Emergency Recovery Management Agreements (ERMA)

[Class 170101]

Does this put off any significant reorganisation of franchising for another 9 months, possibly longer? It looks like an extension of current EMA terms rather than the supposed Treasury-imposed stricter ERMA contract. Nothing from DfT yet.

Should that be a good sign that EMA is carrying vice ERMA?

== Doublepost prevention - post automatically merged: 1 Sep 2020 ==

I don't think they can be shot of both of them. What would happen if they didn't sign the emra is it would return to the existing franchise agreement . The suppressed passenger demand will mean they will burn through any financial security they put up as condition of winning the franchise and it would eventually default to DOR /OLR it would be far for financially Beneficial for the TOC to agree to emergency remedial measures if it was in trouble before coronavirus. As depending on how long this crisis goes on they may be able to retain the franchise for the length of the contract with a 1% profit margin which is better than what they were getting before.

Or if the operator doesn't sign we will go to Operator of Last Resort?

 

[matt_world2004]

Should that be a good sign that EMA is carrying vice ERMA?

== Doublepost prevention - post automatically merged: 1 Sep 2020 ==



Or if the operator doesn't sign we will go to Operator of Last Resort?

If the operator doesn't sign it defaults to the franchise agreement iirc

 

[pdeaves]

If the operator doesn't sign it defaults to the franchise agreement iirc

Yes. In practice it wouldn't take long to go to OLR as the franchise agreement is likely unsustainable in the current situation.

 

[matt_world2004]

Yes. In practice it wouldn't take long to go to OLR as the franchise agreement is likely unsustainable in the current situation.

Doesn't the operator pay a form of security/Deposit which is to cover fines and contract penalties and shorfalls in payments to the DFT and don't the operator have to effectively exhaust that security payment before they hand back the keys IIRC.

The effect of that is the operator still loses a lot of money by defaulting on their franchise commitments. Whereas under the ERMA they would lose less. even if the ERMA doesn't cover all the services costs.

 

[43096]

SWR are running such a reduced service they must be saving money and thus getting less management fee or are Dept of Transport specifying service levels ?

DfT are specifying service levels. The EMAs are very tightly controlled.

They won't be saving that much money in any case: still paying staff, still leasing the trains and still maintaining them. Revenue has crashed through the floor, though, and any cost savings they are making will be nothing compared to the revenue drop.

 

[Bald Rick]

SWR are running such a reduced service they must be saving money and thus getting less management fee or are Dept of Transport specifying service levels ?

They must be.

== Doublepost prevention - post automatically merged: 1 Sep 2020 ==

They won't be saving that much money in any case: still paying staff,

Paying some staff less though, through a significant reduction in overtime etc. But I agree, compared to lost revenue it will be a drop in the Solent.

 

[DorkingMain]

SWR are running such a reduced service they must be saving money and thus getting less management fee or are Dept of Transport specifying service levels ?

SWR's service isn't heavily reduced, and all the main costs are still there (staff, maintenance, etc.) - those don't go away just because you run a few less services. In fact a lot of staff have not been trained (or replaced those who leave) so there's actually just as many overtime opportunities.

Also yes, the DfT dictate service levels as part of the EMA

 

[Bald Rick]

SWR's service isn't heavily reduced, and all the main costs are still there (staff, maintenance, etc.) - those don't go away just because you run a few less services.

Well yes and no. The service reductions in the peak mean that there is a need for fewer units to run the service, which means less mileage, which means less maintenance (and lease charges, and track access charges). It also means fewer crew, which in turn means much less of a requirement to have people working rest days etc. So, some of the costs do “go away”, albeit not in the same proportion as the service reduction.

 

[matt_world2004]

SWR's service isn't heavily reduced, and all the main costs are still there (staff, maintenance, etc.) - those don't go away just because you run a few less services. In fact a lot of staff have not been trained (or replaced those who leave) so there's actually just as many overtime opportunities.

Also yes, the DfT dictate service levels as part of the EMA

Iirc the ema specifies a service level based on a full pre covid timetable. However there is no financial penalty or reward for deviating from that service level or performance enhancements

 

[DorkingMain]

I edited my post to reflect the point about staff - a huge number of staff frozen midway through training, and a shortage of crew as a result means there's as many overtime opportunities as there were before.

I accept the point about less mileage, though there is not a particularly substantial reduction in stock requirements. Admittedly taking the 442s out of service has probably saved many £££ on maintenance lol

As I understand it the EMA specifies a pre-COVID service level but as an aspiration rather than a direct requirement. Current figure I was quoted was 85% of trains currently running compared to pre-COVID - the major reductions being Bournemouth, West of England and Epsom

 

[LNW-GW Joint]

EU diktats are all written into UK law, so unless we have changed our laws, then they will still apply

They aren't diktats anyway, we cheerfully signed up to them to create a level playing field in railway operation.
It's all part of the single market rules which the UK promoted across the EU.
The size/shape/terms of franchises can change without new legislation, but the principle of periodic open competition is still there while the Railways Act 1993 exists.
The trouble at the moment is that the railway economic model is in free fall, so there's no appetite to bid for new franchises until the government defines new rules.

