First Trenitalia has today (14 August 2019) been announced as the successful bidder to operate the West Coast Partnership, set to provide passengers with new trains, more seats, simplified fares and more frequent services on the West Coast Main Line.
Both the Transport Secretary Grant Shapps and Keith Williams, chair of the Rail Review, have heralded the Partnership as vital to deliver the swift introduction of significant benefits for passengers. The new Partnership is also designed to fit with the direction of the Review and to facilitate the implementation of Williams’ recommendations in due course.
It also reflects a significant move away from the previous flawed franchising system to tackle issues already highlighted by the Williams Review, with the use of a forecast revenue mechanism (FRM) to avoid a repeat of the issues that affected the previous East Coast Main Line. This mechanism will be supported by a new annual review process, to ensure partnership working is effective, collaborative and continually improving.
The Transport Secretary has also confirmed that the government intends to produce a white paper in due course setting out the recommendations of Williams, to bring forward his vision for a truly passenger focused industry centred on clear, accountable leadership.
Transport Secretary Grant Shapps said: “This award is positive news for passengers, with more services, more direct connections and ambitious plans for a cleaner, greener railway, and also represents a decisive shift towards a new model for rail.
“It is a Partnership supported by Keith Williams, built with the flexibility to respond to his recommendations and deliver fundamental reform to a flawed system. Meeting Keith last week confirmed our shared determination to deliver a future that puts passengers at the heart of the railways, and get our trains to run on time.
“That is why I have asked Keith to produce his recommendations for a white paper, with fearless proposals that will deliver a railway system fit for the 21st century.”
Keith Williams, Chair of the Rail Review, said: “The railway needs reform that prioritises the customers and communities it serves, with an absolute focus on delivering benefits for passengers. I have also been clear that my review must not stop or delay investment and innovation.
“This West Coast Partnership delivers for passengers. It is a step forward that is firmly in line with the review, introducing benefits for passengers today and capable of incorporating the reforms needed for the future.”
Today’s award confirms that, from December 2022, passengers will benefit from 263 extra train services every week, with Motherwell set to become a major calling point for most West Coast Partnership services. Destinations including Llandudno and Gobowen will now be served by direct trains to and from London, and Walsall will receive its first direct intercity services. Subject to approval from the Office of Rail and Road, 2 trains per hour will run between Liverpool and London.
First Trenitalia will also oversee the introduction of new environmentally-friendly trains, entirely replacing the diesel-only fleet and reducing CO2 emissions by 61%. It will also invest £117 million in a major refurbishment of the current Pendolino fleet, providing more comfortable seats and additional luggage space.
The new operator will also strive for ambitious green targets by investing in stations and depots to reduce the environmental impact of the Partnership. This includes introducing new solar panels and energy efficient air conditioning, alongside a commitment to achieving an 80% reduction in non-recyclable waste from products sold or supplied on-board trains.
First Trenitalia will also oversee the introduction of:
- more flexible and convenient smart ticketing options
- free wifi and high quality mobile connectivity on board services
- improved delay repay compensation for all passengers
- £32 million of investment into developing and delivering infrastructure capacity and capability improvements
- 10 new secure cycle storage facilities; improved bus facilities; 900 new car parking spaces, and 100 new Electric Vehicle charging points
- new ticket machines at stations, removal of the administration fee and enabling on-the-day changes to both advance tickets and seat reservations
- new initiatives to increase diversity, inclusion and skills retention in the rail industry
First Trenitalia will also act at the Shadow Operator responsible for HS2. The government will shortly launch a review into HS2 and the Partnership has been designed in order to ensure that it can implement the review’s outcomes.
Reaction from FirstGroup and Trenitalia
FirstGroup Chief Executive Matthew Gregory said: “We are pleased to have won the West Coast Partnership contract to operate existing InterCity services on the West Coast Mainline and help deliver high speed rail. The West Coast Partnership includes operation of one of the most consistently successful intercity mainline franchises over the last twenty years. We are committed to delivering a range of improvements for InterCity West Coast passengers during the first phase of the partnership and our aim is to provide exceptional service as standard for our customers.
“In 2016, we and our partner Trenitalia committed to bidding for the West Coast Partnership as it is a unique opportunity to help shape and then run HS2. We look forward to playing our part in the success of the once-in-a-generation project to bring Britain’s largest cities closer together.
“The differences between this contract and more traditional rail franchises were reflected in the terms set out by the DfT, which has resulted in a more appropriate balance of risks and rewards for us as operators. The West Coast Partnership’s first phase allows us to earn returns on the significant investments in services and facilities for passengers but protected by a much improved revenue risk sharing mechanism. This will transition to a management contract in the second phase, ensuring we can really focus on using the respective skills and experience within our joint venture to deliver the desired benefits of the HS2 project for passengers and the country.
“We are pleased to have won the West Coast Partnership with Trenitalia, a strong partner who is committed to playing an increasing role in UK rail. The Partnership strengthens and adds a fourth franchise to our UK rail portfolio. Following this award we will not therefore be seeking new franchising opportunities for the foreseeable future over and above our current negotiations with the DfT to extend GWR. Our focus remains on delivering sustainable shareholder value and we will actively manage our rail portfolio and its risk and reward profile accordingly.”
