Select Committee on Transport Written Evidence

Supplementary memorandum by Merseyrail Electrics (FOR 114A)



  The following presentation details the background, issues and actions taken in the transfer of responsibility for the Merseyrail Electrics heavy rail franchise from the SRA to Merseytravel and the successful appointment of a new operator.

  The key areas it covers are:

    —  Putting the Merseyrail network in context—part of the LTP.

    —  Providing a chronology of what has been undertaken over the last two years.

    —  The procurement structure.

    —  The legal structure.

    —  The concession agreement.

    —  Funding the concession.

  Implications of Change of franchise/concession management.

  Achievements of the process.


  Supporting Sustainable Inclusive Regeneration.

  A Multi-modal package of measures.

  A Single Integrated Public Transport Network, including:

    —  Merseytram—3-line network.

    —  Merseyrail Upgrade/Re-franchise.

    —  15 Quality Bus Corridors (90km bus lanes).

    —  Interchange Strategy.

    —  Information Strategy.

    —  Park & Ride Strategy.

    —  Liverpool City Centre Movement Strategy.

  £210 million indicative settlement.

  4 Major Schemes:

    —  Merseytram Line 1.

    —  Allerton Interchange.

    —  Central Station Upgrade.

    —  Hall Lane Scheme.

  Merseyside Centre of Excellence.

    —  Public Transport.

    —  Transport Planning.

  ClearZone Trailblazer.


  PTA Policies:

    —  No Household on Merseyside shall be more than 400 metres from a bus stop.

    —  No household on Merseyside shall be more that 800 metres from a "steel wheels" stop.


Previous Arrangements

  National Level:

    —  Strategic Rail Authority.

    —  Specifies franchises.

    —  Train Operating Companies (25).

    —  Operate UK rail services (including Merseytravel).

    —  Network Rail.

    —  Provides track and infrastructure.

New Arrangements

  Local Level:

    —  Merseytravel (Not SRA).

    —  Specifies Merseyrail franchise.

    —  Serco/Nedrailways.

    —  Merseyrail operator (for 25 yrs).

    —  Network Rail.

    —  No change from National role.

  The Benefits:

    —  Local Control.

    —  Fit with Merseyside's requirements.

    —  Part of wider Local Transport Strategy.

  Project History:

    —  20 June 2000—Approval in principle by Chairman of SSRA to local concession concept.

    —  July 2000—Announcement that provision for local concession cannot be included in the Transport Bill.

    —  September 2000—Initial proposal from Merseytravel to utilise Transport Act powers and franchise exemption order to proceed with proposal.

    —  November 2001—SRA and DfT approve, in principle, use of exemption order and exclusion of Railways Act Closure Provisions to avoid SRA having role as operator of last resort.

    —  February 2002—Joint OJEC Notice submitted by SRA and Merseytravel for expressions of interest either in a franchise or a local concession.

    —  May 2002—Pre Qualified Candidates invited to submit indicative proposals.

    —  August 2002—Rolling Stock Lease Extension and Novation and Letter of Agreement for refurbishment signed with Angel Trains.

    —  January 2003—Best and Final Offers Submitted.

    —  February 2003—Merseyrail Electrics 2002 Ltd ("the operator") applies to Rail Regulator for Railways Act licences.

    —  April 2003 Serco/NedRailways appointed as preferred candidate.

    —  23 May 2003—Concession Agreement signed by Merseytravel and Merseyrail Services Holding Company Ltd ("the concessionaire").

    —  Before 20 July 2003: operator is transferred to concessionaire upon satisfaction of conditions precedent and Day 1 Conditions.

    —  2 am on 20 July 2003: operator commences passenger services on the network.


    —  Following statutory consultation the Merseyrail Electrics Network Order 2002 was made on 18 July 2002 and, after being laid in Parliament, comes into force on 20 July 2003.

    —  The Order exempts passenger services on the Merseyrail network from the need to be franchised under section 23 of the 1993 Act.

    —  It also disapplies sections 37, 39 and 41 of the 1993 Act and applies the alternative procedure for regulating the discontinuance of railway passenger services in Schedule 5 to the 1993 Act.

    —  As a consequence of the changes to sections 37, 39 and 41, it relieves the SRA of the duty to act as operator of last resort, under section 30.


