Rail operators' profits to be capped

Regulator renews two franchises, but announces plans to rake off surplus financial returns

The profits of train operators are to be capped under plans revealed yesterday by the shadow Strategic Rail Authority. The news emerged as the authority awarded M40, the franchise holder for Chiltern Railways, a new 20-year licence and Midland Mainline a two-year extension to its agreement.

The profits of train operators are to be capped under plans revealed yesterday by the shadow Strategic Rail Authority. The news emerged as the authority awarded M40, the franchise holder for Chiltern Railways, a new 20-year licence and Midland Mainline a two-year extension to its agreement.

Under the plans announced by the authority, all companies which win franchises from now on, including M40 and Midland Mainline, will be the subject of what amounts to a profits tax.

All surplus returns are to be raked off by the authority and poured into a central pot for the railway industry. Although authority officials refused to be drawn on a formula for deciding the exact point at which profit-making becomes unacceptable profiteering, the decision should help to ensure a higher level of investment in the industry.

The extra money would be disbursed by the authority to fund worthy rail projects. More likely, train operating companies will ensure that their own investment expenditure will be pitched at a level which will keep profits under the limit. One way or another it could mean hundreds of millions of pounds more for the rail network, it is thought.

The new system represents a highly significant victory for the industry over the Treasury which was tempted to commandeer the money. The Chancellor Gordon Brown ensured that the "windfall tax" on the profits of utilities was taken away from that industry and spent on his own pet project, New Deal for the unemployed.

Speaking at the franchise announcements yesterday, John Prescott, Deputy Prime Minister, said it was essential that taxpayers shared in any excess profits made by operators. It was a formula built into the Channel Tunnel rail project and would be an essential ingredient in the rail industry from now on. Only time will tell if the cap on profits will deter bidders.

Investment was the big theme yesterday. It was hoped that passengers would benefit from £600m worth of train service improvements promised by the two successful train operators. A total of £370m is to be invested in the London to West Midlands Chiltern Railways line and Midland Mainline is to pump £238m into its services.

Officials said the plan submitted by M40 would provide a model for all companies bidding for franchises. It included 50 per cent more train miles overall on the Chiltern network including a doubling of services between London and Birmingham Snow Hill. Journey time reductions of 12 minutes are promised between London and Birmingham by 2003. Compensation for season ticket holders for unreliable services are to be enhanced and punctuality targets are more ambitious. All Chiltern trains are to be replaced or be completely refurbished by 2004.

Some £27m is to be spent on station improvements during the first five years and £28m over the rest of the franchise.

M40's present seven-year licence had been due to expire in July 2003. The new franchise will last for 20 years, but there is provision for shortening it if key projects were not completed.

The Midland Mainline licence held by National Express was extended by a further two years to 2008 following intensive bargaining. Despite the authority's reputation for prolonging negotiations, the talks began in May and were completed just last weekend. The contact was initiated by the incumbents National Express which was seeking extra time to enable the business to make a commercial return on proposed investments.

A £33m premium, which National Express was due to pay to the Government for the privilege of operating the franchise, is now going directly into the route. This is another sign that the Treasury seems to be prepared to forgo revenue for the sake of the network.

Midland Mainline's plans include £135m expenditure on new trains and £60m on infrastructure. Some £22m is to be spent on station improvements.

Significantly a new £17m East Midlands Parkway station, expected to open in 2002, was also part of the successful package. It will enable travellers to switch modes of transport easily between East Midlands airport and the M1.

The M40 train operator has virtually completed a parkway station near Warwick on the A46 close to a junction with the M40 motorway.

The authority yesterday declared a strong interest in the establishment of such stations, built outside city centres near trunk roads. Bristol Parkway was the first of them, built in 1972 and situated near the junction of the M4 and M5.

The trend has not been lost on management at the Great North Eastern Railway (GNER) which is in the middle of negotiations with the authority over its East Coast Mainline franchise. GNER has suggested parkway stations east of Edinburgh near the A1, south of Doncaster near the M18 and north of London on the M25.

Officials at the authority yesterday advised GNER and Virgin Trains, a rival bidder for the main London-Edinburgh route, to take long hard look at M40's blueprint.

The same applied to Connex South Central, which runs the network from London to the south coast, and GoVia its rival for the franchise which is also in the final stages of negotiation.

All companies interested in bidding for train licences should be prepared to offer a high standard of service to passengers and be prepared to shoulder a significant risk to ensure high levels of investment, said one senior official. "M40 have shown how it can be done."