Go-Ahead warns it may need taxpayer support for Southern rail services

[Furrball]

http://www.telegraph.co.uk/finance/...payer-support-for-Southern-rail-services.html

Go-Ahead warns it may need taxpayer support for Southern rail services

Train and bus group Go-Ahead has admitted it may have to seek taxpayer aid for its Southern rail franchise next year in the latest blow to the Government’s transport policy.

Train and bus operator Go-Ahead, which runs Southeastern, Southern and London Midland trains, said growth on its Southern franchise was weaker than forecasts made when it bid for the rail contract in 2009.

Southern, which provides commuter services between London and the South Coast, has been hit by the double-dip recession and growth expectations are not matching the forecasts made by Go-Ahead when it bid for the lucrative rail contract in 2009.

Under the terms of the 2009 deal, Go-Ahead is allowed to claim revenue support from the Government from September 2013 if Southern services continue to undershoot forecasts.

While Go-Ahead is far from the first transport company to seek revenue support, the admission comes during a politically sensitive time in the rail industry.

It will add to the pressure on the new Transport Secretary, Patrick McLoughlin, who has inherited the threat of a judicial review over the recently awarded West Coast franchise.

FirstGroup has been accused of winning the franchise between London and Scotland based on “unrealistic” growth assumptions.

Critics of FirstGroup, led by Sir Richard Branson’s Virgin Rail, believe there’s a high chance it will have to hand back the keys to the West Coast line as its “risky” forecasts will fail to materialise.

David Brown, chief executive of Go-Ahead, insisted his company was doing everything it could to avoid going cap in hand to the taxpayer but said the “jury is out” as to whether it would be able to avoid drawing down on revenue support.

“It’s quite a tough job that they [the Southern team] have got to do but they are focused on trying to grow the top line still and get back onto that trajectory,” Mr Brown insisted.

But Bob Crow, leader of the RMT rail union, said revenue support was akin to “corporate scrounging”.
“This is yet another example of the one-way ticket to the bank for the private rail operators,” he said. “If they can’t extract a fat profit they can fall back on the corporate welfare of revenue support.”

Weaker growth on Southern last year coincided with a £52.7m increase in Go-Ahead’s payments to operate the line until July 2015.

Go-Ahead yesterday unveiled a 3.4pc dip in full year pre-tax profit to £94.2m despite a strong performance from its bus division.

More bad news regarding the transport policy.

 

[ert47]

Ouch, doesnt sound too good, I wonder how this will affect their bid for the "super franchise"?

 

[185]

http://www.telegraph.co.uk/finance/newsbysector/transport/9526574/Go-Ahead-warns-it-may-need-taxpayer-support-for-Southern-rail-services.html

More bad news regarding the transport policy.

More good news for
http://www.bringbackbritishrail.org/

 

[junglejames]

Why should they need taxpayer support? They supposedly pay a premium to the government. So all it needs is for the government to agree to a smaller premium.

Allowing companies to go cap in hand to the government if their profits arent quite up to scratch, is exactly as Bob Crow puts it. For once, Crow is actually right.

Go Ahead made profits of £94 million. They hardly need state aid. Unless next year, the premium payments increased by £95 million, then there is no need for going cap in hand.
If you take on a railway franchise, you should be expected to take the risks. The fact they dont want to, and the fact the government gives them these options, shows this isnt really privatisation in the true sense. Its only privatisation in the fact that private companies take loads of profits from the railways.
So in reality, there has been zero point in privatisation.

 

[LNW-GW Joint]

Why should they need taxpayer support? They supposedly pay a premium to the government. So all it needs is for the government to agree to a smaller premium.

Allowing companies to go cap in hand to the government if their profits arent quite up to scratch, is exactly as Bob Crow puts it. For once, Crow is actually right.

Go Ahead made profits of £94 million. They hardly need state aid. Unless next year, the premium payments increased by £95 million, then there is no need for going cap in hand.
If you take on a railway franchise, you should be expected to take the risks. The fact they dont want to, and the fact the government gives them these options, shows this isnt really privatisation in the true sense. Its only privatisation in the fact that private companies take loads of profits from the railways.
So in reality, there has been zero point in privatisation.