    —  Voluntary compliance with EU procurement rules.

    —  Main theme partnership with three shortlisted bidders from outset to end of BAFO process through iterative process involving:

—  Full disclosure through paper based and virtual data rooms:

    —  Updated throughout the process;

—  Submission of main proposals six weeks into BAFO to allow for comment (and rejection of components) by Awarding Authority and advisers;

—  Focus on operator viability as well as cost effectiveness of bids:

    —  Merseytravel/SRA alerted candidates to key misunderstandings in their financial models;

—  Organised site visits and meetings with key stakeholders:

    —  ATM management, Railtrack, Local Authorities, Angel Trains, Pension Trustees;

—  PTA presentations.

    —  Key contract documentation made available at indicative stage and fully negotiated and finalised in BAFO Stage.

    —  Themed meetings between operator and experts from Awarding Authority team continued up to submission of BAFO:

—  Patronage and Demand including Concessionary Travel; and

—  Pre-Paid Ticketing;

—  Performance regimes (Network Rail and Franchise/Concession);

—  Financial and Risk;

—  Legal Documentation;

—  Infrastructure and Schemes.

    —  Clarification questionnaires received 72 business hours before meeting, with response given at meeting and subsequent circulation of response to all bidders (unless issue specific to one bidder's initiatives).

    —  Candidates encouraged to innovate and innovation kept confidential from other candidates.

    —  Post BAFO clarification and negotiation to reach final position.

    —  All candidates signed heads of terms committing to key contract provisions, if selected.

    —  Announcement of preferred candidate to contract in three weeks.

    —  Candidates proposals divided into:

—  Compliant and fully modelled base unenhanced bid;

—  Compliant and fully modelled nil subsidy enhancement bid;

—  Enhancements offered at no additional cost to the Awarding Authority;

    —  Supplemented by:

—  Enhancement Options:

    —      Additional enhancements to be bought (for increased subsidy payments) at the option of the Awarding Authority within two years of concession commencement to a total value not exceeding 10% of operating costs over first seven years;

—  Mandatory Variants:

    —      Variants to the base bid (such as acceptance by the Awarding Authority of mandatory modification cost to rolling stock) which the Awarding Authority wanted to be priced, in case it could not afford the base bid;

—  Optional Variants:

    —      Variants (such as changes in risk profile) which the candidates considered might be better value for money for the Awarding Authority.


    —  Prospects of acceptable bid enhanced by joint bid development.

    —  Misunderstandings impacting on deliverability or viability rectified before they became major issues.

    —  Candidates can input into negotiations with third parties.

    —  Timescale post BAFO substantially reduced.

    —  Relationship developed with successful (and unsuccessful) candidates before contract went live.

    —  Ensured key hard and soft issues appreciated and addressed.

    —  Candidates like it.


    —  Resource intensive and costly especially in BAFO stage.

    —  Risk of conflict with dual role in developing and appraising bid.

    —  Threat from misuse of disclosed information to detriment of project.

    —  Risk of candidates blaming Awarding Authority for weaknesses in bid.

    —  Need to manage third party confidentiality/data protection issues.


    —  Three compliant bids acceptable to the Awarding Authority were proposed.

    —  Variant proposals were added to the base bids to make the overall bids more affordable and attractive.

    —  Period from acceptance of Serco/NS bid to final contract limited to three weeks (an all time record?).

    —  Negotiations with third parties necessary to facilitate the transfer from a franchise to a concession were expedited by involving all three candidates from the time they were selected in commenting on third party proposals.

    —  All three candidates have submitted expressions of interest in the Merseytram project.

    —  All expressed their appreciation for the efficiency and assistance provided by the Merseyrail procurement strategy.


    —  Merseyrail Electrics Network Order 2002 ("2002 Order"):

—  Excludes SRA franchising (but not regulatory) powers.

    —  Transport Act 1968 (ss 10(1)(ii) and (xv)).

    —  Railways Act 1993 and Health and Safety Act regulatory and access powers remain.

—  Licensing, Access Agreements, Safety Case, Pensions;

—  Closure provisions with some modifications;

    —  Merseyrail Electrics Network Order 2003 ("2003 Order").

—  Preserves roles of Rail Passengers' Council and Committee.

    —  Transport Act 2000 funding from DfT.



