04 October 2021

The long-awaited Williams-Shapps review into the future of the rail sector in the UK was published on 20 May 2021. The white paper sets out the government’s vision for the rail industry and its intent to restructure and re-shape it over the coming years.

The report contains seven ‘promises’, divided into ten key outcomes and sixty-two more discrete commitments. The most significant change will see the establishment of Great British Railways as the new ‘guiding mind’ which had been heavily trailed by Keith Williams prior to the expected publication of his report.

This new organisation will see Network Rail evolve to take on responsibilities from other industry stakeholders, including responsibility for procuring and awarding the new Public Service Contracts to private sector train operators. These new contracts (much like the new National Rail Contracts) will mainly operate as concessions, with operators paid a fee for providing a specified level of service but with revenue risk for most contracts borne by government. 

The review will therefore mean a step-change in the role of operators in the rail industry, and it is clear that one of DfT’s aims is to attract some new entrants to the market.

This latest note, the second in our series on the Williams-Shapps review, considers the key changes for operators in the UK rail market and the risks and opportunities associated with these, as well as the potential for new-entrants investing in the market as the role of the traditional 'TOC' (train operating company) is transformed.

The key potential changes for operators under the new regime are likely to be:


  • Revenue – GBR will, initially at least, take revenue risk in the way which DfT has over the last 12-15 months, pursuant to the EMAs, ERMAs and now NRCs. Depending on the precise final structure, the operator will be protected from most negative fluctuations in demand due to external factors, but will still need to comply with its own obligations and associated performance targets. There will be scope for operators to take some revenue risk on certain, predominantly long distance, routes as passenger numbers recover.
  • Responsibilities and expertise – At a high level, many of the key activities which franchised train operating companies have delivered are to be assumed by GBR. This could mean less focus on certain rail-specific expertise within the operators themselves, as roles such as revenue modelling, timetabling and station operation are delivered by GBR. However, as they will deliver the services and will need to input on passenger feedback, rolling stock availability, staff rosters etc, it remains likely that operators continue to have some role in the above. Clearly industry expertise will remain critical to the strategic decisions and management of operators, but the scope of operators’ roles is likely to narrow.
  • Other financial risk – The concession model could also remove some key barriers to entry to the market. We would expect the cost of bidding for the PSCs to be lower than bid costs during the last round of franchising given the reduced scope of an operator’s role. This may encourage more (and more innovative) bids for the PSCs than was the case in more recent Franchise competitions. In addition, while it remains to be seen what level of shareholder capital will be required for the PSCs, early indications from the NRCs are that the requirement will be significantly lower than that for the most recent round of Franchise bids.

Passenger experience / hospitality

  • The white paper emphasises the importance of passenger experience and encouraging people back to using the railway. Objectives under this broad heading, such as punctuality, capacity and customer satisfaction will likely be priorities in measuring operators’ performance (and any associated financial penalty or rewards). Whilst GBR will apparently take on risk for revenue, there are likely to be financial incentives for operators to grow passenger numbers and improve revenue protection. As with adjustments to the risk-sharing of revenue described above, these standards are also expected to change in-life, to adapt to passenger needs. Operators have the experience and control of the passenger interface so it would seem inevitable that a passenger focussed solution will need to leverage as much of this skill as possible and empower operators to maximise it.
  • The substance behind these 'tough measures and targets' has yet to be laid out in detail, and therefore the metrics of performance (be they quality or delays and capacity) and their associated financial impact will be of keen interest to operators. There have been questions in the past about the degree to which the performance regime for passenger experience under existing rail franchises, the national rail passenger survey (NRPS) properly reflects the true performance of an operator. Whilst there have been attempts to apply alternative metrics (Transport for Wales, for example, employed a Passenger Time Lost regime) it seems likely that GBR may look to other options in its PSCs with a regime based on service quality and passenger perception (as employed by London Overground) with more frequently measured and dynamic systems.
  • The unknown structure of these performance metrics will ultimately determine the level of risk which future operators will be exposed to, including in relation to matters which are outside of their control, and the appetite which private operators will have to bid for the PSCs. Contracts with operators must therefore be designed to give enforceable powers to deliver the required outputs, to manage risk to a commercially acceptable (and economically rational) level for private sector bidders and incentives to deliver the passenger service required.

Innovation and collaboration

  • Aside from performance incentives and passenger experience, other incentives underpinning the PSC’s 'toolkit' of measures relate to innovation and collaboration. The PSCs are set to encourage and reward activities linked to these, which include proposing ways to improve connectivity between modes of transport and reducing costs associated with maintaining and leasing rolling stock. This offers a potentially broad remit to operators seeking opportunities to innovate and collaborate with other stakeholders, both on the railway and the associated infrastructure.
  • Whilst recognising the value of collaboration and the importance of the private sector, through the operators and their partners, the white paper also warns of the 'multiple layers of costs and duplication' which sub-contracting can bring. Operators will need to demonstrate the benefits and expertise brought to the services through their partnerships and sub-contracts and ensure these are cost-effective.

Who may consider entering the market?

  • Whilst much is still unclear, the features of the PSCs proposed by the white paper, including the potential for decreased operator-risk (at least in relation to revenue but potentially more broadly) and focus on passenger experience and innovation could invigorate greater interest and competition from potential operators with a variety of backgrounds.
  • The ultimate structure of PSCs will influence the scope for potential investors in the industry and achieving the desired increase in competition for tendered contracts. In particular, GBR will need to consider: (i) the level of profit margins on offer as compared with existing franchise agreements, which will need to be competitive enough to justify the initial investment and capital at risk, in particular by new entrants; and (ii) an agile approach to revenue risk, as the appetite for risk sharing shifts as the country emerges from the COVID-19 pandemic and associated restrictions on hospitality, retail and working. Operators will want to understand the potential for returns on their investment particularly where this relates to encouraging use of the railways and increasing revenue. It will also be vital that operators are given the ability to control any risks which they are asked to take, so as to avoid significant risk premiums being bid.
  • Non-UK rail operators – operating groups outside the UK market, who are more familiar with the concession model and accustomed to this allocation of risk, may be attracted by the new proposals – in theory, the model is geared towards rewarding the operator provided it can successfully manage the contract against a specification, irrespective of passenger numbers and revenue. Whilst the contracting structure might be familiar to these companies, they would of course require at least some up-front investment in acquiring UK-specific rail expertise, from cultural understanding and relationships to regulatory and legal knowledge. We note also that existing concession based models in e.g. Germany have not been without their practical and financial difficulties.
  • New Entrants – The proposed scope of responsibilities of a rail 'operator' in the future could see the emergence of other companies without a traditional association with the rail industry. The same appeal of lower revenue risk and up-front bid costs (as well as potentially lower capital risk) may invite bids by companies previously put off by the extensive investment required to enter the market. These may include companies from other transport sectors, business process outsourcing and management companies or even large technology and retail brands. Such companies may be geared to benefit from the PSC’s incentivisation structure, bringing existing expertise from within their company, wider group or existing partnerships and transpose these to the railways. There may also be a growing opportunity for purely financial investors e.g. banks and pension funds including through co-operation arrangements with existing operators.

This article was written by Daniel Hogg and Chris Simms. If you have any questions about what we have discussed in this article, please contact Chris Simms or a member of our Rail team.

Key contact

Chris Simms

Chris Simms Partner

  • Rail
  • Transport
  • Asset Finance and Asset Backed Lending

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