The Passenger Services Contract – What Impact Can We Expect for the Private Rail Sector?

The Passenger Services Contract – What Impact Can We Expect for the Private Rail Sector?

DfT officials have given the first glimpse into the commercial arrangements that will replace the current franchise deals to operate train services across the UK.

At a market engagement day in early November, Ministers and senior Civil Servants told the market about the new Passenger Service Contract. These contracts will be let by the new Great British Railways (GBR) in the future, with DfT starting the process in the interim.

Earlier this year I wrote about the way I expected this shift – described as “the biggest change to the railways in 25 years” – would play out for the industry.

Now we have more insight into the way the government wants things to work. To summarise, it seems the new arrangements will remove the strategic responsibility, and most of the risk and reward, from the operating companies and transfer it to GBR.

Critically, there will be a fixed profit margin to the operating companies, which may be as little as 0.5% for their troubles. The risk for trade union negotiations will remain with the operators.

Quite how many owning groups will be interested in operating contracts on wafer thin margins, with no commercial levers to increase revenue and still be at the mercy of union strike action will be interesting to see.

The early feedback from senior figures at existing operating companies was not hugely positive. While it is early days, there does not appear to be a big enough carrot tempting firms to bid the opportunities when they arise. Certainly not if they are in the form outlined earlier this month.

One Director asked why the government wants the private sector involved at all if all the decisions are to be made by the state body. With Wales & Borders, South Eastern and Northern a significant market share is already in public sector ownership.

Of course, there is a need for a change in model as has been identified in the numerous government reviews. The extended upward curve of passenger use of the railways had begun to straighten out well before the Covid-19 pandemic saw numbers plummet and necessitated billion-pound bailouts to keep services running.

There could be a major shake-up across the sector as business leaders and staff at all levels weigh up whether they want to be involved.

So what does this change to PSCs mean for industry talent?

1. Exodus of operating company staff

Under the new plans, responsibility for setting timetables, fixing fares and drawing up strategic plans to boost passenger use will almost certainly move from the franchises to Great British Railways. Those currently doing these roles in TOCs face an uncertain future. Some will find their way to the new public sector client, but Great British Railways won’t have capacity for all. Others will need to look for opportunities in different industries and perhaps even different countries.

2. Consolidation of the operating companies

There are currently 9 private sector owning groups operating franchises on the UK railways. By 2024 this could be much lower as business leaders of the TOC parent company groups consider whether the UK rail market is still a viable market. Most groups working in this field also have fingers in other pies, which may have better returns on offer for shareholders. Some will look to the international market. The margins talked about will not support large group overheads. We may see consolidation in the future with a handful of owning groups making a fist of running super-lean UK operations under the new passenger service contracts.

3. Interest from abroad

Representatives of companies from Spain, Japan and several other nations attended the engagement day earlier this month. There could be some very different entities out there that are set up to deliver under this system. Whether they move into the UK market, or stay where they are, they could very well offer opportunities for adventurous UK staff displaced in the forthcoming shake-up.

4. Changing market for rolling stock

Train manufacturers and leasing companies have built their businesses on the premise that shiny new trains encourage people on to the railways and boosts revenue. That model will have to go under the new regime. However, there will still be an imperative for new trains; decarbonisation. There is likely to be an ‘arms race’ to decarbonise rolling stock fleets. We have just seen an order for the UK’s first ever hydrogen train fleet which will be built by Alstom in Britain and financed by Eversholt Rail. Rolling stock businesses need to prepare for a major shift in their product offering.

5. Opportunities for consultants

While the operating companies will no longer be focused on commercial innovations, they will still need help staying efficient and managing resources. The big opportunity will come from advising the Great British Railway as it finds its feet and takes charge of the commercial offer to passengers.

All in all then much change ahead, and despite a clear direction of travel, a lot of uncertainty. If your company is preparing to make internal organisational changes following recent news, please get in touch to discuss how we can help you.

Author: Jim Newsom

Jim Newsom

Managing Director