    —  Takes over the role of SRA of:

—  Funding services on the Network;

—  Enforcing the PSR and other obligations under the Concession Agreement;

—  Determining whether Concession Agreement is to be renewed every 7/6 years under the efficient operator regime and resetting performance and quality benchmarks;

—  Acting as operator of last resort through Merseyside Passenger Transport Services Limited;

—  Co-ordination with key third parties (Network Rail, RPCNW, Cheshire and Lancashire County Councils).

    —  Continuing to monitor quality of service on train and at stations under CURSER regime.

The Strategic Rail Authority

    —  Continuing role in relation to national schemes and consumer protection provisions of Railways Act licences:

—  Disability Policies;

—  Discount Tickets (only disabled and young persons);

—  Inter Operator Schemes (ticketing settlement agreement, travelcard agreement, staff travel, national rail enquiries);

—  Complaints handling;

—  Provision of performance data to Merseytravel for incentive regime;

—  Bye-laws and railway administration orders;

—  Advice and assistance with national changes (18.1 and 18.2 adjustments).

Rail Regulator

    —  Licensing:

—  Approval of Licence Assignment to MPTS to act as operator of last resort;

—  Access Agreements (Approvals, Directions and Revocation);

—  Track Access Agreement, Station and Depot Leases;

—  Periodic reviews of access charges (next due December 2003).


    —  Funding;

    —  Directions and guidance.

Rail Passengers Committee for the North West

    —  Right to investigate and report to Merseytravel on breach of Concession Agreement or other matters relating to passenger services of own volition, following complaint by a passenger or following a reference by Merseytravel:

—  Equivalent rights in relation to the SRA re breach of licence conditions etc.

    —  Right to be consulted, under MOU, in relation to:

—  changes to passenger charter or PSR;

—  exercise of periodic efficiency review powers; and

—  any other matter which may materially and adversely affect (other than on a temporary basis) the frequency or periods of operation of railway passenger services for the quality of rail or station services;

—  Schedule 5 powers in relation to service closures and contractual regime in relation to station closures.


    —  Must comply with the Passenger Service Requirement (Schedule 3).

    —  Normally changed twice a year in accordance with the Track Access Conditions.

    —  The operator must notify Merseytravel of proposed changes.

    —  Requirement to co-operate with other TOCs (eg over connection times).

    —  The operator must use reasonable endeavours to plan and resource operations to deliver the timetable—must take account of reasonably foreseeable risks (eg weather and disputes).

    —  As far as possible, passengers should receive seven days notice if timetable cannot be operated.


  —  The operator must:

    —  Undertake passenger counts (maximum of four in any 12 months).

    —  Issue Preliminary Statement of capacity requirements.

    —  Use reasonable endeavours to ensure that sufficient capacity is provided to avoid excessive overcrowding, including by scheduling a minimum number of 50 units (53 units after completion of the refurbishment).

    —  Operator must seek to avoid exceeding the Load Factor Specifications in peak periods:

—  95 passengers per drive car plus 113 in a central carriage.

    —  If Load Factor Specifications regularly exceeded by more than 4.5% in the morning of evening peak or by 3% over both peaks, operator may be required to include additional services in the Timetable, if this is feasible:

—  Where this would require additional rolling stock, network enhancements and/or third party consents, Merseytravel may have to fund and otherwise secure this if action is to be taken to ameliorate over-crowding or if it cannot do so, accept that other action to control demand may be necessary.


    —  Concessionary and pre-paid tickets account for 33% of net revenue.

    —  An obligation on the operator to participate in:

—  Existing concessionary and multi-modal fare schemes (listed in Part 7 of Schedule 1);

—  New schemes, subject to the operator being financially no worse off (in the opinion of Merseytravel).

    —  These schemes are administered by Merseytravel, subject to regulations and guidance.

    —  Rail Settlement Plan (RSP) tickets account for 65% of net revenue.

    —  Return RSP fares are subject to regulation.

    —  Separate fare baskets for Northern and Wirral Lines limited to RPI increases overall over the period of the Concession.

    —  Individual fares within the baskets permitted to increase by RPI+2 per annum.


    —  Service commitments to passengers (information, safety/security, customer care etc).

    —  Revised for the new Concession—applies only to Merseyrail Electrics services.

