Passenger rail franchising in Great Britain

The successor Labour government confirmed in 2024 that the train operating companies would be brought into public ownership as their contracts expired, a process that is expected to be complete by October 2027.

Railway franchises are decided by the UK Government's Department for Transport (DfT), who design the boundaries and terms of service, and award contracts to the train operating companies.

At the end of this process, a formal Invitation To Tender (ITT) setting out the detailed terms of the proposed franchise agreement is sent to the three to five prospective bidders who have been identified as pre-qualified.

[4] In contrast to earlier bail-outs, following the 2004 changes in approach to cost/revenue risk, unless there are exceptional circumstances, the DfT's policy toward failing franchises is not to rescue them with further financial assistance.

These operated as 'shadow franchises' that negotiated contracts individually with regulators, Railtrack (the infrastructure and major station owner) and ROSCOs (the rolling stock leasing companies) before being sold off in 1996 and 1997.

Winning bidders were decided on a pure cost basis – those who offered to pay the highest premium, or receive lowest subsidy, would run the franchise.

Stagecoach also won two, although the second was the tiny Island Line, which would eventually be merged with their main win, South West Trains.

[41] The Labour government elected in 1997 chose not to reverse the privatisation process, although they set out a number of reform proposals, including the setting up of a new Strategic Rail Authority (SRA), whose functions would absorb the responsibilities of the Franchising Director, as well as some duties previously performed by the Rail Regulator and the Department of Transport's Railways Directorate.

[43][44] By the end of 2002, the SRA had also changed its policy on Franchising Agreements to introduce various other performance criteria in addition to keeping to the PSR, aimed at raising the overall quality of passenger journeys.

Through the use of tactical short-term extensions, the SRA planned to achieve the changes in franchise redesign and smooth out the timetable for re-franchising, aiming for two or three awards per year.

[5] The 2005 Act also gave local and devolved administrations the ability to alter fares up or down, provided they funded the extra cost, or used the savings on other transport modes.

Because of the increased future risks carried by operators, the government required a large financial surety to discourage early contract default.

[53] The Laidlaw report was published in December 2012, and found the DfT to be primarily responsible for the West Coast failure, having made several errors in its financial modelling.

[5] All three outstanding franchise competitions – Great Western, Essex Thameside and Thameslink – were paused pending the outcome of the Brown review.

One recommendation was to spread out the re-franchising schedule to avoid bunching, which the government acted upon in committing to holding no more than four competitions per year, and staggering the East and West coast awards.

[5] Following the pause for the Brown report, the system resumed in 2013; the DfT published a revised timetable in March 2013, with the first tender being concluded in May, the direct award for the Essex Thameside franchise.

[2] The regulator (by then renamed the Office of Rail & Road) evaluated the CMA's options, leading to a final report in March 2016.

[55] In response to the COVID-19 pandemic, on 23 March 2020 the UK government took emergency measures which suspended all passenger rail franchise agreements for six months.

This would see all aspects of the service set by a new public body, with each operation run by a private company who would receive a fee under a management contract.

They were replaced in most cases by Emergency Recovery Measures Agreements (ERMAs) with durations of between six and 18 months; under these the Department for Transport (DfT) continued to receive the revenue and pay most of the train operating companies' costs.

[67] Following the formation of the Labour government after the July 2024 general election, it was announced that franchises would be gradually phased out as train operating companies are taken into public ownership.

GBR will assume responsibility for passenger services as they return to public ownership, gradually reunifying them under one entity and reintegrating them with infrastructure management.

Investigations are also often closed with no action, after it is found there is little concern (such as in cases where the operator has little-to-no ability to create a monopoly situation in practice, even though they may control large areas of services).

Where a concern is found to be significant, it is often resolved through the operators agreeing to certain undertakings designed to prevent the monopoly situation occurring, although in some cases investigations will conclude there is no alternative but to block the proposed contract.

[82] They highlight the fact that many of the current rail franchise holders are actually joint ventures involving subsidiary companies of the state-owned railways of other countries, such as SNCF of France or the German Deutsche Bahn.

[94][95] In December 2006 Sea Containers, which had held the InterCity East Coast franchise through its Great North Eastern Railway TOC since 1996, was stripped of its contract six years before it would have expired, due to financial difficulties.

By early 2009, NXEC had itself run into financial difficulties due to the recession; after the government refused to renegotiate the terms of National Express's contract, it was announced in July 2009 that the franchise would return to state ownership.

[85] By June 2017 VTEC, like GNER and NXEC before it, had run into financial trouble, with Stagecoach attempting to renegotiate the terms of the contract.

[98] In May 2018 it was announced that the franchise would return to state ownership again,[99] with services duly transferring to the new, publicly-owned London North Eastern Railway TOC the following month.

Responding to media criticism that he had been "outmanoeuvred" by First, the head of the SRA argued that he could not decide who would become a preferred bidder based on what might happen in future regarding mergers and acquisitions.