WBR0027 - Evidence on Wales and Borders rail franchise

This evidence is submitted by Arriva UK Trains Limited (AUKT), the parent company of the present Wales and Borders Franchise operator, Arriva Trains Wales/Trenau Arriva Cymru Limited (ATW). We are pleased to have the opportunity to submit evidence to the Welsh Affairs Committee’s inquiry and to assist it further if that would be useful.

Arriva was delighted to be awarded the Wales and Borders Franchise, which commenced in December 2003. It has been one of very few long duration (15 years) franchises since rail privatisation and although let at a time of extreme financial pressures on the rail industry, which still has consequences today, this long duration has enabled us to develop the business through passenger-focussed service improvements, including substantial investment at our commercial risk, and to build close relationships with the Welsh Government and other stakeholders. We welcomed the devolution of most aspects of franchise management from the Department for Transport (DfT) to the Welsh Government through the Joint Parties Agreement from 1st April 2006.

What standard of performance has been experienced under the current franchise?

Customer Satisfaction

Within the current franchise agreement, ATW has consistently achieved high customer satisfaction as measured by the independent National Rail Passenger Survey (NRPS), which is undertaken by Transport Focus, the industry consumer watchdog. Our NRPS results are consistently above the franchise benchmark and above the industry sector average scores. 31 out of the 32 different categories of measurement within NRPS have improved over the past decade. The chart below shows the long term trend since the start of the franchise highlighting the rise in perception to the upper 80 per cents.

However, the effects of a lack of capacity, quality of rolling stock and impact of engineering work are now showing some effect on the NRPS results and through customer and staff feedback. It is our belief that consistently good results together with improved train service performance (see below), have made rail services in Wales more attractive, resulting in 31.8m passenger journeys in 2015; a circa 70% increase in passenger demand since the franchise began in 2003. This significant rise in passenger numbers has not been matched by a similar rise in train capacity and it is clear that the busyness of key parts of the network (particularly commuter areas and tourism areas during high summer season) is to the fore in customer perceptions. This growth, for which no provision was made in the Franchise Agreement, is shown in the graph following.

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ATW : annual journeys (blue line) and journeys growth cumulative % (red line).

Punctuality and reliability

A key component of our customer satisfaction has been our strong record on punctuality and reliability. We have consistently exceeded the targets set at the start of the franchise and have achieved industry-leading ‘right time’ performance, which is a more challenging standard of punctuality than the more broadly recognised ‘Public Performance Measure’ (PPM). For ATW PPM measures the percentage of all trains arriving at their final destination within 4 minutes and 59 seconds of their timetabled time (having called at all advertised stops).

The chart below shows the long term trend of PPM; overall, we have achieved an increase from 78% in 2003 to over 92% today. We have achieved this with the same fleet of trains, achieving high levels of reliability, despite much of ATW’s fleet now approaching 40 years old. However, in common with the overall industry trend, there has been a small decline in recent years.

One of the key successes for ATW, assisted by the length of the franchise, has been to drive down the performance delays for which we are responsible, working in close partnership with Network Rail, as shown on the next chart.

However, there has recently been a small decline in performance from a moving annual average PPM of 95%. This in part due to an increase in the level of engineering work and temporary speed restrictions, reduced reliability associated with an ageing fleet and increased usage of the network.

Capital investment

The contracted investment requirement in the current Franchise Agreement was minimal, at only £400,000 over a 15 year period, a consequence of the funding challenge faced at the time by the then client body, the Strategic Rail Authority (SRA). However, this has not stopped Arriva investing in the success of the business. The length of the franchise has allowed us to invest over £35m in a range of areas including:

123 Ticket vending machines across the network (£5m)
Numerous small customer enhancements at stations worth a total of £10m (car parking, lighting, seating, waiting shelters etc)
Chester station redevelopment (£2m)
Train Driver training simulators in Cardiff and Chester (£2m)
Improved staff facilities (£2m)
Ticket gates (£3m)
New maintenance depot at Machynlleth (£3m)
Wheel lathe at Cardiff (£2m)

Arriva plans to continue to invest in the current Franchise, including, for example, a new fleet reliability system, tablet devices for our drivers, a new on-train ticketing system and an additional customer car park at Carmarthen.

There is no doubt that by the end of the current agreement, the Wales and Borders franchise will be significantly improved from where it was when Arriva took over in 2003. We believe we have played our full part in developing the business at risk to our capital.

For the next franchise we consider the defined outputs and investment required to meet future Government aspirations for rail in Wales should be clearly established at the outset. This will require articulation of a clear statement of what the future rail network should deliver, with timescales and clarity of funding. This is important when considering the high level ambition around proposed major schemes such as the South Wales Metro and North Wales electrification. In doing this, stakeholder expectations will be set and Government can take a view on the balance between its capital requirement against what it can expect to be funded by the Franchise operator.