    —  Punctuality and capacity standards reflect Concession obligations (92% of trains within 5 minutes of schedule, passengers exceeding capacity in peak no more than 4.5%):

—  92% target based on revised PPM figures which inter alia take into account Sundays and Bank Holidays;

—  Accordingly whilst percentage target is lower than ATM passenger charter targets, underlying target is more stringent, given the inclusion of all services and a reduction in the exclusions from the passenger charter figures;

    —  Contains key compensation information:

—  Refund if passenger decides not to travel after cancellation;

—  Vouchers worth 20% of ticket value if delayed for more than one hour.

    —  Allowance of 5% of TRIO ticket price if punctuality below 92%, 10% if below 90%.


    —  Customer Service Regime (CURSER) is the service quality monitoring regime administered by Merseytravel:

—  14 station and six train quality standards covering provision of information, condition of specific features (eg seating) and cleanliness;

—  Regular inspections by Merseytravel staff, points awarded according to pass/fail criteria;

—  Line benchmarks of 87% and Station benchmarks of 92-96%;

—  Additional targets for station cleanliness and train interiors/exteriors;

—  Additional points if failures not rectified within defined periods;

—  Rectification plan triggered if annual performance below benchmark;

    —  National Passenger Survey (NPS) undertaken on behalf of SRA:

—  Based on survey results obtained every six months;

—  Benchmarks based on the most recent data (combined Spring/Autumn 2002 results);

    —  Both taken into account in Schedule 15 performance reviews.


    —  Fixed Schedule 6 payments plus RPI agreed for 25 years subject to:

—  Adjusted downwards to reflect savings to operator during circumstances of force majeure or reductions in Network Rail charges as a result of surplus property income and upwards to reflect additional charges from Network Rail as a result of changes of law;

—  No Net Loss No Net Gain Regime (see next slide).

    —  Benefit sharing if operator's annual EBDIT over seven year review period exceeds budget by 25%.


    —  Merseytravel to fund if losses to operator arise (or to be credited with net gain if operator profits) from:

—  PSR or Capacity changes which Merseytravel directs;

—  Merseytravel failing to provide printed timetables and booklets 4 weeks in advance of notified service changes;

—  Introduction of new, or variations of, concessionary fares or pre paid ticketing schemes;

—  Variations to access agreements to provide for major LTP projects and cost of utilisation of major LTP projects;

—  Rebranding, service integration, ticketing co-ordination as part of service integration measures;

—  Changes in RPI Fares regime dictated by Merseytravel;

—  Re-branding instructions from Merseytravel.

    —  DfT funding (subject to approval of adjustment) for losses (or credit for profits) arising from:

—  18.1 (Regulators Periodic Review of access charges) adjustment;

—  Change of law;

—  Change to national discount or inter operator schemes;

—  Changes to VAT regime.


    —  Based on PPM—percentage of trains arriving within five minutes of their scheduled time.

    —  Initial benchmark of 92%, rising to 93.5% after seven years.

    —  Operator receives £80,934 per period for each % above benchmark.

    —  Similar penalty levels for performance below the benchmark (more complex calculation).

    —  Additional penalties for timetable changes and short formation.

    —  Note—Schedule 7 does NOT operate "back to back" with Schedule 8 of the Track Access Agreement.

    —  Merseytravel is taking Schedule 7 risk under the new Concession arrangements, although some protection against significantly improved Network Rail performance from strategic possessions has been offered by DfT.


    —  Annual Business Plan to be produced by operator and reviewed by Merseytravel.

    —  Integration commitments including with the tram (on no net loss: no net gain basis).

    —  Merseytravel approval required to service, station and depot closures and changes to the PSR:

—  Derogation and Change procedures may be used to provide temporary or permanent relief to operator from PSR or other concession requirements.

    —  Qualified Right of approval to changes to:

—  Licences, Access Agreements, Output Contracts and Rolling Stock Contracts, if they adversely affect operator's ability to deliver commitments or major schemes.

    —  Preservation of Railways Pension Scheme membership:

—  New employees only whilst employer rate below 14.52%.

    —  Nil subsidy enhancements:

—  Gating at stations;

—  Wheel lathe;

—  Cloverleaf stores;

—  Zonal fares.

    —  Improved security management including conductors patrolling after 7 pm within two years.


