Select Committee on Transport Written Evidence


Memorandum by the Strategic Rail Authority (FOR 97C)

FUTURE OF THE RAILWAYS

  Following the letter of 19 January 2004, you asked if I could provide a simple comparison between the levers available to the SRA in respect of under-performance by trains operating companies under the original and new franchise agreement. I am sorry this has taken longer than expected.

  The comparison may be summarised as follows.

OLD-EXISTING FRANCHISE AGREEMENTS

    —  Compensation: Flows of money between the Train Operating Company and OPRAF-SRA for performance below historically achieved levels. The compensation amounts were related to the benchmarks for Network Rail performance in the track access agreements and the rates for such payments being defined periodically by the Rail Regulator.

    —  "Call In": Levels of performance are set where the Franchisee is required to explain to the Franchising Director what factors had caused the substandard performance and how it proposed to recover the service performance to a satisfactory level. Three "Call Ins" in a three year period equals an "Event of Default".

    —  "Event of Default": The level of performance where the remedy for OPRAF-SRA was to issue an enforcement order. If the Franchisee had not complied with the terms of the enforcement order within the specified time this could result in a fine or ultimately termination of the agreement.

    —  Service quality: There are no service quality standards. The Franchisee is required to comply with the terms of its licence which the SRA enforces in respect of the passenger facing obligations. The licences are far from comprehensive on the required standards of performance to be met and maintained.

NEW FRANCHISE MODEL

  Four defined levels of performance improvement over time:

    —  Target: If the Franchisee achieves this level during a defined measurement period its is entitled to an automatic three year extension of the Franchise. The extension is conditional on all three parameters, punctuality, cancellations and capacity meeting the target level.

    —  Remedial plan: At this level the Franchisee has to produce a plan to the SRA to improve its performance to the target level within a specified time.

    —  Breach: The SRA may implement enforcement action under Section 55, which may result in an order for specific performance or the imposition of a fine.

    —  Event of Default: The level at which the SRA may terminate the agreement.

  On service quality, the new agreement prescribes service quality standards covering train environment, station environment, information provision, security and ticket selling. These service quality standards are expressed as an ideal standard with a "reasonable endeavours" obligation to meet them. The new agreement also contains a Key Performance Indicator (KPI) regime which covers the journey experienced by a passenger and measures whether or not facilities are available, functional, clean and free from graffiti and litter. The mechanism is an incentive-damage regime where up to 20% of a Franchisee's bid profit is at risk.

  A more detailed note on Rail franchise agreements—Comparison between original and new is attached.

  I hope this meets the case.

James Watson

Assistant Director

Parliamentary and Public Communications

17 February 2004

Annex

Rail Franchise Agreements

COMPARISON BETWEEN ORIGINAL AND NEW

1.   Statutory framework

  The statutory framework has not changed and Section 55 of the Act applies.

2.   Train service performance

  The old agreements contain provisions relating to:

(a)  Service punctuality

  The old agreement has a number of variants in relation to the measurement of service punctuality. The later versions worked on Public Performance Measure (trains arriving within five minutes of timetabled time at destination station or 10 minutes if long distance). The PPM measure has the advantage that it correlates closely with what a passenger may experience, its disadvantages are that in a contractual relationship it contains Network Rail caused delays and delays caused by other Train Operating Companies (TOCs) which are to a large extent outside the control of the Franchisee. The old agreement provided for:

    (i)   compensation flows between the TOC and OPRAF-SRA for performance below historically achieved levels. The effectiveness of these as an incentive to perform was dependent upon the nature of the franchise itself and the extent to which Network Rail on TOC and TOC on TOC delays were prevalent. The compensation amounts were related to the benchmarks for Network Rail performance in the track access agreements and the rates for such payments being defined periodically by the Rail Regulator. Since most TOCs operate on a subsidy, continuation of this regime results in a "money go round" ie TOCs bidding for franchises on the basis of having to pay back to the SRA sums to compensate for their poor performance or poor overall network performance. The old agreements had no incentive to improve performance over time except to the extent the Rail Regulator re-set the benchmarks.

    (ii)   "Call In" levels of performance where the Franchisee is required to explain to the Franchising Director what factors had caused the substandard performance and how it proposed to recover the service performance to a satisfactory level (three "Call Ins" in a three year period equalled an Event of Default);

    (iii)  an "Event of Default" level of performance where the remedy for OPRAF-SRA was to issue an enforcement order which, if the Franchisee had not complied with the terms of the enforcement order within the specified time, could result in a fine or ultimately termination of the agreement.

(b)  Service cancellations

  The old agreement provides for reporting and measurement of cancellations and partial cancellations (ie not operating more than 50% of the scheduled route). "Call in" and "Event of Default" levels of performance are defined with the same consequences as for service punctuality above. There is no provision for reduction of cancellations or partial cancellations over time.

