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Wednesday 24 November, 1999

Shadow StrategicRail

Franchise Replacement

Shadow Strategic Rail Authority
24 November 1999



Building a Better Railway:
Franchising Director Invites Replacement Franchise Proposals for
Chiltern, Connex South Central and Great North Eastern Franchises


Franchising Director, and Chief Executive of the Shadow Strategic Rail
Authority, Mike Grant today announced invitations to start negotiations for
replacement of the first group of rail passenger franchises - Chiltern, Connex
South Central and Great North Eastern.  This follows an invitation to train
operating companies on 10 August 1999 to submit ideas for replacement of their
franchises.  Franchise replacement is aimed at ensuring:

Improvement in the quality of passenger services 
Better performance 
Investment in extra services
High quality rolling stock providing additional capacity
New infrastructure
Easier access to the railway 
Better integration with other forms of transport.

Initial proposals have been submitted by the current franchise holders, but
other interested parties are also being invited to prequalify to participate
in this process which is expected to lead to submission of firm proposals in
the new year. 

Decisions on the award of the first batch of replacement franchises are
expected early next summer, although no deadline has been set.  If no suitable
replacement franchises can be agreed, existing franchisees retain their
contractual rights as long as they do not default on their obligations, or
until alternative arrangements are agreed with the Franchising Director.

Invitations for the second group of replacement franchises are expected in the
first quarter of next year.  The objective is to replace most shorter
franchises (expiring by 2004) within about two years. 

Explaining the objectives of the franchise replacement process, Mike Grant
said:

'My aim is to secure long term franchises that provide high levels of
performance for passengers.  I want to see proposals that will provide
additional capacity coming on-stream as early as possible, and in exchange for
this, I am prepared to consider franchise terms which would last between 10
and 20 years.  I shall also be looking forward to receiving proposals from
other interested parties.'
  
Welcoming today's announcement, SSRA Chairman, Sir Alastair Morton, commented:

'Today's announcement is the first step to building stronger train operating
companies able to invest their own capital and to co-invest with Railtrack and
others for the benefit of passengers, while also considering the needs of
freight customers.'

'Operators are already struggling to cope with increased demand and now need
more incentive to commit to longer term investment in their businesses.  The
initiative the Franchising Director has launched today charts the way forward
to better service for passengers and will provide the investment the railway
needs.'

There will be a pre-qualification process for interested parties and
application should be made to Nick Newton, the Executive Director, Franchise
Management, at the Shadow Strategic Rail Authority, Goldings House, 2 Hays
Lane, London SE1 2HB (tel: 0171 940 4200) in the first instance.  Interested
parties should note that the pre-qualification period for the first group of
franchises has been set for December 6th 1999. 


Notes for Editors

1.  Mike Grant has already announced that he will accept proposals from:

Existing franchisees for their own franchise or for a modified franchise area,
ceding to or acquiring services from another franchise
Franchisees already operating services elsewhere on the network
New entrants to passenger rail franchising.

2.  Negotiations will start out on the assumption that new franchises will:
    
Have a high level of commitment to performance, investment, quality, training
and safety
Last for between 10 and 20 years, with termination or renegotiation possible
after reviews every five to seven years
Probably have a changed profile of subsidy or premium.

The assessment of proposals will focus on the level of investment risk for the
franchisee, as well as taking account of that to be undertaken  by Railtrack
and train leasing companies.  The Franchising Director must conclude that the
new terms offer value for money, otherwise, the existing franchise runs
through to expiry.

3.  The Franchising Director will be evaluating proposals against criteria set
out in the Instructions and Guidance set by the Secretary of State. These
include: 

Commitment to improved performance
Extra or accelerated investment 
Better compensation arrangements 
Value to the taxpayer
Initiatives to promote integrated transport 
Track record of the franchisee
Willingness to give passengers a greater voice.


4.  Chiltern Railways operates services along the M40 corridor between
Birmingham and London.  It carries a mix of commuter, business and leisure
travellers.  Connex South Central operates predominantly commuter services to
London from Surrey and Sussex, as well as services to Gatwick and Brighton,
and South Coast services between Bournemouth, Brighton, Hastings and Ashford.

Great North Eastern Railway operates a fast, frequent service linking Kings
Cross with parts of East Anglia and the East Midlands, Yorkshire, Humberside,
the North of England and Scotland.

5.  The Franchising Director's letters of 10th  August 1999 and 7th October
1999 are below.

10 August 1999

BIDS FOR FRANCHISE RENEGOTIATION

Over the next few months I expect franchisees will want to start submitting
bids to me for the renegotiation of their existing franchises.  Sir Alastair
Morton and I have already indicated that we will be ready to receive bids from
this September, and we have outlined some of the things which we would expect
bids to contain.  I thought that it would now be helpful to write to all
franchises, with copies to TOC Managing Directors, explaining in a little more
detail what I am looking for in these bids, and how I intend to run the
process of renegotiation.

