which will run and plan the rail network in Great Britain, own the infrastructure, and receive the fare revenue) in respect of the delivery of specified services, rather than relying in part on income from passenger fares. As such revenue risk will be taken by Great British Railways with cost risk remaining with the TOCs. Under the franchise model TOCs accepted cost risk for delivery of the services as well as revenue and demand risk in respect of passenger numbers. The unpredictability of passenger demand led many operators to leave the UK rail market such that operating franchises were typically contested by small group of corporations. Solvency issues as a result of overly optimistic passenger number forecasts and performance issues (often not of the TOC’s making) resulted in several franchises being handed back to the DfT in recent years.

Although the plan provides only a high level analysis of the new model with much of the detail yet to be specified, this move is likely to be seen as good news for suppliers to the TOCs, such as the ROSCOs (rolling stock companies) and their investors, as it should reduce the likelihood of operator insolvency and help allay fears about passenger numbers not returning to their pre-pandemic numbers. With the TOCs having already turned to the DfT for support during the pandemic and as the emergency recovery measures agreements come to an end and are replaced by direct award national rail contracts, the transition to this way of sharing cost and revenue risk has been accelerated and industry participants are already adjusting to the new model and what it means for them. This should make the move to passenger service contracts less of a shake up and more of a continuation of the status quo when it finally happens.

Whilst increased state involvement in the railways might make private participants in the sector nervous about the continuation of their role, the white paper seeks to downplay this by repeatedly emphasising the importance of the role of private businesses and partners in the sector. With the paper outlining an ambitious plan for innovation in many areas, including ticketing, digitalisation and a move towards a greener railway, the private sector can take comfort from the fact that it seems unlikely that these aims could be achieved without their involvement and capital.

The ROSCOs and their investors will be relieved to see that the plan expressly states that the reforms “do not assume any direct change to the industry model for procurement of train fleets and maintenance by independent train-leasing companies”. For those with fleets currently being manufactured, they will also be pleased to see the white paper referring to the importance of the decarbonisation of the network. The newer, greener electric and hybrid fleets, many of which are being built with the capability to be adapted to run on batteries or hydrogen in the future, will be central to achieving this aim of decarbonisation. The white paper points to opportunities for EV charging, fibre networks and improvements in the railway being used to drive improvements in housing and social infrastructure in the local communities the rail networks serve. The reforms should introduce a 30 year strategy for rail, and much longer term planning for investments in the rail sector – including for the upgrading and replacement of rolling stock fleets. The first strategy plan is expected to be ready in 2022, following consultation with stakeholders across the rail sector.

The devolved authorities in Scotland and Wales have a range of powers in relation to rail which they will continue to exercise, as will TfL (in relation to London) and other metropolitan authorities, in relation to rail and light rail in their areas. They will need to work together with Great British Railways to deliver a co-ordinated network across Great Britain.

The implementation of the new model will require primary legislation, and the development of the new passenger service contracts – which are intended to be adapted to the specific requirements of each area to which they relate. The government intends to work with potential commercial partners and investors to design the passenger service contracts in a way that will create a healthy, sustainable commercial market, and will launch initial competitions by the time the emergency recovery agreements end in 2022. The government expects that the new contracts will reduce barriers to entry for bidders and reinvigorate the competitive market for rail.

Whilst it remains to be seen exactly how delivery of the ambitions set out in the plan will be implemented, its publication, which was timed to coincide with the announcement of the agreement of the national rail contracts on the South Western and TransPennine Express franchises, should be welcomed by market participants for confirming the industry’s expectations for what will follow the national rail contracts and ending rumour and speculation about the findings of the Williams review.