 

[Nicholas Lewis]

As I understand it the EMA specifies a pre-COVID service level but as an aspiration rather than a direct requirement. Current figure I was quoted was 85% of trains currently running compared to pre-COVID - the major reductions being Bournemouth, West of England and Epsom

West of England has been a dreadful service although it looks like from next week there will some improvements.

Anyhow the point I had intended to make was that TOCs on cost+fee arrangements would surely seek to maximise income by running full requirements of the EMA ie to maximise costs and thus fees earned which is there profit margin. So the fact they aren't is either they have resource constraints or they are being told not to. I accept that running 10-20% less service doesn't reduce costs by same amount as most stock is on fixed cost whether its used or not.

 

[DorkingMain]

West of England has been a dreadful service although it looks like from next week there will some improvements.

Anyhow the point I had intended to make was that TOCs on cost+fee arrangements would surely seek to maximise income by running full requirements of the EMA ie to maximise costs and thus fees earned which is there profit margin. So the fact they aren't is either they have resource constraints or they are being told not to. I accept that running 10-20% less service doesn't reduce costs by same amount as most stock is on fixed cost whether its used or not.

It is rather bizarre how the service has been so dreadful on certain routes while other routes are back at pre-COVID levels (including peak extras) - Reading and Surbiton-Woking come to mind. I'm not sure how the scope for service reductions was decided.

 

[LittleAH]

Not pedantic at all in this case.

As SWR and TPE were in trouble before covid, I do wonder if First Group will be quite amiable to be shot of both of them. Guess we'll find out this week or next.

You say that as if franchising will be a thing post-Covid. I strongly suspect it won't be.

 

[Starmill]

You say that as if franchising will be a thing post-Covid. I strongly suspect it won't be.

And on the other hand it also seems near certain that at least some tendered contracts will still be let. So the reality is that what's changing is actually just the words in use to describe the terms - and there is little consistency in that regard as it is. It's also near certain that this will only significantly affect the trajectories of the groups of services contracted by DfT. The TfW Rail Services contract for example looks reasonably stable.

 

[Bald Rick]

I edited my post to reflect the point about staff - a huge number of staff frozen midway through training, and a shortage of crew as a result means there's as many overtime opportunities as there were before.

For some operators, with high levels of training, perhaps. But I gather that many operators have had significantly reduced overtime / Rest Day working. Certainly the drivers I know have (across several TOCs).

 

[Camden]

Especially as it's now desired to change to concessions, instead of bribing TOCs to keep running empty trains, wouldn't it be better to just require them to fulfill their existing commitments until they collapse, so that the government can take over free of charge?

 

[JamesT]

Especially as it's now desired to change to concessions, instead of bribing TOCs to keep running empty trains, wouldn't it be better to just require them to fulfill their existing commitments until they collapse, so that the government can take over free of charge?

The optics of all the TOCs failing would reflect badly on the government, even though it’s working as planned.
The future concession model also will want people to bid to run them. If you’ve forced the existing groups into large losses they’re unlikely to want to bid and risk being screwed over by the government again.

 

[Camden]

But it would be much cheaper, right? If you have an operator of last resort, then the trains still run.

 

[JamesT]

But it would be much cheaper, right? If you have an operator of last resort, then the trains still run.

If it’s a policy matter to run empty trains, they will be run regardless of whether it’s a TOC or OLR. OLR still have their management fee, not unlike what the TOCs are currently being paid under EMA.
The government gets the very short term benefit of the TOC having to run through their buffer until they hand back. But that then poisons the goodwill of anyone who deals with them in the future. Potential concession runners may demand higher fees to cover themselves for the risk that they get stuffed in turn. Which only raises the price long term.

 

[RT4038]

If it’s a policy matter to run empty trains, they will be run regardless of whether it’s a TOC or OLR. OLR still have their management fee, not unlike what the TOCs are currently being paid under EMA.
The government gets the very short term benefit of the TOC having to run through their buffer until they hand back. But that then poisons the goodwill of anyone who deals with them in the future. Potential concession runners may demand higher fees to cover themselves for the risk that they get stuffed in turn. Which only raises the price long term.

The scenario is just not a possibility. The TOCs would not just 'run through their buffer' either, they would take steps to minimise their losses.

 

[BeHereNow]

If you’ve forced the existing groups into large losses they’re unlikely to want to bid and risk being screwed over by the government again.

How would they force anyone into large losses? And what's the alternative, just give them free money?

The TOCs would not just 'run through their buffer' either, they would take steps to minimise their losses.

Exactly, and many were doing that pre-COVID anyway.

 

[RT4038]

How would they force anyone into large losses? And what's the alternative, just give them free money?