First, I should explain the timescale over which I intend to negotiate.  There
are no deadlines, either for the submission of bids or the conclusion of
negotiations - you should feel free to submit a bid whenever you are ready,
and I will take a preliminary view on each bid as it reaches me.  Similarly, I
am not going to set deadlines for deals to be concluded.  I will only agree to
franchise changes where I am satisfied that they will deliver worthwhile,
cost-effective benefits which would otherwise be unobtainable.  I should
emphasise that there can be no guarantee of a successful renegotiation and I
always have the option of allowing franchises to expire and offering them for
re-tender.

As I announced at the ILT conference on 30 June, I expect early this autumn to
select perhaps three or four of the bids I have received so that I can begin
detailed work on them at that point, with the aim of concluding those which I
decide to take forward within six to nine months, I will move on to detailed
work on other bids during the year 2000, and by the end of that year I hope
that we will have made progress on all bids relating to those franchises that
expire by or before 2004.  I should add that while I am also willing at this
stage to look at interesting proposals for franchises with expiry dates later
than 2004, I am unlikely to begin detailed discussions on these until after I
have dealt with the shorter franchises.

I do not intend to issue advance guidance on the way in which bids should be
structured.  As I have said before, there is no one template for
renegotiation, and I do not see the current franchise map as fixed; indeed,
once I have selected bids to take forward I may wish to talk to the bidders
about possible variant bids involving franchise map changes.  You should also
be aware that any franchise extension of more than two years will require a
direction to me from Ministers if the extension is not to be the subject of a
competitive tender.

However, I shall outline some of the things that I hope and expect to see in
bids.  Building on the criteria outlined at the Rail Summit, I am naturally
looking for proposals that offer significant investment in improving the
capacity, punctuality and reliability of your current passenger services, and
in providing other service enhancements such as better train and station
standards and information provision.  In appraising bids I will focus on the
quantum of outputs generated by new investment, and on the expected return on
investment.  I will also expect to see TOCs committing themselves to improved
performance and service levels, and to listening to the views of the
passengers.  I will hope to see measures to integrate different modes of
transport.  But I would also encourage you to take a long term view of what
your company can bring to the rail industry, and to consider whether you can
put forward worthwhile proposals for changes on a larger scale - perhaps after
discussion with Railtrack.  You will know that the SSRA has commissioned a
number of studies, particularly in the performance area, and that I will want
to reflect the outcome of these in renegotiations.

In preparing for renegotiation the SSRA is consulting with local authorities,
PTEs, the CRUCC/RUCCs network and LRPC, the Scottish and Welsh devolved
bodies, and other interested parties in order to understand their aspirations
and priorities for this process.  As customer service organisations with a
close and detailed understanding of the needs of passengers, representative
groups and local authorities, the TOCs are uniquely placed to develop ideas
which can offer major passenger benefits, and I would expect to see evidence
of this in the bids that are put to me.

Finally, a word on the detail that will be needed to underpin bids in
discussion.  As I have noted above, I do not want to set arbitrary
restrictions on bid content since the SSRA will want to explore the contents
of bids and the scope for variant bids as part of the negotiation process.  
However, I will always want to take a rigorous look at the value for money
offered by each bid as we go into negotiations, taking account of both
passenger and non-passenger benefits; and you should therefore be prepared to
provide the SSRA with detailed information at due times on investment
proposals, cost and revenue assumptions and the other elements of your bid if
and when asked to do so.

I hope that you will find this summary of my approach to renegotiation helpful
when considering whether, when and how to approach me.  I look forward to
hearing from you.

MIKE GRANT 
Franchising Director




7 October 1999

FRANCHISE REPLACEMENT

I want to follow up my letter of the 10th August, the presentation to the
Association of Train Operating Companies on 13th September and Sir Alastair's
speech to the Institution of Highways and Transportation at Chester on 17th
September by formally inviting existing and would be franchise holders to
offer proposals for franchise replacement for all the existing franchises
which expire within the next 5 years.

I want to set out in this letter 

the kind of proposals I envisage receiving and from whom;
what I will be looking for in proposals;
some process issues. 

As Sir Alastair mentioned in his speech in Chester, I anticipate proposals
might be received from 

the current incumbent in relation to his existing franchise;
the current incumbent in relation to a modified geographical version of his
existing franchise;
current incumbents in relation to any other existing franchise;
would be franchise holders in relation to existing franchises, 

but I wish to make it clear that in the absence of default I cannot terminate
an existing franchise. Those parties that wish to make a proposal in relation
to an existing franchise will have to reach agreement with the incumbent and
myself as to the terms for giving up or transferring that franchise.

Interest from would be franchise holders has already been stimulated by Sir
Alastair's speeches and resulting press content. I am also placing a copy of
this letter on the SSRA's web site and will be taking a number of other steps
to publicise this opportunity.

In selecting proposals to go forward I shall be looking for 

the commitment to performance, customer services, innovation, investment and
efficiency;
the extent to which extra or earlier investment can be obtained;
the extent to which better performance can be secured;
the extent to which integrated transport measures both within the rail network
and between rail and other transport modes can be achieved, including
integrated public transport information systems;
affordability and value for money. 

I shall also be looking for evidence of the proposals having been widely
consulted on with local authorities, the CRUCC, RUCCs network and, if
appropriate, LRPC and the Scottish and Welsh devolved bodies.

