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It's the middle way for Inter-City East Coast
Since this column regularly hands out stick to the DfT Rail, it is only fair to start by saying that the Ministry of Railways came to a sensible compromise on the future of the troubled Inter-City East Coast franchise. It couldn't renegotiate the deal while terminating the franchise and running it directly as operator of last resort would have been messy. So instead, it modified the franchise agreement so that GNER will continue to run the business until a new operator could be appointed.
No wonder, then, that my chums at GNER were miffed when some of the media talked of their being ‘stripped' of the franchise. While it may seem irrelevant, there is a difference, especially for those working in the business, between being terminated, full stop, and terminated earlier than planned. Instead of being taken away in shackles, the GNER team will march out with drums beating and banners flying.
Under the ‘franchise management agreement' signed by DfT Rail and GNER on December 14, GNER will continue to provide ‘franchise services' under an amended franchise agreement and the business will be run as if it were in the last 12 months of a normal franchise. The initial end date is 31 March 2008 , and while this is expected to be brought forward, subject to two month's notice, it could also be extended by not more than seven four weekly accounting periods..
GNER will also ‘help ensure a smooth transition to the holder of the new franchise'. The net worth of the company largely passes to the Government and GNER will cover the Department's costs of re-letting the franchise early.
While DfT Rail will not pay a management fee, GNER will have financial incentives to increase revenue and reduce costs. ‘In conjunction with its advisers', DfT Rail has set a ‘realistic' net revenue target. If GNER beats the target, it will qualify for separate revenue and cost-saving incentive payments.
While GNER could not meet its premium payments in full from April 1 this year, the business is still expected to make a surplus and DfT Rail will retain all revenue earned until the franchise is re-let. Instead of a premium, GNER will make what are termed a ‘cash payments' based on the surplus in the franchises cash flow statement for each reporting period.
Sea Containers' performance bond, worth £15.3 million, will be transferred to the new agreement. But the company no longer has provide the £10 million working capital facility and a separate £30m facility in the original franchise agreement.
DfT growls that the bond ‘ensures GNER's continued co-operation at the end of the management agreement'. Should Sea Containers terminate the new management agreement, the bond would be forfeited and used by DfT to cover any further costs. The threat presumably refers to the hand over to a new franchisee.
But while it is business as normal for GNER, a number of commitments in the original franchise agreement have been dropped, hopefully only deferred. These include the £25 million station improvement programme, the provision of 900 additional car parking spaces, car park expansion at Darlington and York and improvements at Peterborough and Newcastle stations.
Also out is the Enterprise Asset Management System, the installation of automatic ticket barriers at Peterborough , Durham and Newcastle stations, introduction of branded coach links and expenditure of £3 million on security measures. Of the committed obligations at York station, only the scheme to convert the goods subway and associated lifts to passenger use will continue.
On the positive side, GNER and DfT Rail are still committed to introducing the Leeds half-hourly service in May this year.
Something else I spotted in the management agreement, which you can find in Professional Stuff at Alycidon Rail ( www.alycidon.com ) is that DfT Rail has a high opinion of Sea Containers' President and CEO, and GNER Chairman, Robert MacKenzie. He is required to continue as a director of GNER for the duration of the management agreement and must devote an ‘appropriate proportion of his time' to the operation of the company.
Not only that. GNER will be entitled to pay Mr MacKenzie, or an ‘affiliate', for the proportion of his salary represented by the time spent on GNER matters. Nice to be wanted!
GNER's Open Access challenge continuesWhen DfT Rail announced the early termination of the Inter-City East Coast franchise I asked what would happen to GNER's request for the European Commission to investigate the Office of Rail Regulation's open access charging regime? You will recall that DfT Rail actively supported GNER's unsuccessful appeal for a judicial review of ORR's decision on open access on the East Coast Main line. A DfT Rail spokesperson told me that the complaint ‘is purely a matter for the European Court '. So nothing to do with us, Gov. But, hang on. There must be a cost to GNER in legal fees. And unless Sea Containers re-bids and retains the franchise, the outcome is irrelevant to GNER. In my question, I suggested that GNER's application to Brussels must have had DfT Rail's tacit approval and this provocative assumption was not challenged. Since the application to Brussels was made on December 1, when negotiating with DfT Rail were well advanced, it is unlikely that GNER would have done anything against the Department's wishes. So DfT Rail has nothing to lose by leaving well alone. If Brussels reverses the UK Court of Appeal's decision it's a result, while if the ORR ruling stands, the government is no worse off. Meanwhile, there may be trouble ahead for open access operators irrespective of the GNER case. What is termed the Third Railway Package is currently passing through the European Parliament. After the second reading on December 19, the Parliament's Transport Committee approved the section on market opening and liberalisation. This includes a new requirement for extra charges to be imposed on open access operators: the money raised would be used to help fund public service obligations. So on the one hand, Brussels wants to break the power of the state railways by encouraging open access competition, but on the other hand wants open access operators to help subsidise the state railways. Only Gilbert and Sullivan could do this justice. |