What lessons can be learned from the current Franchise?

The current Franchise Agreement can, we believe, be regarded as an effective contract, but with areas that could be improved in future agreements. The existing franchise has helped move the railway in Wales from a low growth, low satisfaction and unreliable operation to deliver a high performing railway with significant growth in passenger usage (and the consequent support this provides to employment and opportunities for employment), and also importantly to high levels of passenger satisfaction. Arriva is proud that these achievements have been delivered during our tenure. We have seen an on-going need to develop the business beyond the confines of the contract, this being both a reflection of our transport expertise and desire to make the railways in Wales a success story.

It is unlikely that schemes such as the South Wales Metro would have been conceivable in 2003 with the then ill-used and unreliable network. However, with the efforts and huge investment of ATW, Welsh Government, UK Government, Network Rail and others, these levels of transformational infrastructure investments are now credible and moreover, are now in the process of detailed planning. There is no doubt that, at the end of the Franchise term, the Wales and Borders Franchise will be in a much stronger position than at its inception, with a great position to further grow and succeed.

Consideration of growth and how the impact is mitigated

The current Franchise Agreement did not include any provisions or obligations arising from growth in passenger numbers or overcrowding, other than to utilise the specified fleet to best effect. This had the benefit to the SRA of minimising contracted franchise payments. ATW has achieved growth of 70% and, whilst this has been partly accommodated by improved timetables and increased efficiency, a series of ad hoc negotiations have been required with the Welsh Government to address emerging overcrowding.

We note that in the current agreement there is an absence of a passenger capacity regime such as ‘PIXIE’ (in use with many TOCs). This type of regime can trigger action by Government or the franchisee when over-crowding or passenger standing time reaches a prescribed level. It would to our view be advantageous to have an agreed trigger point and, most importantly, plan from the outset to cater for growth. For example; to allow in the future rolling stock provision for additional units to cater for growth trigger points and to provide for special events.

Alignment of incentives

The current Franchise Agreement was written, it seems to us, somewhat in isolation of the needs and aspirations of Welsh Government and also from those of other key stakeholders such as Network Rail. While current working relationships with Welsh Government, the UK Government and Network Rail are positive and constructive and can, to a degree, mitigate the lack of contractual alignment, there would be benefit in a future franchise facilitating closer working, particularly where that drives cost-efficiency (a benefit to Government and ultimately fare-paying passengers). For example jointly planning engineering work to achieve an optimum balance of Network Rail maintenance costs and TOC costs to reduce costs to the industry overall.

Stakeholder expectations and the long term plan

We would observe that, for a future rail franchise in Wales, Government should be clear as to what outputs it requires (and it can afford to fund) irrespective of the contractual model that is chosen. The rail system, not just in Wales, is complex and its limitations not always well understood. A simple example being the frequent contradiction in requests from stakeholder groups for more station stops but also faster journey times and extensive non-stop services. The reality is that the majority of rail services within Wales are not commercially viable (i.e. revenue from fares does not cover the operational cost) and thus require Government support. It would be helpful to establish a clearer mechanism to help stakeholders understand how business cases for change will be handled by Government.

We would urge clarity and if possible consensus on the outcomes that are required from the system for the next franchise and for the longer term, and that these outcomes are well understood by bidders and stakeholders. The governance structures for public transport in Wales will need to be appropriate and support the longer term planning and oversight that this would demand. ATW currently commits fully to engagement with all stakeholders in Wales who have an interest in the services we deliver. We are active members in all the communities we serve and fully engage and participate in joint activity and discussion with key organisations such as the Welsh Government, Network Rail, rail user groups, business representative organisations, local authorities and others. We will and have already started (where they are now active) to engage closely with any bodies or representational organisations which may form part of future transport policy in Wales.

Accountability and Commercial independence

Whilst we believe the current relationship provides an acceptable balance in transparency between a responsible franchisee and the regulating authorities, we suggest improvements might be considered to the existing model (or other models the Government may specify) to provide the franchisee with greater freedom to (re)act, and empower it to address challenges and opportunities quickly and responsibly, for example, reacting to changes in demand and optimisation of timetables. The present circumstances rely on Government approval which can in our experience import delay in addressing obvious and logical need, for example, in the implementation of an emergency adverse-weather timetables.