Cap and collar is a standard feature of recent franchises (future ones will be a bit different). It limits TOC losses and also profits.
Most franchises are in revenue support. This means they get a rebate if revenue is significantly below target (the TOC is losing as well as DfT).
More generally it worsens the DfT budgetary position and their willingness to subsidise other franchises that need it.
There's a recession on you know.

 

[WatcherZero]

Last year their franchise payments went up by £52.7m, cant find what it will increase by next year but its unlikely to be less than that with the usual ramping profile towards the end of the franchise (2008-2015)

 

[3141]

Why should they need taxpayer support? They supposedly pay a premium to the government. So all it needs is for the government to agree to a smaller premium.

Allowing companies to go cap in hand to the government if their profits arent quite up to scratch, is exactly as Bob Crow puts it. For once, Crow is actually right.

Go Ahead made profits of £94 million. They hardly need state aid. Unless next year, the premium payments increased by £95 million, then there is no need for going cap in hand....private companies take loads of profits from the railways.

No, because the government will not agree a smaller premium.

Go-Ahead's profit is for the whole company - bus companies, rail franchises and everything else - not just Southern.

They don't make "loads of profits". The contract defines the profit margin they forecast, often quite small, about 4%, and if they make more it stipulates that they share it with the DfT. That's the other side to the provision for revenue support if revenue falls below the forecast. They don't get 100% support, but have to take some of the loss themselves.

I reckon Bob Crow is once again shooting his mouth off. Maria Eagle (Labour shadow transport person) is good at that too.

 

[John55]

No, because the government will not agree a smaller premium.

Go-Ahead's profit is for the whole company - bus companies, rail franchises and everything else - not just Southern.

They don't make "loads of profits". The contract defines the profit margin they forecast, often quite small, about 4%, and if they make more it stipulates that they share it with the DfT. That's the other side to the provision for revenue support if revenue falls below the forecast. They don't get 100% support, but have to take some of the loss themselves.

I reckon Bob Crow is once again shooting his mouth off. Maria Eagle (Labour shadow transport person) is good at that too.

The profit is not the number which triggers revenue support. Revenue support is solely related to the revenue of the TOC. As revenue goes above forecast HMG takes more money if revenue goes below forecast HMG has to pay money to the company.

This is a contractual commitment known and understood when the franchise was signed and is one way in which risk is managed between HMG and the companies which run franchises. If Southern had to manage all the risk then there would be no or very much smaller premiums paid.

It works both ways Northern and Virgin have in recent years have paid lots of extra money to the Government as franchise agreements underestimated revenue growth.

 

[junglejames]

Cap and collar is a standard feature of recent franchises (future ones will be a bit different). It limits TOC losses and also profits.
Most franchises are in revenue support. This means they get a rebate if revenue is significantly below target (the TOC is losing as well as DfT).
More generally it worsens the DfT budgetary position and their willingness to subsidise other franchises that need it.
There's a recession on you know.

Ive gathered cap n collar is in use. However it is silly. Privatisation should mean exactly that. The private companies should be taking a risk. If revenue is below expectations, and they end up making a loss, well, thats life. It happens all the time. If Sainsburys suddenly started making a loss, could they suddenly go cap in hand to the government? Of course not. So as i said, it is only privatisation to the extent that private companies take the profits.
I have no problem with some operators receiving subsidies for loss making operations, but once the subsidy is agreed, that should be the end of it.

This just goes to show this isnt privatisation in the true sense of the word.
Its basically a farce
--- old post above --- --- new post below ---

No, because the government will not agree a smaller premium.

Go-Ahead's profit is for the whole company - bus companies, rail franchises and everything else - not just Southern.

They don't make "loads of profits". The contract defines the profit margin they forecast, often quite small, about 4%, and if they make more it stipulates that they share it with the DfT. That's the other side to the provision for revenue support if revenue falls below the forecast. They don't get 100% support, but have to take some of the loss themselves.