As I have said before I expect to start with only a small number of proposals
as a first tranche - no more than four franchises. The proposals to be
selected will be at my absolute discretion. Again I repeat what I said in my
letter of the 10th August - there can be no guarantee of a successful
renegotiation and I always have the option of allowing franchises to expire
and offering them for re-tender.

Those parties who submit proposals will be expected to sign a Replacement
Process Agreement which, inter alia, will require them to 

disclose to me financial and other information about their proposal on an
'open book' basis;
(for existing incumbents) give their consent to the disclosure of historic,
financial and performance information relating to the existing franchise to
third parties;
prepare such disaggregated financial and performance information as I may deem
reasonably necessary for the purpose of evaluating variant offers proposed by
me;
supply a business plan supporting the initial proposal. 

I expect to announce which franchise proposals will be taken forward in the
first tranche by the beginning of November. Other parties will then have sixty
days to bring forward alternative proposals for those franchises.


Yours sincerely
M J GRANT
Franchising Director



The full list of 25 franchises, with start and finish dates, is shown below:

TRAIN OPERATING COMPANIES AND THEIR FRANCHISEES
Franchise            Franchisee             Franchise Length   Start  Finish
Anglia Railways      GB Railways Group Plc. 7 yrs 3 mth         1.97   4.04

Cardiff Railway      Prism Rail PLC.        7 yrs 6 mth        10.96   4.04

Central Trains       National Express Group 7 yrs 1 mth         3.97   4.04
                     PLC.

Chiltern Railways    M40 Trains Limited     7 yrs               7.96   7.03
                     (John Laing plc)

Connex South Central Connex Rail Limited    7 yrs               5.96   5.03
                     (subsidiary of Vivendi SA).

Connex South Eastern Connex Rail Limited    15 yrs             10.96   10.11
                     (subsidiary of Vivendi SA).

CrossCountry         Virgin Rail Group      15 yr 3 mth         1.97   04.12
                     Limited.

Gatwick Express      National Express Group 15 yrs              4.96    5.11
                     PLC.

Great Eastern        FirstGroup plc.        7 yrs 3 mth         1.97    4.04

Great North Eastern  GNER Holdings Limited  7 yrs               4.96    4.03
Railway              (subsidiary of Sea Containers Ltd.)
 
Great Western        Great Western Holdings 10 yrs              2.96    2.06
                     Limited (subsidiary of FirstGroup plc).

Island Line          Stagecoach Holdings plc. 5 yrs             10.96   10.01

LTS Rail             Prism Rail PLC.         15 yrs              5.96    5.11

Merseyrail Electrics MTL Rail Limited         7 yrs 2 mth        1.97    4.04
                     (subsidiary of MTL Services PLC).

Midland Mainline     National Express Group  10 yrs              4.96    4.06
                     PLC.

North Western Trains Great Western Holdings   7 yrs 1 mth        3.97    4.04
                     Limited (subsidiary of FirstGroup plc).

Northern Spirit      MTL Rail Limited         7 yrs 1 mth        3.97    4.04
                     (subsidiary of MTL Services PLC).

ScotRail             National Express Group   7 yrs              3.97    4.04
                     PLC.

Silverlink           National Express Group   7 yrs 8 mth        3.97   10.04
                     PLC.

South West Trains    Stagecoach Holdings plc. 7 yrs              2.96    2.03

Thames Trains        Victory Railways Holdings 7 yrs 6 mth      10.96    4.04
                     Limited (subsidiary of The Go-Ahead Group Plc).

Thameslink           GOVIA Limited             7 yrs 1 mth       3.97    4.04
                     (Go-Ahead Group and Via G.T.I. SA).

Wales & West         Prism Rail PLC.           7 yrs 6 mth      10.96    4.04

West Anglia Great    Prism Rail PLC.           7 yrs 3 mth       1.97    4.04
Northern

West Coast Trains    Virgin Rail Group         15 yrs            3.97    3.12
                     Limited.

Important Notice

This news release is issued by the Franchising Director and its contents have
been approved for the purposes of section 57 of the Financial Services Act
1986 by KPMG Corporate Finance.

KPMG Corporate Finance is a division of KPMG which is authorised to carry on
investment business by the Institute of Chartered Accountants in England and
Wales. This news release has been prepared for general information purposes
only and is not intended to form the basis of any investment decision or
constitute an offer or invitation to bid for any passenger rail franchise or
to acquire shares in a train operating company. Neither this news release nor
any copy of it should be taken into or distributed in Canada, France, Japan or
the United States except in accordance with an applicable exemption. The
distribution of this news release in other jurisdictions may be restricted by
law and therefore persons into whose possession this news release comes should
inform themselves about and observe any such restrictions.

KPMG Corporate Finance is acting for the Franchising Director and will not
regard any other person as its client in relation to passenger railway
franchising or be responsible to anyone other than the Franchising Director
for providing the protections afforded to clients of KPMG Corporate Finance
nor for advising any other person on the contents of this news release or any
matter referred to in it. 



Media Enquiries: SSRA Press Office. Telephone: 0171 940 4339 / 4294 / 4224

                                                                                                                 

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