GBR’s rolling stock and infrastructure strategy – a new era for passenger operators

The government's proposed railway reforms continue to gather pace. The eagerly awaited long term rolling stock and infrastructure strategy (the Strategy) was published on behalf of Great British Railways (GBR) on 28 September. Publication of the Strategy marks a notable milestone in the establishment of GBR and is a critical signal to the wider rail market of GBR’s priorities and intentions going forward.

This insight considers the Strategy from an operator’s perspective – including both the future GBR operator and, more widely, the open access view. There is clearly a balance that GBR is trying to strike between the need to deliver a reliable service with trains that entice as many passengers as possible to retain and grow revenue whilst simultaneously having an eye on the public purse’s budget constraints.

This is the third in a series of insights from the Stephenson Harwood Rail and Road team exploring the Strategy and what it means for manufacturers, operators and financiers of rolling stock. We will shortly be sharing the final insight in the series, which considers the Strategy from the financier’s perspective.

You can find our overview and initial thoughts on the Strategy here and our insight considering the manufacturer’s perspective here.
 

All things for all passengers?

One of the repeated warnings made to GBR is that in integrating infrastructure and rail operations, it should not place infrastructure needs above those of the passenger. GBR should not be a Network Rail 2.0, and assurances have already been given that GBR will not be. In the Strategy, GBR tackles this head on by making clear that it understands the need for trains to deliver for passengers and making it a central plank of the Strategy. Considerable thought has been given as to what GBR’s passengers need and expect and what fleet types are required to address those needs and expectations. GBR knows that more passengers means more revenue and this will be a key way of reducing the subsidy to the industry.

Long-distance leisure passengers have very different needs to day-to-day commuters. The Strategy identifies four ‘fleet families’ that it will operate going forward: Intercity; Regional Express; Commuter; and Metro. The Intercity and Regional Express fleets will focus on prioritising comfort, quality and space with GBR expressly planning to offer an “attractive alternative to the private car and domestic aviation” when it comes to long distance travel. The Intercity proposition will need to offer appropriate catering and family spaces. In contrast, the Commuter and Metro fleets will need to be more focused on having appropriate seating and standing accommodation to move large numbers of people effectively, with efficient boarding and alighting experiences.

However, while the Strategy makes clear that GBR will secure new trains that meet these various needs and expectations, it will only modify existing trains to do so where “appropriate and cost efficient”. Given the length of time it takes to procure, manufacture, test and deliver new trains into passenger service, expectations need to be tempered by the fact that these needs will not be met overnight. Realistically, this is likely to be on a patchwork basis as GBR beds in and assesses its current fleets as against its future operational needs. There will of course still be opportunities as part of midlife refreshes, or life extension work, and so we can expect these guiding principles to influence key investment decisions.

Disability campaigners will be encouraged by the Strategy’s recognition of the need to improve train provision for passengers with mobility issues by introducing unassisted level boarding, together with GBR’s intention to codevelop design guidance for new trains with accessibility panels and disabled travellers. However, trains are, by their nature, constrained by the amount of physical space on offer and so the needs of disabled passengers will need to be balanced against GBR’s desire for “family spaces” on the Intercity fleet and cycle storage across all fleets. Wheelchair users will want reassurance that they do not board a train only to find a bicycle or buggy taking up the space allocated to them and on-train enforcement will be as important here as initial design.

Clearly, open access operators will not be tied in with GBR’s approach to rolling stock, but will need to ensure they are able to compete in future. As rolling stock is often bespoke for the GB rail market, it is also possible that open access operators will only be able to access similar types of rolling stock to those being procured by a dominant GBR.
  

Money, Money, Money

Certain parts of the national press and other stakeholders were excited about the Strategy’s contemplation of GBR’s potential direct ownership of new trains. Some queried, or even heralded, the end of the leasing model. The Strategy makes no such threat or promise. As many a Chancellor of the Exchequer has made clear, the public purse is not a bottomless one and there is no magic money tree. Questions therefore remain about whether GBR’s budget will actually allow it to directly purchase all new trains going forward. Instead, the Strategy notes that direct purchase will be considered where it offers “the best possible commercial outcome” and there are already existing examples of where initial direct purchase is then financed down the line through a sale and leaseback arrangement.

