Memorandum submitted by First Group
EXECUTIVE SUMMARY
The response below should be read in conjunction
with the response by "The Association of Train Operating
Companies".
First believes that there have been considerable
achievements as a result of the franchising process over the past
10 years, and the company is proud to play a leading role as the
largest passenger rail operator in the UK. We now carry 222 million
passengers a year.
We have seen significant increases in passenger
numbers and investment since the latter days of British Rail,
while we offer better value for money through reduced franchise
subsidies or increased premiums paid to government.
First Great Western has seen 58% passenger growth
since 1994, while service frequencies have risen by 35%. Franchises
the group has won more recently have also seen increases in ridership;
First ScotRail by 11%, and First TransPennine Express by 7% since
their launch. On key services to and from Manchester Airport,
First TransPennine Express has seen passenger numbers rise by
29%.
Hull Trains, an open access operator, carries
400,000 passengers a year, compared to an initial 80,000 journeys.
Since privatisation, First has invested more
than £110 million on the last Great Western franchise including
new trains, upgrades to the rest of the fleet, and improvements
to maintenance depots and stations. As part of the new Greater
Western franchise which was launched in April this year, First
is committed to further investment of £220 million including
interior redesign of High Speed Trains, station and car park upgrades,
and improved passenger security. First TransPennine Express has
a £260 million programme. This is paying for 51 brand new
trains—the entire fleet is being replaced—as well
as station enhancements. First ScotRail has a £40 million
programme covering enhancements to the fleet and stations, and
improved safety and security for both passengers and staff. First
Capital Connect will spend more than £50 million on, among
other measures, rolling stock upgrades, station and car park improvements,
and greater passenger security.
In franchises awarded recently, there has been
a greater emphasis than in the earlier phases of privatisation
on achieving best value for money for the taxpayer, either through
reduced subsidies or increased premiums, or a mixture of both.
Our First Great Western franchise will deliver premiums totalling
£1.6 billion over 10 years. Premiums from First Capital Connect
will total £969 millions over nine years. Both figures are
given in 2006-07 prices.
In addition to the above, First brings the added
value of being the country's biggest bus operator, serving 100
towns and cities. We are ideally placed to develop integrated
transport, a key government objective. As examples, we lead the
way in promoting and selling PlusBus and other intermodal tickets,
and have launched dedicated bus links from rail stations to regional
airports.
First is generally very supportive of the franchising
process and aims to be an enthusiastic bidder for further train
operating companies.
What should be the purpose of passenger rail franchising?
The purpose should be to secure a blend of private
sector delivery with public sector specification—aimed at
maximising value for money for the taxpayer and fare-paying passengers.
The re-franchising cycle should deliver the
right mix of regular competition to bring in new ideas and investment
and sufficient length of tenure for these to be delivered in the
most cost-effective manner.
In the first round of franchising, the emphasis
was on growing patronage and statistics prove that this has been
overwhelmingly successful.
However, for well documented reasons, the associated
investment in the network infrastructure failed to keep pace with
the levels of growth—resulting in several instances of demand
outstripping capacity, with an adverse affect on performance and
reliability.
The latest round of re-franchising has attempted
to address this by the procuring authority being far more prescriptive
in the service levels and specification.
Whilst this is understandable and undoubtedly
necessary in certain circumstances, more freedom needs to be allowed
so as not to stifle growth and innovation moving forward.
As Network Rail starts to regain its health,
the franchisees must be encouraged to work with the infrastructure
provider to take full advantage of the continued potential for
growing rail's share of the transport market.
How well does the process for awarding franchises
work?
There has been a discernable improvement in
the efficiency of letting franchises in the latter days of the
SRA and early days of DfT Rail.
Generally, there is greater clarity in the specification
and bidding timetables are reasonably well adhered to.
There are still issues for many bidders regarding
the quality and availability of accurate data supplied, but experienced
operators are able to overcome these deficiencies, but lack of
accurate data can increase bidding costs as more expensive research
is required.
Some of the residual problems may be addressed
through improved harmonisation between infrastructure planning
(RUS) and franchise specification. It is important that the priority
RUS outputs (designed to meet the passenger growth identified
in the studies), are specified in the Invitation to Tender as
part of the re-franchising process.
