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BRITAIN’s Department for Transport (DfT) has agreed terms for new National Rail Contracts (NRC) for its South Western Railway (SWR) and TransPennine Express (TPE) train operating companies to replace the current Emergency Recovery Measures Agreements (ERMA) on May 30.
The two NRCs will run for two years to May 2023 with options to extend them by another two years to May 2025. Unlike the former franchises, First Group will bear no revenue risk and very limited cost risk under an annual budget agreed with the DfT. There is also no significant contingent capital risk for the operator.
Each year, First Group will receive a fixed management fee plus a performance fee based mainly on the delivery of customer-focused performance metrics. Under the NRC, the operating company bears the risk of costs in excess of the agreed annual budget unless agreed in advance with the DfT. The budget can be increased for items outside of the operating company’s control or changes requested by the DfT.
The performance fee is scored against operational performance, customer satisfaction, finance and business management. There are three levels of performance: below acceptable, acceptable, and good. The acceptable rating results in approximately two thirds of the performance-based fee element being payable.
Additional incentive fees can be earned for participation in significant industry change projects outside normal operation.
South Western Railway’s (SWR) new Alstom Arterio EMU for operation on London Waterloo commuter services.
For First Group’s 70% share of the First MTR joint venture for SWR, the fixed management fee will be £3.3m per annum with the opportunity to earn up to a maximum of £9.9m in performance fees. For TPE the fixed management fee is £2.3m per annum with a performance fee of up to £5.2m. Punctuality and other operational targets required to achieve the maximum level of performance fee are designed to incentivise the highest level of performance for passengers.
“The NRCs achieve a more appropriate balance of risk and reward between First Group and the government,” says First Group. “They carry no significant contingent capital risk, with the group’s contingent capital for both the SWR and TPE NRCs totalling £15m, 50% of which is bonded. There are limited scenarios in which this contingent capital can be called upon, primarily in the event of early termination of the contracts by the operator.”
Both train operating companies will try to build back patronage following the coronavirus lockdowns, while upgrading the service. This includes the introduction of flexible commuter tickets and continuing the move towards electronic and mobile ticketing, smartcards and improved apps for both companies.
“The Group recently became the first bus and rail operator in the UK to formally commit to setting an ambitious science-based target for reaching net zero emissions by 2050 or earlier,” First Group says. “Sustainability is at the heart of the NRCs and both SWR and TPE will develop a decarbonisation policy and roadmap towards achieving net zero emissions in accordance with this goal.
First Group agreed to pay the DfT £33.2m to terminate the SWR franchise in December 2020. It also agreed a £6m exit fee for TPE earlier this month. The fees will be paid at the end of the ERMA term.
“The National Rail Contracts agreed for SWR and TPE leave us well-placed for lower risk, cash generative rail operations on those two networks,” says Mr Matthew Gregory, First Group chief executive. “We have long called for this transition to a new contract structure with a far better balance of risk and reward, and which benefits customers by a clearer focus on performance, including the introduction of a new set of passenger service metrics.”
“As previously announced, the West Coast Partnership ERMA is in place until the end of March 2022 and we are discussing an NRC with a duration of up to March 31 2032 (with the core and extension periods to be determined). The existing Emergency Measures Agreement for Great Western Railway (GWR) has already been extended to June 2021, and the underlying GWR direct award runs to April 1 2023 with an extension option of up to one year.”
This article first appeared on www.railjournal.com
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