The shake-up of the UK rail network announced in May marks a significant shift from the franchise regime that preceded it, but there are still many challenges ahead.

The proposals have been coming since well before Covid-19, with the Williams Review commissioned in the wake of the timetabling fiasco of 2018. And it is clear that work is needed to regain the UK public's trust in the existing regime, which was also plagued by long-running industrial disputes and confusion over complicated fare structures.

It is also clear that a return to franchising as we knew it was not possible, post pandemic. Franchises with operators rewarded primarily through collecting revenues require the ability to forecast passenger traffic with a degree of confidence. But this is not possible at present because of the collapse in passenger numbers and the potential for different models of office/home working to emerge as the pandemic recedes.

We are told that the new system will be more streamlined and efficient. Services will continue to be run by private operators, but franchises with revenue risk will be replaced by concessions that incentivise punctuality and efficiency. Achieving this will require the application of all we have learned about effective, customer-focused regulation.

Operating contracts temporarily park the post-pandemic revenue forecasting problem but replace it with a huge principal-agent problem. Under the franchising regime at least it could be said operators had an incentive to run a good service because this would encourage passenger growth from which the operator would benefit. But if the operator is only paid to run a good and punctual service the new contracts will have to specify “good” and punctual” in even more minute detail than before, while none of the problems of interaction between different players go away.

None of this is impossible. The UK has experience in developing “outcome based” regulatory frameworks for electricity and water intended to induce private operators to adopt a more customer-focussed approach to their goals and operations. Pre-pandemic there was also extensive work going into applying something similar to Heathrow Airport.

But these frameworks exist within regulatory regimes that apply to licenced monopolies. As such they provide the flexibility for the approach to evolve with time and experience. By contrast, performance contracts run the risk of codifying precise definitions and measures of performance which may have unintended consequences or may fail to deliver improvements passengers actually value. Unwinding legal contracts that are not working well is much harder than amending a faltering regulatory settlement.

We will be writing more on these topics in the next few weeks, including thinking how these developments may impact on the faltering moves towards rail liberalisation in the EU.