Future rail franchise agreements will need to look very different in order to avoid the sort of issues raised by the hand back of the National Express's East Coast (NXEC) franchise to the government, according to law firm Osborne Clarke.

The three franchises let by the government in November 2007, which included the NXEC franchise, were awarded at the peak of the economic boom.  Winning bids were based on passenger numbers continuing to grow at around 10% per year.  With the subsequent recession, those figures now look extremely challenging, if not unattainable. 

Lara Burch, head of rail at Osborne Clarke, said:

"The hand back of the East Coast franchise demonstrates the difficulties in devising a franchise structure which is flexible enough to adapt to the unforeseeable whilst being robust enough - from the Government's perspective - to protect tax payers' money. 

"Just as cross-party support has been gained for longer franchises – with terms perhaps up to 30 years – in order to encourage greater investment by operators, the surrender of the NXEC franchise has thrown doubt on how realistic these franchise agreements would be.

"Although the rail industry has welcomed the idea of longer term franchises, there is a clear tension between that longevity and the challenge of predicting long term risks such as passenger numbers through all phases of the economic cycle."

Significant growth in passenger numbers, high levels of promised investment from both the government and main opposition parties and projects such as the Thameslink expansion project and Crossrail have created the impression of a second golden age for the UK's railways in recent years. 

Lara Burch commented:

"Despite the effects of the recession, rail's golden age can continue.  Political parties now recognise rail's valuable contribution to cutting carbon emissions, which should drive continued investment despite the squeeze on public spending.  However, the franchising process will need to adapt and we may see a complete re-vamp. 

"We may see far greater use of non-franchised, "open access" operators to increase competition on profitable routes, combined with much longer fixed franchises for the non-commercial services.

"For these longer franchises, the structuring of break clauses and cross-default provisions, as well as mechanisms for fare regulation, will need very careful thought to avoid the issues illustrated by NXEC being replicated on a greater scale across the industry."

Date: 02 Jul 2009