The current franchise model itself provides for high levels of scrutiny and accountability between ATW and Government. The day to day working relationship and regular performance reviews provide detailed understanding of business activities to the Government, providing reassurance in terms of compliance with the existing agreements. However, a salient positive factor is also that ATW is afforded a necessary degree of commercial independence (e.g. the development of a yield management system) which is an important feature in a changing and competitive market, where commercial advantage and revenue could be lost to other train operators or transport modes. Having a high degree of commercial focus, and being part of a wider transport business, ensures that the market can be closely monitored within the UK. Close partnership working and dialogue between ATW and Government ensures that the day-to-day operation of the train service is well controlled and this, given the right resources, should afford Government the opportunity to concentrate on future transport strategy and policy.

Allocation of Risk and the benefit of Franchisee Buying Power

We would emphasise that the existing franchise model offers a high level of financial protection and security of service provision for the Government.

The current contract is of the net cost type where ATW takes the revenue and cost risks i.e. the risks of running the business are transferred from the Government to the private sector operator. The franchisee’s “reward” for this risk and its investment is profit. The Government is “insulated” from potential cost perturbations such as, in recent years, escalation in the price of diesel fuel. While Arriva is able to hedge costs such as fuel (see example below), ATW has still had to sustain a 244% increase in its annual diesel fuel costs of £15.5m since the start of the contract. ATW has fuel hedges in place until the end of the franchise term and these have proved to be particularly effective in protecting the business against the volatility of the fuel market, albeit prices have still risen. As a Group (Arriva and DB), we have been able to achieve large volumes of hedged fuel at relatively low market prices. These cost savings are passed through to Welsh Government when, for example, service enhancements are introduced, such as the re-opening of the Ebbw Valley route, which benefit from hedged fuel prices rather than the higher market rate.

There are other similar examples of contractual and procurement efficiencies realised within the life of the contract to date and, in tandem with sound management of its variable operating costs and the continuous drive to improve train service performance and customer satisfaction, have resulted in a successful business.

Within ATW, in addition to employing more than an additional 300 employees than when the contract started, colleagues have shared in the success of the business, with pay levels growing over the franchise term. We work in partnership with the Rail Trades Unions to improve terms, conditions and employee experience, and we expect that this partnership will continue into the future.

Profit

For every £1 earned by ATW only £0.06p is retained as profit. This on a business taking full cost and revenue risk on a turnover of circa £300m and that has made some £35m of optional investment. Even this level of profit was not achieved until some years into the franchise. This profit margin is modest when compared with other sectors of the economy and represents a return for the commercial risks taken and investments made in developing the franchise. We believe the franchising model has delivered greater growth and reduced cost to Government.

We are aware that some have claimed excessive profits can be made by train companies within the current ‘net cost’ franchising model. However, the current Wales and Borders Franchise Agreement includes a profit sharing benchmark (or profit cap), whereby should ATW profits exceed the ‘capped’ level (circa £20m), the first 30% and then 60% (after a further level) of profit above these levels are returned directly to Government. These levels have only been triggered in the last few years. The Government will need to consider this mechanism and its optimum balance to avoid harming willingness to invest, innovate and accept risk. Such outcomes would be likely to increase costs for the Government or user, and/or deliver a poorer standard of service.

We consider that the current franchise model, although capable of improvement, has been a success, particularly in delivering record levels of customer satisfaction whilst incurring no additional risk to the tax-payer. We are convinced that the cost of operating this franchise (and hence cost to future Governments) would have been significantly higher had it not been run on a strong commercial basis by a strong, agile and expert enterprise.

What improvements to rail passenger services should be expected under the next franchise?

Undoubtedly, there are a huge number of challenges to the rail industry which impact on the overall quality of customer experience, and many of these challenges are not unique to the Wales and Borders Franchise. The scale of growth achieved and predicted raises challenges of limited infrastructure and rolling stock capacity. These are long-lead issues to address and infrastructure improvements in particular often cause short term inconvenience during construction.

For Wales and Borders specifically, there are number of key opportunities for improvement in the future discussed next.

Rolling stock

As mentioned previously, some of the existing diesel rolling stock used by the current franchise will be approaching 40 years old at franchise end. In addition, from 2020 new rail vehicle accessibility rules (PRM-TSI) will apply to the entire UK train fleet, requiring either investment to achieve compliance or the non-compliant vehicles to be replaced. The decision point for action to achieve compliance is drawing close for the majority of trains used by the existing franchise.

With the age and condition of the fleet now becoming a concern for customers, as reflected in the NRPS feedback, any new franchise agreement will require a commitment for a step change in the quality and quantity of rolling stock, as well as taking into account the emerging plans for infrastructure investment. In addition to overall quality, we are certain that, along with an improved passenger environment, customers wish to see more seating and capacity available to for current demand and to manage future growth.

We believe such future fleet changes must also make provision for major events, especially those at the Principality Stadium. Other franchises, particularly Great Western, also require specific contractual provisions to address this issue.

