We work hard alongside train operators to run a punctual and reliable train service for passengers.
Unfortunately, there are times when things do not go to plan and regrettably passengers experience delays. When delays do occur, passengers are able to claim compensation from the train operator they brought their tickets from.
Separately, train operators are compensated for the long-term impact of disruption that is not their fault.
This note explains why we have these separate arrangements and how they work.
Payments made to train operators
Why do we have performance regime?
Most passenger train services in Great Britain are delivered through long-term contracts between train operating companies and the government (Department for Transport in England and Wales and Transport Scotland in Scotland). These contracts are called franchises. Companies compete with each other to secure franchise contracts for the right to run services in different parts of the country. The competitive franchise process is designed to improve services and deliver the best deal for taxpayers and passengers.
Train operators make payments to or receive payments from the government for the right to run a franchise. These payments are called ‘franchise payments’. The size of franchise payments are based on factors such as the revenue that train operators expect to generate over the course of the franchise. To get the most value for the taxpayer, i.e. maximise franchise payments, franchise train operators are protected from some risks that they face but cannot control.
One significant risk to train operators is that the railway operates at a level of reliability lower than that assumed at the time when the terms of a franchise are agreed, through no fault of the train operator – for example if the signalling system is unreliable. Evidence suggests that if passengers experience disrupted journeys, they will be less likely to travel by train in the future. If fewer passengers travel, because they have experienced delayed journeys in the past, then fare revenues will be lower than expected, thus undermining the financial assumptions behind the contract between franchise operator and government.
In order to get the maximum value for the taxpayer from the franchise competitions and to protect non-franchise operators from risk they cannot directly control, this risk is mitigated through an automatic system of payments which seeks to leave train operators in a financially-neutral position when their trains are disrupted by other parties. This is the basis of the current performance regime in the rail industry. This scheme is called Schedule 8.
What is the thinking behind the design of the performance regime?
Schedule 8 is an automatic mechanism for ensuring that both we and train operators are held financially harmless for delays that they cause to each other. The ORR sets the targets and the rates. A formula drives the payments, based upon who caused the delay, how bad the delay was, and how much fare box revenue is estimated to have been lost in the long-term from the incident. If everyone achieves target level performance, no money changes hands. It is a no net gain, no net loss regime that means we do not take financial risk on the failings of another party, and therefore allows the industry to plan with a reasonable degree of assurance.
The rail industry’s performance regime simplifies what could otherwise be a lengthy and costly legal dispute for every incident into a consistent calculation done at the end of each four-week period. The Schedule 8 performance regime has a number of advantages:
- It greatly reduces the industry’s costs by reducing discussions about the impact of each incident.
- It gives train operators some financial comfort that if their business suffers as a result of events outside of their control then we will make a payment under the performance regime.
- It gives us clarity on how much it will gain from making train performance improvements in excess of industry targets.
- It helps companies bidding to become franchised train operators to forecast the potential financial impact of things outside of their own control – for instance in the event of us performing better than targets then it can calculate how much will be paid to us.
- It helps those bidding to become franchised train operators to calculate the potential financial impact of changes in their contribution to train performance.
- By being clear to bidders, governments can get the most value for taxpayers from each franchise when these are competitively tendered.
How are the payments calculated?
The payments made to train operators are worked out using data automatically collected at thousands of measurement points across the network all day and every day.
The regime is a pre-determined mechanism that rewards (or penalises) both us and train operators depending on their contribution to delays and cancellations, compared to industry targets.
Payments are made at the end of each four-week period, according to which party has been responsible for the lateness of train services. These payments are calculated to address the impact on train operators’ ability to honour their financial obligations to government arising from for reduced future ticket sales.
The long-term financial impact of disruption varies by operator and by the type of service that each train operator runs eg commuter or leisure services.
How are cancellations factored into the calculation?
Sometimes trains are unable to complete to theirs journeys. These situations are referred to as cancellations. Cancellations are also factored in to the Schedule 8 payments. Payments for cancellations depend on their estimated impact on future ticket sales and on the type of journey that is cancelled.
Each cancellation is worth a certain amount of ‘delay minutes’, which reflects the disruption that passengers face as a result of having to wait for the next train.
Are details available about the payments made for disruption to a specific train journey?
Schedule 8 payments are made every four weeks and are aggregated, based on average lateness for the previous four-week period. This aggregation means that the regime works efficiently, and allows for the fact that all the costs arising from an individual incident can typically only be calculated some time – which can be weeks – after the incident has occurred.
The way the performance regime works means that we do not calculate the payments to operators for individual incidents. There are only two exceptions to this:
- For significant incidents of disruption, we sometimes estimate the performance payments relating to that incident. These estimates help us to make decisions on how to improve the railway.
- Where an identified third party has caused delay, for instance a vehicle has struck a bridge, and we consider there is a realistic prospect of recovering the cost, it will calculate the cost of that incident for the purposes of pursuing a claim against the third party.
How does this relate to the compensation that passengers receive on the day?
Payments to train operators, made through the performance regime, are not designed to cover the refund claims which passengers make. They are instead designed to hold train operators financially neutral to the long-term revenue impact as a result of disruption.
Do these arrangements apply to all train operators?
The performance regime applies to all freight and passenger operators (although the freight performance regime operates slightly differently to the passenger train regime, as described above). Some passenger operators do not take revenue risk, and the payments made by us are passed straight on to the government department that specified the contract with the train operator – the Department for Transport in England and Wales, or Transport Scotland in Scotland.
Compensation paid by train operators to passengers
As a passenger, you may have experienced a disrupted journey – this is deeply regrettable. We work hard with train operators to minimise delays. If you have experienced a delayed journey you might have subsequently made a claim to the train operator for financial compensation. However, payments between us and train operators for disruption are not designed to cover the refund claims which passengers make. Train operators pay for passenger refunds themselves. Payments between us and train operators are instead designed to hold train operators financially neutral to the long-term revenue impact through reduced ticket sales, which disruption will have on their future business. These payments are based on economic research which indicates that passengers are less likely to use trains in the future, after they experience disruption.
How is passenger compensation paid for?
All train operators have schemes in place to provide compensation to passengers for any significant delays they suffer on their journeys. Passenger compensation (called Delay Repay) is determined entirely by train operators according to their Passenger Charters, and is not related to any payments between us and train operators under the industry’s performance regime. The details of these schemes may vary from company to company, and may have been put in place as part of commitments made in winning a franchise. Any compensation paid to customers is paid for by the train operators themselves.
Want to know more?
For details about payment calculations and performance targets, read the technical overview:
Technical overview – payments relating to disruption (PDF)
Templates of the agreement between Network Rail and train companies are available at ORR’s website:
Proposed Schedule 8 for Franchised Passenger Operators (PDF)