FS Italiane Chief Executive Gianfranco Battisti said: “After only three years in the UK, we are strengthening our presence through the management of one of the country’s most important railway operating companies, alongside our partners at FirstGroup. This award represents another significant step in our ambition to play a major part in the UK rail industry. With this partnership, our international business continues to go from strength to strength, particularly in a high-potential market such as the UK.
“We have more than 20 years of expertise in the high speed sector in Italy, which has significantly improved connectivity for Italians. Trenitalia is operating in the only competitive and open market for high speed services in the world.
“Starting with the acquisition of c2c in 2017, our development in the British market has seen progress through investments in technology and in client services. We are proud with the results achieved in terms of performance punctuality, and customer satisfaction, which has proved to be amongst the best in the UK.
“Trenitalia is now one of the main railway companies in Europe with operations in France, Germany and Greece as well as in Italy and in the UK. We also operate partnerships in Austria and Switzerland and we aim at growing further in the UK and elsewhere in the coming years.”
Key contract terms
The Partnership will start from 8 December 2019 and comprises two distinct phases.
During the first phase from December 2019 to March 2026, First Trenitalia will operate InterCity West Coast services as a franchise with revenue risk shared with the DfT through a GDP-based revenue protection mechanism and an additional Forecast Revenue Mechanism (‘FRM’) from April 2021. The former mitigates the financial impact of UK macroeconomic conditions outside the control of First Trenitalia, while the FRM can be triggered if revenue variances exceed a set threshold from the bid assumptions for any reason. Had these revenue sharing mechanisms formed part of FirstGroup’s TPE and SWR franchise agreements, the company believes that these contracts would have remained profitable overall.
First Trenitalia will deliver £1.6bn real NPV* in premium payments to the Government over this first phase. First Trenitalia will directly fund £11m of residual value assets, and deductions from the premium will fund investment of £252m by First Trenitalia in the first phase. A further £453m will be funded by rolling stock leasing companies for new and refurbished trains. These investments, together with additional routes and other timetable changes, will drive a combined annual growth rate (‘CAGR’) for seat miles of approximately 1.2% per annum over the first phase. Passenger revenues, which were £1.2bn in 2018/19, are expected to increase at a mid-single digit CAGR over the first phase, lower than the historic growth rate of the franchise over the last ten years, from the additional capacity created and other initiatives.
In addition to InterCity West Coast services, First Trenitalia will also provide a range of services as Shadow Operator to the HS2 programme. Overall FirstGroup expects to earn a robust margin towards the high end of the recent industry range during the first phase. The first phase may be extended beyond March 2026 for up to five years if required by the DfT, subject to an agreed revenue and selected cost reset mechanism, and this phase will come to an end at least six months prior to launch of HS2 services.
The JV partners, through their parent companies, have committed to certain funding obligations under the contract, which reduce materially between the first and second phases. In the first phase, the JV partners’ parent companies together will provide a loan of up to £30m, subordinated contingent loan facilities of £102m, and a performance bond of £20m to First Trenitalia. FirstGroup will be responsible for 70% or £106m of this total contingent capital commitment of £152m. In the second phase, the total contingent commitment reduces to £65m, of which FirstGroup will be responsible for £46m. In addition, the JV partners provide a season ticket bond of c.£10m. A wide range of scenarios were considered as part of the modelling to assess the pension aspects of this bid, including the risk sharing mechanisms provided by DfT, and extensive advice from external specialists informed this assessment. In common with other rail franchises, no ongoing pension liabilities remain at the end of the franchise term and in any case, are transferred to the DfT during the second phase of the contract.
The award is subject to the customary ‘standstill period’ of at least ten days, after which formal contracts will be signed by the DfT. As with other UK rail franchise awards, the Competition and Markets Authority will also carry out a ‘phase one review’.
FirstGroup and Trenitalia believe that this unique contract has an appropriate balance of potential risks and rewards for shareholders, befitting the distinctive nature of the work required to make a success for taxpayers and passengers both of operating InterCity West Coast services and supporting the HS2 project in the coming years.
FirstGroup and Trenitalia signed a joint venture agreement (the ‘JV agreement’) to form First Trenitalia in November 2016, with the purpose of engaging in the West Coast Partnership bidding process. FirstGroup has a 70% share while Trenitalia has a 30% share of the entity. First Trenitalia has benefitted from FirstGroup and Trenitalia’s complementary skill sets and experience in this award. It was a condition of entry to the West Coast Partnership process that bidders could demonstrate experience in operating high speed rail networks.
Initial bids were submitted in July 2018 after external validation and extensive review by both FirstGroup and Trenitalia. In the context of FirstGroup’s recent experience, the assumptions have been kept under rigorous review, including back-testing against the actual performance of the current franchise ahead of making final commitments. During this period the JV partners were particularly focused on the potential financial performance of the Partnership under a broad range of potential scenarios and uncertainties, given the challenges experienced by some franchise operators elsewhere in the UK national rail network.
The FirstGroup Board has undertaken extensive reviews on the West Coast Partnership proposal. It has tested and revalidated the bid assumptions in accordance with our commitment of 30 May to seek an appropriate balance of potential risks and rewards for shareholders, and, taken into consideration our obligations under the JV agreement with Trenitalia, who are fully committed to the franchise. The FirstGroup Board remains very aware of concerns expressed by shareholders regarding rail however it has unanimously concluded that signing the Partnership agreement is in the best interests of all shareholders.
Image credit: DfT