Franchise termination negotiations pass revised January deadline

NEGOTIATIONS between the Department for Transport

(DfT) and passenger franchise owning groups over termination payments to bring franchises to an end failed to be concluded by January 29, the revised date set for the process to be concluded.

This was already a revision to the December 14 deadline set by the Government.

Currently most franchises are operating on emergency contracts termed either EMAs or ERMAs and, as previously reported, the ‘termination sums’ are based on the DfT’s calculation of the total losses incurred by each franchise, which would have been payable at the end of the franchise period had Covid-19 not intervened and the contract had run to its conclusion.

Once the payment has been agreed the DfT engages with the owning group to agree terms for a new Direct Award contract which will be put in place as part of the process to move towards concession agreements.

Both stages of the process are understood to be causing difficulties, with some termination sums yet to be agreed and in other cases the Direct Awards are still being discussed. It is reported that the new target date is around the end of March, with the DfT only prepared to state: “We continue to engage with some operators as part of the ERMA termination process. As the process remains ongoing.”The DfT added: “It would be inappropriate to comment further on commercial matters.”

Termination fees

Addressing the Transport Select Committee on February 3, Transport Secretary Grant Shapps commented: “The rail operating companies right now are involved in paying back tens of millions, hundreds of millions of pounds in termination fees. These fees have been agreed with, I think six operators; it’s real money.”

Part of the delay stems from an initial decision by the DfT not to allow owning groups to see the ‘modelling’ that was being used to arrive at the final sums, despite promising that the process would be “fair, reasonable and transparent”.

When the process was opened up, owning groups lodged a number of challenges and changes were made, but a number of issues remained unresolved through February.

The DfT has maintained close control of discussions with owning groups tied into Non-Disclosure Agreements. Some termination sums will run into tens of millions of pounds, others could be zero, depending when the franchise was awarded although there is concern the DfT modelling may be flawed.

Of concern is what the industry is calling ‘Tier One’ franchises – seen by the DfT to be in the most difficult positions financially and due to be resolved by January 29 in order to move to new contracts from April 1.

Of these c2c and TransPennine Express were still subject to negotiation as The RM closed for press, while the announcement by First Group it had agreed a termination sum of £33m for SWR is now understood to have been only the first step in the process, with a significant gap still to be resolved over the Direct Award contract it will move onto at the end of the ERMA agreement. This process is complicated by uncertainty at the DfT over exactly what the next set of contracts will involve.

Evolving contracts

As one senior manager explained: “The National Rail Contracts are still evolving, which means the DfT doesn’t really know what they are. Meanwhile the deadline for the first group of contracts has been moved back as the uncertainty over the contracts means that on one side there is a reluctance to sign by owning groups and on the other the DfT doesn’t want to take more franchises back into its control.”

The DfT is seeking significant cost reductions in the NRCs, telling owning groups: “There is no more money.” One manager explained the frustration dealing with the DfT, saying: “The DfT thinks running 80% timetable would mean it costs 80% to provide, but in the short term, reductions in timetables save marginal costs, they don’t save much. If we’re not running trains we don’t ‘not pay drivers’ but DfT doesn’t understand that.”

Industry sources also highlight confusion over plans for future service levels, with the DfT demanding very efficient diagrams and rosters, along with elimination of rest day working, commonly used across the industry.

With managers explaining to the DfT that while it retains a requirement for timetables to be stepped back up at four weeks’ notice there is little scope for short term efficiency improvements. TOCs are reporting discrepancies between issued public statements and the messages they are receiving from the DfT. Industry sources say the public are being told the timetable could be reduced to a 70% level but telling train operators it could be as much as 50%.