Rail franchising in Great Britain

Rail franchising in Great Britain was created by the Railways Act 1993. Passenger services are franchised, for a limited period, to train operating companies. The award of the franchise is determined by competition.

Characteristics
Rail franchise holders in Great Britain accept commercial risk, although there are clauses in newer franchises which offer some compensation for lower-than-expected revenue (and also claw back some excess profits, should these occur). This should be compared with a "concession", such as those awarded to Stagecoach for Manchester Metrolink or to Serco for the TfL Docklands Light Railway. Concession holders are paid a fee to run the service, which is usually tightly specified by the awarding authority. They do not take commercial risk, although there are usually some penalties/rewards built into the contract for large variations in performance.

From 2011 franchises, starting with InterCity West Coast, were offered under a new scheme, rather than the previous "Cap and Collar system" which provided for risk-sharing with government regarding future demand. The new franchising scheme is intended to provide greater incentives for cost reduction by operators.

Administration
Rail franchising was, initially, administered by the Director of Passenger Rail Franchising. On 1 February 2001 the position of Franchising Director was abolished by the Transport Act 2000 and the passenger rail franchising functions were transferred to the newly created Strategic Rail Authority (SRA). The SRA was in turn abolished in 2006 and the SRA's franchising functions were taken over by the Secretary of State for Transport.

Operation
When a franchise becomes due for renewal, the Department for Transport (DfT) invites bidders to tender for the franchise. The DfT specifies the level of service required and judges bids on several criteria. In the past, many services required a public subsidy and the level of subsidy required by each bid was one of the factors considered by the DfT. Although recent franchise renewals have seen a reversal of this process and bidders are now expected to offer a premium (typically around GBP 1,000 million over 10 years) for the franchise, this masks the public subsidy of most rail franchises through the UK Government's direct grant to Network Rail, which therefore does not levy a full access charge to the franchisee for use of the infrastructure. In the interim McNulty report in September 2010 ["Rail Value for Money Study"] the Net (annual) Cost to government (£m) and Net Cost to government as % of total cost were shown as: Or put another way 75%, 81% and 39% of costs are covered by the Franchise payments.
 * Long-distance franchises £693m / 25%
 * London and South East franchises £760m / 19%
 * Regional franchises £1,873m / 61%

Criticism of the franchising process
It has been impossible to compare premiums offered by successful and unsuccessful bidders because the DfT has refused to release the information. A decision on 28 July 2008 by the Information Commissioner may change this, but the matter is still unresolved because the DfT has appealed to the Information Tribunal (case number EA/2008/0070). The DfT has now published the information in anonymised form for the South Western franchise. The winning bidder offered a premium of £1,191 million (net present value) over the life of the franchise, and the other bidders offered £636 million, £513 million and £501 million.

Passenger Rail Franchising has also been examined by the National Audit Office and a report was published on 15 October 2008. http://www.nao.org.uk/idoc.ashx?docId=C7CEB170-1E47-4A5B-BF0B-F1E2A87849D3&version=-1