I reckon Bob Crow is once again shooting his mouth off. Maria Eagle (Labour shadow transport person) is good at that too.

I dont give 2 hoots how many companies Go Ahead have. If Southern can not manage their premium payments, then they will have to be responsible for going to Go Ahead who will then have to help out their subsidiary. If they can manage to pay them, then brilliant, no need for any support from anywhere. If Go Ahead suddenly start making huge losses because they cant afford Southerns payments, then diddums. Thats life as a private company for you.

 

[WatcherZero]

The risk for the companies is they have to operate all the services for the given revenue and still have enough left to make franchise payments with whats left over being the profit. Revenue could increase but if they fail to run the service efficently they could actually lose money, thats the risk.

Its no different to farmers, they recieve subsidies to produce food/leave fields fallow but unless they are efficent enough they can still produce lots of food and make a loss because they were unable to create a large enough margin between what they earn for a tonne of carrots and what it costs them to grow a tonne of carrots.

 

[Dennis]

They don't make "loads of profits". The contract defines the profit margin they forecast, often quite small, about 4%

and this profit margin is very poor compared to many businesses; the company (shareholders) might as well walk away and put their money in the bank at no risk for that rate of return.

 

[BestWestern]

From a purely observational point of view, the main issue with Revenue Support would seem to be the way in which it is blatantly abused many TOCs who fall into eligibility. Suddenly, all efforts to collect revenue seem to come to a grinding halt, with Revenue Protection staff invariably being the first to go in the name of 'cost cutting' exercises, and gatelines which would normally always have been in operation suddenly standing idle and letting the freeloading masses wander straight past.

Frankly it stinks, and is a sign of the attitude which blights our system today that revenue is somehow not all that important, since there is always a handy 'safety net' to land in if things aren't going too well. What other industry would in times of need immediately dispense with the staff and facilities who are there solely to ensure that income is collected?! Yes, RPI's cost money, but if they weren't a productive grade (whether that is directly or in terms of the wider deterrent they provide) then presumably they would have never existed in the first place. Not manning gatelines on a busy friday or saturday evening is even worse, there can surely be no sensible argument that a couple of bods on relatively low wages can't be afforded when thousands of pounds is walking straight out of the door due to their absence?

It does appear to be the case that once a TOC has fallen into Revenue Support there is little incentive for them to work their way out of it, presumably because it is preferable to just sit back and let the taxpayer underwrite the operation rather than paying people a wage to go out and earn the company's money honestly.

 

[WatcherZero]

Which Toc are you thinking of? Up here all the Tocs have increased their physical and manual gating over the last five years or so, even the ones in revenue support. First with their strategy to gate all West Coast stations are trying to squueze the last drops of revenue out as they say they believe only 4% of revenue is being lost from evasion/fake tickets and they think they can cut that down to 2%.

 

[Wath Yard]

The risk for the companies is they have to operate all the services for the given revenue and still have enough left to make franchise payments with whats left over being the profit. Revenue could increase but if they fail to run the service efficently they could actually lose money, thats the risk.

The risk of being so incompetent that they let costs spiral out of control isn't one the tax payer should bear. That's a risk for the shareholders.

and this profit margin is very poor compared to many businesses; the company (shareholders) might as well walk away and put their money in the bank at no risk for that rate of return.

That is a common misunderstanding of rail profits, and an often flawed argument for how privatisation hasn't added unnecessary costs. The often quoted profit percentages are % of revenue. TOCs have not created most of the revenue. They inherited a lot of it from BR or the previous operator. A profit of approx 5% of revenue where there is very little risk is pretty good. If it was a 5% return on investment then they could moan.

If you earn £50,000 pa (your revenue) and have a surplus of £3,000 (your profit) that you put in a savings account the bank doesn't pay you interest on £50,000.

Cap and collar is wrong. Many TOCs admit it and the DfT has also finally come to that conclusion which is why the new franchises don’t have it

 

[DXMachina]

and this profit margin is very poor compared to many businesses; the company (shareholders) might as well walk away and put their money in the bank at no risk for that rate of return.