(c)  Overcrowding

  The old agreement provides for periodic manual counting of passengers on trains. It is particularly difficult to obtain accurate and complete data in the periods of most intense use during the peak. The agreement contained a "reasonable endeavours" obligation to match available capacity to demand across the peak periods. It is essentially a planning obligation. The delivery of capacity by the Franchisee to match demand was converted into an index and a target was set with "Call In" and "Event of Default" thresholds determined. In addition in certain contracts (London and South East commuter franchises) there was a short formation incentive payment which allowed fares to be increased in the event that the number of short formation trains operating was reduced compared to the previous year although it did not operate the other way.

  A significant problem with the old franchise agreements was that the level at which "Call in" and "Event of Default" levels were set in the initial agreements was based on worst case historic performance levels pre-privatisation. Not only were the absolute performance levels set too low but there was insufficient differentiation between the two levels. This lead in some cases to TOCs performing just above the Call in level and the passengers experiencing a poor service and OPRAF-SRA having no contractual right to demand improvement. When Network Rail's performance started to deteriorate after the Southall accident the TOCs were net recipients of compensation under the track access agreement and were insufficiently incentivised by the regime within the franchise agreement.

  In contrast the new agreement provides as follows:

  For service punctuality, cancellations and capacity there are four levels of performance defined which each have an improvement in performance required from the Franchisee over time.

  Target level—which if the Franchisee achieves during a defined measurement period entitles it to an automatic three year extension of the Franchise. The extension is conditional on all three parameters: punctuality, cancellations and capacity meeting the target level.

  Remedial plan level—at which the Franchisee has to produce a plan to the SRA to improve its performance to the target level within a specified time.

  Breach level—at which the SRA may implement enforcement action under Section 55. This may result in an order for specific performance or the imposition of a fine.

  Event of Default level—at which the SRA may terminate the agreement.

SERVICE PUNCTUALITY

  In the new agreement the measure is calibrated in delay minutes attributable to the Franchisee, ie focussing on what the TOC can control directly and excluding Network Rail caused delay and TOC on TOC delay where the Franchisee is the victim of another's failings. There are no incentive payments or damages attributable for performance better or worse than target level.

  The targets have been set by disaggregating all the causes of delay in any period of measurement, eg rolling stock causes, tram crew causes, station causes etc and taking the average of the best two periods for each cause and then calculating the aggregate delay minutes total from those averages. In order to obtain an extension the Franchisee therefore has to do the best that has ever been achieved on those franchise routes for every cause, every day. The remedial plan, breach and event of default levels track the improvements required in the target level over time. Thus, if the Franchisee makes no improvement in its performance levels during the franchise term by the time the measurement for the proposed extension is undertaken, it will be performing at below breach level. The provisions of the agreement permit adjustment to the contractual performance levels pro rata to any change in the scheduled mileage to be operated in the timetable.

  In respect of management of Network Rail performance the Franchisee bids the level of improvement it is seeking to obtain over the franchise term from Network Rail in terms of a reduction in delay minutes. This reduction is then incorporated in the agreement. It has a reasonable endeavours obligation to achieve the bid level of improvement, however the definition of what has to be done to satisfy a reasonable endeavours obligation is very tightly prescribed and incorporates what is regarded as best practice including close monitoring of the delivery by Network Rail of its obligations to the Franchisee under the track access agreement.

SERVICE CANCELLATIONS

  The service cancellation performance levels have been set in a similar way to the service punctuality regime above using a future target based on best previous performance.

DELIVERY OF CAPACITY

  The new franchise agreement requires that the best available technology is used to assess passenger usage, point to point, by time of day, by day of the week and seasonally. The information on usage will therefore be more complete and useful for optimising the delivery of capacity.

  The obligation is to use reasonable endeavours to match available capacity to demand through effective train planning and timetabling of calling patterns and then to operate the service in accordance with the approved train plan. Additionally there is an obligation operate all available capacity in the peak subject to the requirements of scheduled maintenance and the provision of "hot standby" trains used to mitigate cancellations.

  The measurement of capacity delivered is at a single train level and is expressed as a percentage of trains having the capacity which was scheduled to be delivered by the daily train plan. This is a simple pass-fail test per train and is therefore more difficult to achieve than under the old agreement. There is no short formation incentive payment regime.

  Delivery of capacity performance levels have been set in a similar way to the service punctuality regime above using a future target based on best previous performance.

3.   Service quality

  The old agreement made no reference to service quality standards. The Franchisee is required to comply with the terms of its licence which the SRA enforces in respect of the passenger facing obligations. The licences are far from comprehensive on the required standards of performance to be met and maintained.

  The new agreement includes service quality standards covering train environment, station environment, information provision, security and ticket selling. They are expressed as an ideal standard with a "reasonable endeavours" obligation to meet them.

  The new agreement also contains a Key Performance Indicator (KPI) regime which covers the journey experienced by a passenger and measures whether or not facilities are available, functional, clean and free from graffiti and litter. The mechanism is an incentive-damage regime where up to 20% of a Franchisee's bid profit is at risk.


 
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