    —  Efficient Operator Performance Reviews to be conducted by Merseytravel after six years and thereafter every five years:

—  Criteria for contract continuation—linked to achievement of PPM, Curser and NPS Benchmarks, assistance with major LTP projects, compliance with concession agreement, delivery of nil subsidy enhancements and operator viability.

    —  Termination for major default at any time or serious or persistent failure to satisfy performance review criteria.

    —  Otherwise expiry of agreement in July 2028.

    —  Continuity on termination provided for inter alia by:

—  requirement to keep handover package up to date and for direct agreements between Merseytravel and operators key suppliers/contractors;

—  Special rights to veto major changes in contracts, wages etc over last 12-13 months of concession or when operator under notice of possible termination;

—  Operator of last resort plan implemented by Merseytravel subsidiary, Merseyside Passenger Transport Services Limited and assignability of Railways Act Licences.


    —  Covers Schedule 6 payments + RPI:

—  Subject to not exceeding "affordability limits" by more than £4-5 million; and

—  No net loss no net gain adjustments triggered by Merseytravel.

    —  Schedule 7 payments to and from the Operator to rest where they lay (ie no compensation for Schedule 7 payments by Merseytravel where operator above performance benchmarks):

—  Subject to side letter permitting possible revisiting of this issue if strategic possessions regime implemented by Network Rail and the operator.

    —  Separate admin allowance to be negotiated annually (subject to maximum of £2,030,000 per annum plus RPI).

    —  External audit of funding claims from DfT (31 July—provision of audit information, 31 October—audit certificate).

    —  Annual bid for administration costs to DfT before commencement of financial year and possible need to seek Schedule 7 funding if strategic possessions strategy is implemented.

    —  Funding memorandum with DfT will need to be renegotiated as from 1 April 2009.


    —  Angel Trains funding refurbishment, door modifications and other engineering improvements to rolling stock in return for an extension of their operating lease.

    —  RPF funding for third axle sanders.

    —  Stations IOS (basic facilities at stations):

—  Programme being reduced.

    —  James Street turnaround.

    —  South Parkway (LTP Scheme).

    —  Garston closure procedure and Network change.


    —  Major LTP Schemes.

    —  Concession agreement provision that Operator will assist with and utilise major LTP schemes as required by Merseytravel:

—  Includes adjustments to Track Access Agreement, station leases and other agreements;

—  No net loss:no net gain re change of access rights and losses from utilisation (net operating costs less additional revenue).

    —  Merseytravel should consider each major scheme in advance to determine whether it can be implemented with the Operator on more advantageous/certain terms than provided for in the Concession Agreement:

—  eg by operator investing in project to reflect expectation of increased revenue.

    —  Provision for integration of branding, timetables and publicity with the tram on a NNL:NNG basis.


    —  Risk of Schedule 7 movements with Merseytravel:

—  If there is a major improvement delivered by Network Rail and/or the Operator in Network Reliability, the increase in incentive payments may need to be funded locally.

    —  Revenue risk and benefit with the operator:

—  No net loss: No net gain provisions re concessionary fare changes and changes in ticketing schemes more relevant.

—  May encourage operator to invest in revenue generating network improvements.

    —  Need to monitor national changes which may trigger no net loss no net gain adjustment and liase with DfT:

—  Regulators' reviews (eg December 2003), change of law, changes in inter operator and national discount fare schemes, VAT.

    —  Wide powers to change fares regime, PSR, rolling stock capacity and network branding and to make provision for major infrastructure or transport integration schemes if Merseytravel is willing to compensate operator on no net loss no net gain basis:

—  Local management powers still subject to budgetary constraints.


    —  An efficient procurement process delivered to budget and within tight timescales.

    —  Three proposals specifically designed to cater for local policies and issues.

    —  A close working relationship with the successful bidder which is already operational in the mobilisation stages and will be continued into the franchise.

    —  The ability to focus concession management, investment and enforcement on local rather than national issues.

    —  Package funded without further recourse to local community (passengers and non passengers) unless there is a marked improvement in performance/reliability to be funded under incentive regime.

    —  Overall fares increases limited to RPI.

    —  Additional investment in rolling stock, refurbishment, passenger and staff security, station and rolling stock maintenance and commercial expansion of the network.

    —  Market credibility demonstrated by the level of interest in Merseytram.

November 2003

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Prepared 11 May 2005