<-- Accountant

The 4% a bank might give the investors is return on investment, IE interest on capital

The 4% quoted here is profit margin, IE the excess of gross revenue over gross costs

If a rail company makes 4% margin that doesnt mean there's only 4% return on investment to the shareholders. the return on investment is the dividend divided into the cost of their shares after all. The return on investment might be 1% or might be 70%. All depends what the shares cost.

Edit sorry - beaten to it !

 

[maniacmartin]

This is a strange form of privatisation! If you're making money then cash in, and if not the taxpayer will bail you out. No risk, but lots of potential gain. I don't understand why DfT signed the contracts like this at all.

If a franchise holder can't afford to run the franchise, instead of a bailout, I think they should have to hand it over to DOR and the group of companies should be barred from bidding on future franchises for a number of years. Running a business is all about taking risks. Sometimes they pay off and sometimes they don't.

 

[transmanche]

They don't make "loads of profits". The contract defines the profit margin they forecast, often quite small, about 4%

and this profit margin is very poor compared to many businesses; the company (shareholders) might as well walk away and put their money in the bank at no risk for that rate of return.

I'd say that 4% of revenue is a healthy profit margin for what is effect a semi-utility; with pretty much a guaranteed income stream.

Most people consider Tesco to be a very profitable company. Tesco UK makes almost £2.5billion operating profit on revenues of almost £43billion - approx 5.8% of revenue.

 

[3141]

I'd say that 4% of revenue is a healthy profit margin for what is effect a semi-utility; with pretty much a guaranteed income stream.

But it isn't a guaranteed income stream, hence Go Ahead saying they may have to join some other franchises in seeking revenue support. The franchises in this position have all found that revenue has fallen below expectations as a result of the economic downturn.

Some people may feel that "privatisation" should mean that when such a thing happens the franchises should have to put up with all the consequences, but the former Strategic Rail Authority, and subsequently the DfT, took the view that there should be a "cap and collar" arrangement, to ensure that the government got a share of any profits above an agreed level, and to give some but not complete support to a franchise if revenue fell below that level.

I'd hope those who think that was the wrong approach contacted the DfT when it was consulting on how franchises should be reformed and told them what they should be doing. But they didn't, of course.

SWT is one of those in revenue support. I see no evidence when I'm travelling that they have reduced their efforts to collect revenue. Why would they do that? As they do not get full compensation for lower revenue, but have to take some of the loss themselves, the less revenue they get the bigger the loss.

Although future franchises won't include cap and collar, the DfT is including an alternative method of recognising that in changed economic circumstances revenue may be less than the bidder expected. If it didn't do that, and told bidders they must take 100% of the risk, then their bids would be a lot lower.

The comparison with Sainsburys isn't accurate. If they find their sales are going down because people have less money they can reduce opening hours, close stores, reduce the number of part-time and short-term posts, cut down on the range of goods, and so on. A TOC is contractually bound to run the same number of services to the same stations.

One thing that Sainsburys (and other retailers) can do is to reduce prices, or in effect do so by making more two-for-the-price of-one offers. It's true we don't see much of that on rail services.

 

[Wath Yard]

Some people may feel that "privatisation" should mean that when such a thing happens the franchises should have to put up with all the consequences, but the former Strategic Rail Authority, and subsequently the DfT, took the view that there should be a "cap and collar" arrangement, to ensure that the government got a share of any profits above an agreed level, and to give some but not complete support to a franchise if revenue fell below that level.

Just because some politicians and some rail insiders, all of whom have a vested interest in the headline premium payments being high to 'prove' what a great success privatisation has been, and then hiding extra subsidies in cap and collar and direct grants to Network Rail, do something doesn't mean it is right.

 

[tbtc]

This is a strange form of privatisation! If you're making money then cash in, and if not the taxpayer will bail you out. No risk, but lots of potential gain. I don't understand why DfT signed the contracts like this at all

The way that "cap and collar" works is that the DFT would share part of the "hit" if franchise revenue goes below a certain amount, as long as they share part of any unexpectedly large increases in revenue.