If a service is profitable, it will be specified
in the SLC specified in the ITT and will, therefore, get into
the Timetable. It is misleading for the DfTR to now say that this
is a "Minimum Service Level Commitment"—as bidders
will not dare to include loss-making services, as this depresses
the value of the bid—which you might lose. There needs to
be greater clarity on this between, DfTR, Stakeholders and bidders.
Are franchise contracts the right size, type and
length?
Size and Type
Generally, First believes the current variety
is appropriate. Consolidation has generally been helpful in terms
of reducing the number of interfaces and improving service planning.
A less prescriptive approach would give more
scope for operators to propose timetables that deliver better
revenue and performance.
There should be some easement of fares regulation,
which is already limiting the ability of operators to offer more
and cheaper fares. This will be increasingly required, not as
a way for train operators to overcharge customers, as is often
reported in the media—but as a way of managing demand within
a heavily-constrained network. Apart from the level of fares,
there is also the need to deliver social objectives including
impartial retailing.
A review of risk sharing might lead to reduced
costs, particularly on issues that are outside the control of
operators, or affected by Government taxation policies, like fuel
price increases.
Length
The current seven to 10 year duration of franchises
should be regarded as a minimum to allow a sensible period for
investments to be implemented. There are some instances where
larger investments would be desirable, where a longer term would
be preferable.
Do we need more competition and vertical integration?
Competition
There is already strong competition with car,
with bus and coach and with air for longer-distance journeys,
while the scope for on-rail competition is constrained given the
limited capacity on the network.
Every opportunity is given to serious new operators
to bid for franchises.
One area that still needs to be clearly settled,
is what rights a franchisee actually has to run services within
its franchise area (reference Grand Central v GNER) where there
is a clear belief amongst the franchisee fraternity that it is
unfair for an Open Access Operator to steal revenue that has been
committed to in a franchise bid.
FirstGroup, through its ownership of the only
successful open access operator, Hull Trains, is uniquely qualified
to comment on this aspect. Hull Trains was established to fill
a gap in the market for high-quality through trains between Humberside
and London. Research showed that there was significant demand
for something better that the one GNER service in each direction
every day with the remainder of the day requiring passengers to
either drive to Doncaster or change trains there.
Throughout its history, Hull Trains has tried
to generate more revenue for rail rather than abstract the revenue
of other operators. This was an issue raised before services started
and has been reviewed by ORR every time services have been increased.
The ORR five-stage process in looking at new routes is based on
the way that Hull Trains has built up its business with only limited
early abstraction which is then overtaken by generated growth.
The conclusion has to be that competition is
good for passengers where it fills a gap in the market not covered
by the franchise, but not good for passengers where it results
in cherry picking, prevents the establishment of an integrated
timetable, worsens overall train performance or precludes interavailable
fares.
Vertical Integration
On the multiple operator, mixed traffic sections
of railway, there would be a need to alter the current structures
to cope with the different interfaces. There are some areas, however,
where there is one main operator where a trial might be the best
way forward. The most significant of these is with First ScotRail
in Scotland, where vertical integration could produce cost-savings
and greater harmony between track and operator. Until the benefits
of such a radical step are identified through a long term trial,
it is unlikely that more widespread schemes would be sensible.
Meanwhile, First has pioneered measures to improve the effectiveness
of its working relationship with Network Rail including the creation
of joint control rooms, where problems can be solved quickly,
and of joint boards.
CONCLUSION
— Franchising has led to significant
passenger growth, more frequent services, major investment, and
increasing financial contributions to government.
— Planning for further growth and dealing
with increasing customer expectations need to be priorities for
future franchises.
— The major fixed costs such as franchise
payments and track access charges should be set at a level that
encourages investment and expansion of the railway.
— The railway generally, and franchising
in particular, is helping to achieve political, and social goals.
— Some longer franchise terms will
be appropriate.
— There is a case for exploring some
vertical integration.
— The industry, its customers, staff
and investors need a stable environment and a vision to buy into.
19 June 2006
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