Exactly, and many were doing that pre-COVID anyway.

Well, yes, the only practicable answer is to give them free money. The other option (given to other industries), of allowing them to shut down operations, furlough their staff, moratorium of leases, only restart gradually as profitabilty allows etc, was not permitted them.

 

[BeHereNow]

The government do seem to be covering the costs of operators post-COVID initially through EMAs and then the ERMAs. The costs they seem unwilling to cover are the losses pre-COVID, for understandable reasons.

 

[LNW-GW Joint]

Especially as it's now desired to change to concessions, instead of bribing TOCs to keep running empty trains, wouldn't it be better to just require them to fulfill their existing commitments until they collapse, so that the government can take over free of charge?

There isn't a policy to ruin the franchise owners in order to reclaim the franchises.
HMG has to find a fair way to transition from the current model to concessions or whatever it decides for the future.
The same owners operating the same or similar concessions is entirely possible (with the DfT taking revenue risk and controlling fares).
Some owners (and manufacturers behind them) have long contracts which you can't simply terminate without compensation.
The new/extended deal with First over GWR seems to postpone any serious redesign of franchising.

Wales (TfW) is different, and there are concerns that if the passenger franchise (Keolis Amey) fails, it will knock on to the Valleys upgrade infrastructure scheme, for which they are also the contractors.

 

[JamesT]

How would they force anyone into large losses? And what's the alternative, just give them free money?

I’m responding to @Camden who’s suggesting making franchises run till they collapse. Presumably the method would be the same as Virgin Trains East Coast, where the government insisted the TOC ran to the terms of their franchise agreement until they burned through the bond from their parent and could then hand in the keys. (Which I referred to as a buffer previously)

The alternative is to recognise these are circumstances far beyond anything the franchise agreement could have envisaged and work with the TOCs to find a solution that allows them to make some sort of profit whilst running the service that is being demanded. The EMAs do this in the short term but don’t appear sustainable.

 

[BeHereNow]

I’m responding to @Camden who’s suggesting making franchises run till they collapse. Presumably the method would be the same as Virgin Trains East Coast, where the government insisted the TOC ran to the terms of their franchise agreement until they burned through the bond from their parent and could then hand in the keys. (Which I referred to as a buffer previously)

The alternative is to recognise these are circumstances far beyond anything the franchise agreement could have envisaged and work with the TOCs to find a solution that allows them to make some sort of profit whilst running the service that is being demanded. The EMAs do this in the short term but don’t appear sustainable.

It seems those are the two options on the table, I agree. Interesting to see what comes of it for the 4 "in trouble" franchises mentioned.

 

[Clarence Yard]

Especially as it's now desired to change to concessions, instead of bribing TOCs to keep running empty trains, wouldn't it be better to just require them to fulfill their existing commitments until they collapse, so that the government can take over free of charge?

The problem with that approach is that it will lead the Government into the Courts very quickly because it will be seen as Government deliberately putting companies into collapse for their own gain, something they are not allowed in law to do. Government is not an all powerful body that can do just what it likes - it has to operate under the law, as interpreted (over time) by the Courts.

Government has effectively (through stated policy - "do not use public transport") altered the conditions under which a Government franchise operates, so it has an obligation to sort out the effects of that stated policy. Now, if a franchise holder doesn't behave reasonably in this mitigation, Government will have the right to revert to previous conditions and the franchise will probably collapse in very short order.

But be careful about the 4 "in trouble" franchises. Who says they are in trouble? One Owning Group consistently books future losses, when identified, into the "year of discovery" as an "Onerous Contract Provision" (now under IFRS 16 an "Impairment") so it appears as a massive loss in that year alone. With the move of franchises into EMA, that provision could be (in part) reversed, to the benefit of the bottom line.

 

[Starmill]

Government is not an all powerful body that can do just what it likes

I'm not sure that the Prime Minister agrees.

 

[47421]

Don't agree that will be seen as govt deliberately putting cos into collapse for own gain. Also don't agree that they are not allowed to do that. It is the nature of many contractual disputes that the courts enforce deals that have turned out bad for one party, and that companies often end up in administration or liquidation as a result.

Govt has a duty to the public to require people they contract with to deliver on those contracts in the public interest. In the case of the Franchises that means enforcing the terms, to deliver the train service specified and if the revenue does not meet expectations for the profit shortfall to be covered up to the amount of the parent company guarantee / bond.

Why should Franchisees not be required to deliver on the contracts they freely entered into? For example Abellio provided a £280m parent guarantee re Greater Anglia. They should be required to deliver on it - not the UK govts fault they overbid. Same issue re C2C. Dutch and Italian taxpayers should complain to their govts about the contracts their train cos entered into.

The commercial reality however is that if the UK government does strictly enforce all the contracts they will all soon burn through the Parent company funding and be handed back to OLR. And no one will ever bid for a franchise again.

I will be interested to see what does happen with the Abellio Anglia bond.