OLR versus OTOCs Contracts

[RailwayRose]

Keen to hear more.

Why are OLR TOCs, such as LNER, on a different contractual agreement to those under franchise arrangements?

 

[Dr Hoo]

Welcome to the Forums.

Since Covid the concept of ‘franchising’ hasn’t really existed.

Did you have a definition for at ‘OTOC’?

 

[Clarence Yard]

If by OTOC, you are meaning other Train Operating Companies, the following may help.

Since 2020 all 14 DfT TOCs are either run through the OLR method (where some, usually two, ex railway execs sit on the existing TOC board for the DfT) or via a management contract arrangement with an Owning Group, the one that used to hold the franchise prior to 2020.

In every case the DfT makes the key decisions, sets the budget and agrees the train plan, takes the revenue (on behalf of the Treasury) and pays the costs. In the latter method, the contractor gets a fixed fee for running the TOC on behalf of the DfT together with a Contract Performance fee.

The management contract arrangement was envisaged to be only temporary, as the TOCs were going to be offered to the market again, but time has dragged on, as has the proposed GBR set up. Fundamental changes are likely to be made following the next General Election, whoever gets in.

 

[43066]

Fundamental changes are likely to be made following the next General Election, whoever gets in.

Fingers crossed that’ll mean more independence and commercial freedom, reduced micromanagement from government, and rather less emphasis on cost reductions, to the exclusion of everything else.

 

[najaB]

...and rather less emphasis on cost reductions, to the exclusion of everything else.

I can't speak directly to the situation in the railways, but this is a bug bear of mine: management that knows the cost of everything but the value of none.

So they make "savings" that end up costing huge amounts.

 

[Backroom_boy]

In every case the DfT makes the key decisions, sets the budget and agrees the train plan, takes the revenue (on behalf of the Treasury) and pays the costs. In the latter method, the contractor gets a fixed fee for running the TOC on behalf of the DfT together with a Contract Performance

But isnt the OLR also a contractor? So one route the contractor gets paid to run the TOC on a fixed fee, the other route the contractor gets paid to provide OLR services to run a TOC on a fixed fee?

So is the only difference the contract performance fee?

 

[JamesT]

But isnt the OLR also a contractor? So one route the contractor gets paid to run the TOC on a fixed fee, the other route the contractor gets paid to provide OLR services to run a TOC on a fixed fee?

So is the only difference the contract performance fee?

Yes, unless it's changed recently OLR is a partnership of Arup, EY, and SNC-Lavalin Rail & Transit.

 

[Haywain]

I would say that the OLR TOCs perhaps have a little more independence because any profit goes to the government

 

[Fundee on Tay]

Yes, unless it's changed recently OLR is a partnership of Arup, EY, and SNC-Lavalin Rail & Transit.

I believe that was only the case for a short time after LNER was brought under OLR. Since later on in 2018 an arm of the DfT; DOHL (Department for Transport OLR Holdings - not sure why the abbreviation is DOHL) with a small staff number has taken over operations of OLR franchises.

== Doublepost prevention - post automatically merged: 10 Jan 2024 ==

I would say that the OLR TOCs perhaps have a little more independence because any profit goes to the government

All profit goes to the government since 2020 - as said in a previous post the former franchisees are paid a standard management fee.

 

[Haywain]

All profit goes to the government since 2020 - as said in a previous post the former franchisees are paid a standard management fee.

Not strictly true - the non-OLR TOCs are paid a management fee of costs plus 2% so do have a built in profit to the owning groups.

 

[Dr Hoo]

Not strictly true - the non-OLR TOCs are paid a management fee of costs plus 2% so do have a built in profit to the owning groups.

Can anyone clarify this ‘built in profit’ point for me. I had always thought that the non-OLR TOCs’ ‘owner’, e.g. First Group, still had to actually ‘do some managing’, which might or might not cost something approaching 2% of what might be termed more ‘front line’ costs.

Or is it literally the case that the 2% is a straightforward cash ‘bung’ that can go straight into First Group’s (or whoever’s) shareholder dividend pot, directors’ bonuses and so on?

 

[43066]

Not strictly true - the non-OLR TOCs are paid a management fee of costs plus 2% so do have a built in profit to the owning groups.

Although it’s (AIUI) true to say the profit, if any, generated by the actual railway operation goes to the government, and is separate to that which the owning group will generate from its 2% fee.