So Northern (which was planned on a "no growth" basis) are having to share some surplus with the DfT, but other franchises which are performing poorer are in the opposite position.

Since we are planning on franchises lasting a decade or longer there's no way that a bidder could predict economic growth/ recession, so some element of risk management maybe appropriate.

 

[WatcherZero]

Thats where the new West Coast franchise comes in, instead of being based on the Government providing passenger revenue projections and performance being compared to this instead the Government provides national economic forecasts (theyve said expect an average of 2.5% annual GDP growth which looks completley unfeasible at least in the next three years) if the economy grows at an annualised average 4% less than that the West Coast gets revenue support, if the economy grows 4% more than that then the Government gets a slice of the extra revenue.

 

[bb21]

So are we now assuming that GDP growth goes hand-in-hand with revenue growth?

 

[tbtc]

So are we now assuming that GDP growth goes hand-in-hand with revenue growth?

There's got to be some correlation (in terms of employment, business travel etc).

Think of it as an incentive for the Government to avoid dumping us back in recessions!

 

[Searle]

I reckon Bob Crow is once again shooting his mouth off. Maria Eagle (Labour shadow transport person) is good at that too.

You could say that about the whole of Labour right now!

 

[knight2004]

I personally think any operatorin London should expect zero help from the government they charge us all enough

 

[transmanche]

I'd say that 4% of revenue is a healthy profit margin for what is effect a semi-utility; with pretty much a guaranteed income stream.

But it isn't a guaranteed income stream

Ah, but that's not exactly what I said.

Southern operates a franchise where a large proportion of business comes from non-discretionary travel - the commuter market. To a certain extent, that's a captive market - many customers do not have any realistic option other than use the train. Hence why I described such a franchise as a semi-utility.

The franchises in this position have all found that revenue has fallen below expectations as a result of the economic downturn.

Levels of employment have remained higher in SE England in comparison to the rest of the country. And I see from other threads that sections of the Southern network (e.g. Brighton Main Line) are already operating at maximum capacity during peak hours. So with little room to increase non-discretionary commuter travel, it suggests to me the possibility that GoVia based their revenue forecasts on dramatically increasing discretionary leisure travel - something which I'm assuming hasn't happened. Or in other words, it suggests that they might have over-bid.

Most people consider Tesco to be a very profitable company. Tesco UK makes almost £2.5billion operating profit on revenues of almost £43billion - approx 5.8% of revenue.

The comparison with Sainsburys isn't accurate.

But I wasn't comparing business models, merely relative levels of profitability, to counter the argument which suggested that a 4% profit was poor.

And I'd say that a 4% profit rate for a semi-utility (at a time when central bank interest rates are 0.5%) is actually pretty good.

 

[WatcherZero]

So are we now assuming that GDP growth goes hand-in-hand with revenue growth?

The new thinking is if you just measure revenue its hard to tell what increase/fall was down to the tocs effort and performance and what due to the wider economy. Under the new model if the Toc cant increase revenue while the economy is growing their considered to be under performing and vice versa.

 

[johnnychips]

I'd hope those who think that was the wrong approach contacted the DfT when it was consulting on how franchises should be reformed and told them what they should be doing. But they didn't, of course.

I'm sure the rail unions, amongst many others did. Do you think they were listened to?

 

[WatcherZero]

I personally think any operatorin London should expect zero help from the government they charge us all enough

Im actually a critic of the London centric investment programmes when you compare Crossrail, Thameslink etc.. with the large investment programmes elsewhere in the country (Birmingham New Street, Leeds Station, Lancashire Triangle, Northern Hub)

However on this point rail/Underground/Tramlink/Bus fares in London are actually the lowest as a percentage of average income than they are anywhere else in the country. In London a season ticket is on average something like 10% of annual income whereas elsewhere its as high as 30%.

 

[BestWestern]

I personally think any operatorin London should expect zero help from the government they charge us all enough

Wow, really?! You should try taking a public transport journey outside of London, you might be in for a shock!