Stations

While significant investment has been made by Welsh Government, UK Government, Arriva, Network Rail and others in improving the station environment for passengers, there is still more that could and should be done.

We are delighted to have worked closely with Welsh Government, Network Rail, transport consortia, local authorities and others such as the Railway Heritage Trust to secure some £41m from the National Stations Improvement Programme (‘NSIP’) and Welsh European Funding Office (“NSIP+”).

This has and is being used to deliver passenger benefits across the whole of our franchise area, with new ticket offices and waiting areas at a number of locations, enhanced CCTV coverage and completing fitment of customer information screens. The latter benefit was rolled out to every ATW station by the end of 2013 and is especially important for passengers at unstaffed locations. In addition, many waiting shelters have been upgraded, CCTV has been fitted to many stations and all ticket counters are now accessible with induction loops.

Further, significant investment (£2.5m) has been made by ATW in ticket vending machines, with over 123 machines installed, as well as the innovative provision of the first ‘Virtual Ticket Offices’ (a Ticket Vending Machine with video link to staff based elsewhere) in the UK at three stations on our network.

Our approach has been to standardise to provide consistency across the network, giving full consideration to energy-efficiency, security and access to facilities for all our customers, including those who may have reduced mobility. Elements of the award-winning design at Chester station (which was fully funded by ATW) have been carried forward into the award winning development at Swansea. The improvements at Swansea have particularly impressed passengers with the NRPS scores for the station rising from 50% to 93% at completion of the project.

Despite these station improvements and the improving satisfaction scores and trends, this is still an area where customer perceptions could be raised. We would suggest that in the next franchise a minimum standard of station facility is set by Government and a level of investment funding made mandatory in bids, in addition to continuing direct investment by Government in major station projects.

The majority of stations in the Wales and Borders area are Victorian in origin and were not originally designed to modern accessibility standards. We have, with industry partners, made good progress and 53% of stations with 80% of total passenger footfall on the ATW network are now accessible. Currently committed projects will take this to 55% of stations and 83% of footfall. Some stations have very low footfall, so it may not be cost-effective or reasonable that all stations are fully accessible, but we would suggest clarity is given in the new franchise competition of the scale of improvement required, both as a policy objective and to ensure compliance with legislation.

One key challenge to Wales as a nation is the design and capacity of its hub station, Cardiff Central, which is now handling many more passengers than for which it was envisaged. This causes crowding in the subways, staircases and concourse. The problem is made acute when major events are held at the Principality Stadium, which is so closely situated that very large crowds arrive at the station within minutes of an event finishing. Cardiff Central needs significant investment to make it fit for purpose for both to cater for the current and predicted regular passenger footfall as well as being able to safely accommodate large volumes from events. Clearly funding of Cardiff’s own “Reading” scheme is going to be a critical factor and is likely to need a multi-funder approach.

Timetable

We would like to remind the Committee that Arriva’s bid for the Wales and Borders Franchise was based on a comprehensive revision to the timetable, which we called the Standard Pattern Timetable, introduced in December 2005. The basis for this was our commercial judgement that for the same support payment and using the same train fleet as for the base proposition required in the franchise competition we could deliver a higher level of service. The substantial additional operating costs were at Arriva’s commercial risk, but we were successful at attracting the additional passengers to meet this cost and set us well on the path to the overall 70% growth achieved to date.

We are pleased that the substantial growth we have delivered during the present franchise has set the foundation for further development of services and the potential for major investment during the course of the next franchise. We suggest it is important to enter this process with clear and realistic objectives for the service improvements desired and allow franchise bidders and other industry partners the scope to determine the best way to meet these with integrated proposals for timetable, rolling stock and infrastructure. From our experience this is likely to lead to better value solutions and hence improvements for more passengers delivered from a fixed budget, than by starting with a preconceived infrastructure solution.

How do the Welsh and UK Governments cooperate in deciding how rail passenger services in Wales should be run?

We welcome the likely completion of the devolution process, but observe that passengers expect and the economy requires a joined-up rail network for travel within Wales and between Wales and England. We also observe that:

as a result of geography and history, “railway Wales” has different boundaries from the political boundary, as the key north-south spine of our network lies partly in England; and
some key destinations for people in Wales are a short distance into England, such as Liverpool, Manchester, Birmingham and Bristol, together with their respective airports.

We therefore hope that the Welsh and UK Governments will achieve cooperative arrangements that meet the needs of passengers as well as their policy objectives and provide appropriate structures to represent the areas served by the franchise. We see our role is as championing the practical delivery of quality services for our customers and partners throughout this process to ensure that our partners and customers get the best possible outcomes.

02 September 2016