Opinion: Go-op share prospectus

Office of Rail and Road (ORR) approval of proposals by the Go-op Co-operative to operate open access services in Somerset and Wiltshire has been followed by the issue of what is described as a pioneer share offer.

Go-op is seeking initial funding of £200,000 and offers the payment of interest in return for investment once services are profitable.

Its prospectus states that passenger demand will amount to 150,000 in 2026 (expected to be the first year of operation), growing to between 350,000 and 400,000 after ten years.

The forecast has six distinct elements described as the core Taunton-Westbury section, followed by diagram one to reach Swindon via Melksham, diagram two to serve Weston-super-Mare, and specific add-ons to cover Friday evening services, potential new stations, and income from a connection with the West Somerset Railway.

A chart for the expected financial outcome shows that a loss of £1 million is anticipated in the first year of operation, with a reserve of £2m in shareholder funds available, which rises to a £5m reserve before services become profitable by 2029, with the surplus rising to £1m per annum by 2031.

It is the intention that once a profit is generated, it will be accrued less interest of 8% paid on share capital, which will create reserves that can be applied to future business development.

It must be a concern for fund raising that ORR has limited the length of track access rights to an initial period of five years (December 2025 to December 2030), as opposed to the 12-year period sought by Go-op.

However, the ORR decision letter, dated November 15, reveals that restricting the length of the contract is considered prudent to mitigate against potential risks on the ability to use the capacity that has been allocated. It has also set a timescale of one year to demonstrate that conditions are in place to run services.

The approval recognises the benefits of providing new rail journey opportunities across Wiltshire and Somerset. But as with all open access applications, the assessment of not being primarily abstractive from the income of existing operators was applied (the NPA test).

Other assessments covered the potential risk to network train service performance, operational viability, and the absolute impact on funds available to the government.

Unusually for an open access application, there was support from the Department for Transport owing to the innovative nature of the proposal, which was also backed by Somerset and Wiltshire County Councils and Transport Focus.

Of the train operators that responded to the consultation process, CrossCountry offered support, but both GB Railfreight and Great Western Railway were opposed.

Both the objectors were concerned about future capacity, given that for freight operations, Westbury is an important centre for the Mendip stone trains. In addition, GWR had specific comments about the capacity of the Melksham single line, which is used as a diversionary route, as well as the potential for revenue abstraction.

Network Rail did not support the application, which resulted in statutory consultation by ORR with NR about the reasons for opposition. The most substantive objection was the safety risk at 17 level crossings as a result of increased rail movements. The outcome is that Go-op has been required to provide £1.5m for investment to provide mitigation at eight locations.

It is intended to carry out rolling stock inspection and maintenance at Thingley Junction depot, which is where the Melksham single line diverges from the Great Western Main Line. This is currently a facility used by NR, which is concerned about any impact on infrastructure maintenance activities.

The NPA test passed the threshold required, with figures quoted in year three of operation of £1.16m revenue, of which £0.45m was generative, with abstraction of £0.71m mostly from GWR - giving a ratio of 0.64, which is comfortably above the 0.30 ratio that the rail regulator considers must be exceeded for applications to be successful.

These are very small numbers set against overall GWR revenue of £904m in 2022-23.

Data was calculated using a range of forecasting models that assess the revenue effect of timetable change.

These are systems developed by British Rail that remain in use. However, it is accepted that the actual impact of new open access services such as those provided by Hull Trains, Lumo and Grand Central bring a generative effect that is understated, with other operators on the route also benefiting from increased traffic.

There are many first-time aspects with the timetable proposed, as there is no precedent for providing open access services that do not serve London, and providing improved connectivity for towns within Wiltshire and Somerset looks to represent a significant financial challenge.

The train service is made up of operations between Taunton and Swindon via Westbury and Melksham, and from Taunton to Weston-super-Mare. No significant centres of population are served, although Castle Cary has an annual inundation of demand as a result of the Glastonbury Festival.

The proposed use of single-vehicle Class 153 trains gives the distinct feel of a local bus service rather than what is traditionally associated with rail, but there are clear opportunities to improve connectivity. As well as local journeys, new opportunities to make longer-distance journeys will be created as a result of connections at Taunton and Swindon.

Go-op will be part of the Ticketing and Settlement Agreement (TSA), allowing revenue to be apportioned from stations served to destinations throughout the network.

Effective sales channels are essential to gain a revenue share from these longer-distance journeys and not confine sales to the local stations served. Under the TSA, tickets can also be sold between any network stations, which is a further source of potential income.

Presumably, on-board staff will sell tickets and be provided with ticket issuing machines that have the appropriate software to enable sales to stations throughout the network.

An experience from the Wrexham, Marylebone and Shropshire Railway, which was unable to generate sufficient ticket revenue to operate viably, was the value of station retailing. A successful cafe was established at Wrexham, and this is a feature that might be repeated by Go-op at suitable stations.

In summary, forecast income levels will need to improve to meet overhead costs that will emerge.