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  • Writer's pictureRob Macey

Melbourne’s Train Franchise Contracts – The Next Evolution

Updated: Dec 15, 2021

There are a number of aspects of the train franchise that will undergo scrutiny under MR5 and that could lead to changes in the rail franchise model. Let’s take a look at some of them.

1. Privatisation or renationalisation?

While privatisation has generally worked well in Melbourne, its future will be examined. Perhaps given the significant investments being made in the network and the asset integration challenges this will pose, the time might be right to contemplate what renationalisation might look like; where government takes more control (and responsibility) for public transport delivery and network and rail asset management.

Perhaps post COVID the impetus will not be on meeting surging patronage (like 10 years ago), but rather, on designing a system that integrates better, with government at the centre with more levers to pull. Time will tell.

2. Vertically integrated or separated?

Vertical separation (separating operations from infrastructure maintenance) could simplify the franchise business to focus more on operations. This leaves government to focus on asset management, either under a self-perform model, or through procuring third party entities. Maintenance outsourcing might be undertaken to extract efficiencies from the current level of maintenance spend. Outsourcing could be regularly tendered to ensure best practice.

This could provide the opportunity for an overall “asset stewardship” approach across assets. Governance structures would need to be established to coordinate maintenance activity, and government would need to ensure that any outsourced contractual arrangements provide it with sufficient oversight and information to ensure it remains an informed asset owner.

3. Transport governance

The provision of public transport services in Melbourne represents the collaboration of efforts of a number of parties. Aside from the authorities in PTV and DoT, a number of other interfaces that are managed by government contribute to service outcomes, including Southern Cross Station, HCMT, Metro Tunnel and potentially Airport Rail Link and Flinders Street Station.

The growing number of interfaces can present challenges for government at the centre, and having growing responsibility for a number of different inputs into the provision of a transport network. For train operators, it’s also challenging as they don’t always have direct relationships with these third parties in connection with the services they must provide under their contract with government. This complexity might attract some closer examination.

4. Big projects, big challenges

The current projects regime reflects the position formed in MR3 around the importance of the rail franchisee’s involvement in project delivery. The franchisee’s in-house project team structure has evolved, moving from traditional delivery of State and franchise projects, to partnering frameworks, alliancing and recently, the major program alliances (Melbourne Tunnel and LXRP), and introduction of next generation rolling stock (65 trains over seven years) and delivery of high-capacity signalling.

Project delivery impacts franchisee operations (operational disruption, running bus replacement services, driver training on new rail infrastructure). Relief from performance regime penalties and provision for franchise sum adjustments are contemplated under the contract, and are relied upon from to time given the significant volume of project work.

A number of related agreements are relevant to the current franchise. For the train franchise for example, Franchise Cooperation Agreements accommodate interfaces with Melbourne Metro Tunnel and HCMT. The franchisee’s roles here are significant, with heavy consequences for non-performance.

The expectations created by Melbourne’s Big Build have put stress on the current projects regime, together with the franchisee’s ability to resource to these requirements. The current projects regime of “minimum role” arguably contemplated a world of lower risk project delivery engagements as opposed to mega projects with their attendant risk and complications. Third-party projects (West Gate Tunnel) where the franchisee does not necessarily have a direct relationship with prime contractors are also problematic. It would be prudent to examine a re-set of the current regime to address these issues and provide frameworks to allow a tailored risk/reward regime depending on the level of cooperation actually required by the franchisee; and where its skill/risk appetite is best directed.

5. Fares and ticketing

Impacts from COVID and increasing requirements for fare policy flexibility may mean that transferring revenue risk is no longer sustainable for a future rail contract. As commuter habits change and more and more people get used to working from home, a shift towards a more flexible set of ticketing options could be considered.

Around the world, the pandemic has had a significant effect on commuter habits, with the number of rail journeys falling to its lowest since the mid-nineteenth century. In the UK for example, with many workers furloughed, working from home or shifting to private cars, the impact on ticket sales has been so material that the government has had to introduce emergency funding to keep rail operators in contract and trains running. Granted, this is also because of the risk exposure UK rail operators take on farebox revenue, nevertheless the impact of falling patronage has been real.

While patronage may eventually come back, it appears clear that people’s move away from five-days-a-week in the office has been dramatically accelerated, and commercial arrangements around ticketing will need to accommodate that. Among the most obvious consequences of the pandemic is the need to perhaps re-evaluate the concept of peak and off-peak fares. This is currently being considered in Japan, where train operator JREast is studying the feasibility of adjusting its fare system based on traffic volumes, rewarding passengers who avoid peak hours.

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Postscript: that’s it for the series, thanks for your messages, and well done, you’ve made it to the end. Or is this the beginning?

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