Franchising and freight – friend or foe?

Maggie Simpson, policy manager, Rail Freight Group, looks at some of the challenges facing the rail freight industry

There seems to be a common perception that passenger and freight trains are constant rivals on the UK rail network. Yet although there are occasions where different priorities clash, for the most part both co-exist without issue. In fact, rail freight competes most fiercely with road freight and is best thought of as part of world of logistics than the world of rail.
    
It is worth reminding ourselves on the differences between the two on rail sectors. At privatisatiown, the rail freight business was sold outright. The passenger business was divided into 25 franchises, which were tendered for periods of around 7-15 years. Over time, the number of franchises has varied, as has the duration, but the vast majority of passenger services today are still franchised. In more recent times, a number of open access passenger operators have emerged – notably Hull Trains – and there is interest from many more including international operators through the Channel Tunnel.
    
The franchised operators have a detailed contract with government setting out the services they must provide, regulating the fares they can charge and stating the subsidy they will receive, or, if successful, the premia they must pay back. Open access passenger and freight operators have no such contract, and are free to offer whatever services their customers seek, subject of course to being able to secure access on the network.
    
There are, however, many similarities between these different operations. The rules governing timetabling, access to the network, safety, licensing and so on are the same throughout. The rules of railway operation are the same. The performance penalties follow the same format, as does the compensation if the railway is disrupted. So on a day-to-day basis, operations can run smoothly whatever the mix of services.

The differences
So, what are the differences and do they matter? Well, a major difference, comes in the way that government is structured. The Department for Transport has a large team responsible for looking after the franchised passenger operators, with each company having at least 2-3 people overseeing its activities, as well as experts in fares, tickets, timetables and the like. For rail freight, there are two people in total in the rail directorate and a handful in the logistics team. This means amongst other things that the level of understanding of freight in the Department can be quite low. It is easy in these cases for freight to be ‘forgotten’ or omitted when new schemes and initiatives are being considered – although the rail freight team work tirelessly to prevent this happening.
    
The specification of new franchises has also caused some issues where government has been keen to secure new services – with associated revenue – and has signed them into the franchise contracts without understanding whether they can actually fit on the network. Recent examples on the Midland Main Line and East Coast Main Line have caused significant issues for freight operators, and open access passenger operators, and have lead to significant work being required from Network Rail and the Office of Rail Regulation to resolve satisfactorily for all concerned. This type of issue will become more acute as the network gets fuller, and more sophisticated approaches are required in the franchise specification process. An initiative lead by Network Rail is seeking to identify Strategic Freight Capacity on key routes and protect it from being inadvertently used by others. This has been blocked by passenger operators keen to protect their patches although some headway is now being made.

Paying your way
Another long running topic of discussion is access charges and whether freight ‘pays its way’. A former managing director of a large franchise was so incensed by this that he went all the way to court, only to have the case thrown out, which shows how complex and misunderstood it is, even by those who should know. In summary, every service on the network pays a ‘variable charge’ that covers the ‘wear and tear’ it exerts on the network. Specific additional charges cover use of electricity, coal spillage for freight and time of day charges. This way, Network Rail is recompensed for the direct damage caused by the traffic that operates – the so called variable charge. Now Network Rail also incurs what is called the ‘fixed cost’ of providing the network. Under the charging rules set by Europe, traffic can be asked to pay some or all of its share of the fixed costs if it can afford to do so. As an example, the Office of Rail Regulation has judged that coal traffic to power stations, and spent nuclear fuel can afford to pay their share of the fixed cost on any freight only lines that they use, whilst other sectors of freight cannot.
    
This ‘affordability test’ can be applied to any services, although to date, has only explicitly been applied to freight only lines. So government has chosen to pay the fixed charge to Network Rail in two ways – partly as a direct grant, and partly by passing it through the passenger franchise contracts. This gives the illusion that the franchise services pay the fixed cost – whereas in fact it is factored into their subsidy or premia. There is an argument for changing this arrangement so that all the fixed cost is paid directly to Network Rail and the affordability test applied to each service group in turn, which would at least have the benefit of transparency.

Looking forward
What of the future? Well, there is presently much debate about how long the franchise of the future should be and what terms it should be let on. Both the present Government, and the Conservatives favour longer franchise terms albeit with different views on how it would be specified and let. For freight operators, the length of the contract matters little, as does the exact payment profile and revenue risk share. What is of concern though is any suggestion that franchise operators would be given greater control of the rail infrastructure on which they operate – so called vertical integration at its most extreme. Such models are likely to be to the detriment of any other operator seeking to share the same routes, and even with a benevolent franchise will add complexity and cost. Of course, if this only extends to stations, car parks and bike racks then there would be no objection but we will be watching carefully to ensure that this really is the limit.
    
Going forward, there is also great pressure to reduce the impact on passenger and freight users of engineering work. An initiative titled ‘seven-day railway’ is looking at ways to keep routes open longer in the day and at weekends. This is good for all users on the face of it, but as freight services often operate overnight to keep out of the way of daytime passenger trains, there is concern that freight growth will be squeezed by ever later running services. An appropriate balance needs to be found to address this, and also to allow freight companies to start operating more trains at weekends to meet the needs of the growing retail sector.
    
So, in summary therefore, rail freight and rail passenger franchises can co-exist peacefully on the network most of the time, but there are pressures emerging around the way that government specifies the franchise contracts and funds them, and around competing demands for future capacity on the network.
    
If rail freight is to take its place at the heart of sustainable logistics then it is imperative that growth is not stifled unnecessarily. After all, rail freight produces 70 per cent less carbon than the competing journey by road, and decarbonising HGVs is proving far more intractable than developing the electric car. So there must be a mature debate by all to ensure that the promised benefits to the UK are delivered.

For more information
Web: www.rfg.org.uk