While the unions may cheer the prospect of direct ownership, passenger groups may be less enthusiastic. Once a train is purchased outright by an operating company, and with limited budgets, the temptation is there to sweat that asset for as long as possible without significant further investment in it. One of the arguments made in favour of rail industry privatisation in the 1990s was that British Rail had ceased investing in new rolling stock and many of its trains were well past their best days. This is not to say that franchise operators were not subject to equivalent pressures, as passengers on Northern Rail’s Pacers can confirm all the way until 2020. However, the ability to take advantage of low interest rates during the 2000s and 2010s incentivised the inclusion of new trains as part of franchise bids, and the franchise model offered an opportunity for more regular fleet replacement.

Indeed, it is likely that GBR will need the support of leasing companies for quite some time, particularly in the context of where it wants to retrofit existing fleets to meet passenger expectations. It is unlikely that GBR will be able to pay for all such retrofits from its own purse, in which case it will be reliant on striking deals with the leasing companies to fund the same and rentalise repayment.

GBR is clearly conscious of future budget constraints. Whether it is discussing maintenance, infrastructure investment, new train procurement or fleet refurbishment there is a strong emphasis in the Strategy on the need to be cost effective. This pragmatism is reflected in GBR’s intention to move away from diesel trains to battery-electric trains as it seeks to replace fleets moving forward. This is not just a matter of GBR seeking to meet net zero targets. It is an express reaction to the rising cost of diesel fuel and a recognition that electrification works carry a disproportionate cost and impact on the ability to operate services. It also sidesteps the political sensitivities involved in delivering electrification works to rail infrastructure, a topic that has generated headlines and headaches in equal measure.

Open access operators are likely to want to continue to draw on the rolling stock leasing market, as the upfront investment cost in rolling stock would otherwise likely be prohibitive.
  

Depot dangers and opportunities

GBR’s desire to secure best value for money and performance outcomes is particularly explicit in its proposals to restructure depot capability. Here, GBR explicitly contemplates modifying practices to support those objectives while also building depot capability at a more integrated level to support delivery at local level. As the ultimate owner of the majority of Great Britain’s depot facilities, there is a real opportunity here for GBR to tailor depot maintenance arrangements to its operation. GBR appears to see this as a process that goes hand-in-hand with its consolidation of fleet families to improve reliability and performance.

Open access operators will want clarity on what GBR means when it says that it will reconsider Depot Facility Owner (DFO) arrangements at the time they come up for renewal. This is especially given that GBR also intends to preserve or improve its control over depots as the opportunity arises and also intends to plan depot capability over its fleet families. The obvious concern here is the potential for GBR to organise DFO arrangements to prioritise its own operational needs over those of open access operators and thereby deny or reduce access to depots on capacity grounds. In a worst case scenario, GBR could mothball or even sell off those sites that are surplus to its operational requirements, leaving open access operators having to seek access to other GBR controlled depots, with greater capacity constraints. The high sunk costs involved in constructing depots makes such a step incompatible with the lean margins on open access operations, thereby potentially forcing them out of the market.
 

The operator perspective

A coordinated and consistent approach to the passenger proposition seems sensible. As well as delivering for the passenger, implementation of the Strategy has the potential to drive down the whole-life cost of procuring and maintaining rolling stock for GBR operators. In a cost-conscious environment, this will be key.

For open access operators not directly constrained by the rolling stock elements of the strategy, there is more to think about. The Strategy commits GBR to consulting with stakeholders, including open access operators, about the impact of infrastructure choices GBR may make. However, there will be indirect impacts of the proposed rolling stock and depot parts of the Strategy and these need to be carefully considered as they could have a significant impact on open access businesses.