 

[ainsworth74]

Fingers crossed that’ll mean more independence and commercial freedom, reduced micromanagement from government, and rather less emphasis on cost reductions, to the exclusion of everything else.

And I have a very nice bridge to sell you!

 

[Clarence Yard]

No, the 2% of costs has long gone for TOCs - under an NRC it is a fixed fee and contract performance fee only with the DfT paying for all authorised costs. The contract performance fee is around 2.5 times the fixed fee if you get 100%, which you won’t.

It is all in Chapter 7.1 of the appropriate NRC. For example, in the GWR contract (on the DfT website), the fixed fee was set at £526,923 per railway period (28 days).

The base fee and contract performance fee are now the only items that can effectively go straight to the Owning Group. If a TOC does better than the DfT cost or revenue targets, the Owning Group does not benefit, save for the fact that it helps the contract performance fee “score”.

Owning Groups are trying to change this as the incentive on them to grow the business isn’t really there at the moment. They are looking for a cut of the over target revenue.

 

[Dr Hoo]

No, the 2% of costs has long gone for TOCs - under an NRC it is a fixed fee and contract performance fee only with the DfT paying for all authorised costs. The contract performance fee is around 2.5 times the fixed fee if you get 100%, which you won’t.

It is all in Chapter 7.1 of the appropriate NRC. For example, in the GWR contract (on the DfT website), the fixed fee was set at £526,923 per railway period (28 days).

The base fee and contract performance fee are now the only items that can effectively go straight to the Owning Group. If a TOC does better than the DfT cost or revenue targets, the Owning Group does not benefit, save for the fact that it helps the contract performance fee “score”.

Owning Groups are trying to change this as the incentive on them to grow the business isn’t really there at the moment. They are looking for a cut of the over target revenue.

Thank you very much for this but I am still completely unclear about what (if anything, substantial) the Owning Group actually has to 'do' to justify any payment whatsoever.

So, from my maths, based on your example, First Group get £526,963 x 13 = £6,849,999 (presumbly intended to be £6.85 million) per year, come what may. They then have the chance to 'earn' up to £6,849,999 x 2.5 = £17,124,997.50 in additional Contract Performance Fees, making a total of up £23,974,996.50 per year.

So apart from a few essentially token actions such as having a Registered Office brass plaque on the door or printing a few sheets of headed notepaper for use in occasional DfT correspondence what is First Group actually going to 'add'?

 

[Clarence Yard]

It is effectively acting as the DfT’s managing agent - to ensure that the DfT’s wishes are carried out and overseeing the TOC’s actions.

To keep the private sector interested (remember this was originally only intended to be temporary), you have to pay them something for doing all this, especially when they still hold the safety card.

Arguably, the longer this goes on without them taking any real financial risk (save the use of their own funds to provide for working expenses), the less the justification for their continued involvement.

For example, there are 14 DfT TOCs individually dealing with 1 NR (split into 5 English Regions). It doesn’t take a genius to realise that substantial savings could be made by merging the TOCs and NR Regions, with some TOCs becoming joint Regional operations. With Rachel Reeves on the look out for easy savings, it is a good bet that Labour rolls up the remaining non-OLR TOCs in their first few years of Government, even prior to a Regional GBR being fully set up.

The private sector, of course, would like to return to something like the franchise days when they could make a bigger return than they currently enjoy through a low risk and easy gain NRC.

 

[Bald Rick]

For example, there are 14 DfT TOCs individually dealing with 1 NR (split into 5 English Regions)

3 English, 1 Scottish, and 1 English & Welsh (or Welsh & English, depending on your point of view).

 

[Clarence Yard]

Thanks for the correction, I thought Anglia was separate from Eastern, although it could be in the future as Eastern is a bit too big these days to properly manage an integrated railway.

 

[WAB]

Arguably, the longer this goes on without them taking any real financial risk (save the use of their own funds to provide for working expenses), the less the justification for their continued involvement.

For example, there are 14 DfT TOCs individually dealing with 1 NR (split into 5 English Regions). It doesn’t take a genius to realise that substantial savings could be made by merging the TOCs and NR Regions, with some TOCs becoming joint Regional operations. With Rachel Reeves on the look out for easy savings, it is a good bet that Labour rolls up the remaining non-OLR TOCs in their first few years of Government, even prior to a Regional GBR being fully set up.

Merging the TOCs into regions is the cheap and easy option, but you're still going to end up with TOC-like subsectors under the region to actually run the service so it's questionable how much in the way of savings can be achieved. A few people in the industry have an affinity with sectorisation in its final form, but I doubt if splitting maintenance to that degree is the best way forward.

 

[Clarence Yard]

I wouldn’t be thinking about sub Sectorisation at all - that’s what started the balkanisation and “beggar my neighbour” attitude in the first place. Better to go back one step further to Regional BR.

The savings are fairly obvious because you currently have 14 TOCs transacting with NR. So, say, if you had regional integrated train planning units, instead of 15 different offices, that would save money. Similarly with commercial departments currently each doing their own thing. Then you start combining other HQ functions and it all starts to roll into serious money being saved.

The more tricky things, like combining train crew depots, you can leave till towards the end, once you have thought through all the equal pay implications as well as all the logistical issues.

But to those of us who split the railway up in the first place, first through Sectorisation and then privatisation, it would be a relatively easy task to put it all back together again and save a fortune. It just needs to be done logically and carefully, as part of a rolling programme of re-integration.

 

[Meerkat]

I wouldn’t be thinking about sub Sectorisation at all - that’s what started the balkanisation and “beggar my neighbour” attitude in the first place. Better to go back one step further to Regional BR.

The savings are fairly obvious because you currently have 14 TOCs transacting with NR. So, say, if you had regional integrated train planning units, instead of 15 different offices, that would save money. Similarly with commercial departments currently each doing their own thing. Then you start combining other HQ functions and it all starts to roll into serious money being saved.

The more tricky things, like combining train crew depots, you can leave till towards the end, once you have thought through all the equal pay implications as well as all the logistical issues.

But to those of us who split the railway up in the first place, first through Sectorisation and then privatisation, it would be a relatively easy task to put it all back together again and save a fortune. It just needs to be done logically and carefully, as part of a rolling programme of re-integration.

Sounds like a big, inefficient, blob with little attention to the customers.

 

[ainsworth74]

Sounds like a big, inefficient, blob with little attention to the customers.

Because today's railway is so reactive to passenger needs and customer focused...

 

[Meerkat]

Because today's railway is so reactive to passenger needs and customer focused...

Well that’s because it’s run by one body - DfT.

 

[D365]

Yes, unless it's changed recently OLR is a partnership of Arup, EY, and SNC-Lavalin Rail & Transit.

Not sure if SNC-Lavalin (now AtkinsRéalis) is still involved. Don’t forget Wikipedia is notoriously poor in its real-world accuracy.

 

[WAB]

I wouldn’t be thinking about sub Sectorisation at all - that’s what started the balkanisation and “beggar my neighbour” attitude in the first place. Better to go back one step further to Regional BR.

The savings are fairly obvious because you currently have 14 TOCs transacting with NR. So, say, if you had regional integrated train planning units, instead of 15 different offices, that would save money. Similarly with commercial departments currently each doing their own thing. Then you start combining other HQ functions and it all starts to roll into serious money being saved.

The more tricky things, like combining train crew depots, you can leave till towards the end, once you have thought through all the equal pay implications as well as all the logistical issues.

But to those of us who split the railway up in the first place, first through Sectorisation and then privatisation, it would be a relatively easy task to put it all back together again and save a fortune. It just needs to be done logically and carefully, as part of a rolling programme of re-integration.

It depends on who you ask from that era. There are plenty of railwaymen who say that the regions were far too production-led, and where unwieldy behemoth which were not commercially-minded. Sectorisation and OfQ meant proper integration of the functions on a local level. OK, there may be some disbenefits in continuing to divvy things up, which is an inevitable compromise for avoiding unwieldy areas and focusing on the customer. But having it through different cost centres of the same business would hopefully encourage a bit more cooperation and strip out some of the bureaucracy compared to what we have today, as long as the right people are in charge to set the culture.

There's no need to turn the clock back to 1992 of course - you could have traincrew provided to the sub-sectors as a shared service, and several TOC head office expenses could be treated similarly.

Of course, this all depends on whether you think the flaws of regionalisation were due to the regions' inheritances from the Big 4 or whether the flaws are inherent to the regional structure.