Memorandum submitted by Govia Ltd
INTRODUCTION
Govia Limited is a joint venture between the
Go-Ahead Group plc and Keolis SA, first established in 1997. Since
then Govia has run a number of passenger rail franchises:
| 1997-2006 |
Thameslink |
| 2001-2009 |
Southern (formerly South Central) |
| 2006-2014 |
Integrated Kent |
Govia is also currently a shortlisted bidder for Transport
for London's London Rail Concession and intends to bid later this
year for the East Midlands and West Midlands franchises.
SUMMARY
Passenger rail franchising should have as its objective the
steady improvement of the service offered to rail passengers.
The current system is broadly achieving that, while also allowing
the government the opportunity to exercise policy choices about
how it spends taxpayers' money. The franchising process has become
reasonably well established and understood by current industry
players. However, it is expensive and onerous and may be deterring
new entrants to the market. Franchise contracts are based on sensible
commercial principles and risk allocation, but there would be
benefit to all parties in making them on average 10 years in length,
not seven. Open access operators have a role within the system.
Franchised operators must be adequately appraised of the potential
for such operations at the bidding stage. Thereafter they should
live with the risk. Vertical integration has no particular virtue.
Instead the current industry structure should be given time to
settle and mature.
RESPONSE TO
QUESTIONS THE
COMMITTEE WISHES
TO ADDRESS
1. What should be the purpose of passenger rail franchising?
Its purpose should be to bring private sector entrepreneurialism
and customer service skills into the railway. The purpose of making
franchises competitively bid is to ensure that passenger train
operations remain fresh, dynamic and as passenger-focused as possible.
The spur of competition drives up standards, best practice is
disseminated and innovation introduced.
An allied purpose should be to permit the government to exercise
policy choice and decisions about the provision of railway services,
which it is able to do through the specification it sets in franchise
competitions and through the terms of franchise agreements.
2. Is the current system achieving that purpose?
Up to a point. It has undoubtedly resulted in a greater focus
on the passenger and a different attitude among providers of rail
services. The challenge now for owning groups is to work to ensure
that the customer focussed attitude they espouse permeates their
organisations all the way to the front line of operations. This
is currently happening with varying degrees of success. Franchising
generally encourages the process, because when a franchise is
re-let the successful bidder invariably commits to working to
improve customer service (and through the National Passenger Survey
and other means is measured objectively as to success). However,
one downside of franchising is that staff have found themselves,
every few years, subject to new ownership with attendant shifts
in policy, corporate values and expected behaviours. This can
breed a degree of cynicism. This is picked up below under comments
on franchise length.
The government's success in using the franchise system as
the means to exercise and implement policy choice about rail services
is more mixed. It has not helped that there has been a succession
of government bodies (OPRAF, the SRA and now the DfT) responsible
for franchising. The current industry framework needs time to
settle and mature. We have seen signs, through our involvement
in the franchise competition for IKF, that the government is making
progress in its ability to use franchising to deliver policy,
for example in the way it has specified the domestic services
to be delivered using the new Channel Tunnel Rail Link.
Strong growth in the industry is an indication that the system
is achieving at least some of its purposes. The fact that more
than 1 billion passenger journeys were made last year can only
be seen as a measure of success.
3. How well does the process for awarding franchises work?
It works reasonably well, but it has become extremely demanding
on both bidders and the government. The highly onerous nature
of bidding competitions may well be acting as a deterrent to new
entrants to the passenger rail industry. It is noticeable that
the current participants in the industry are almost entirely either
those transport groups that entered the market around the time
of privatisation or overseas rail operators (and at least one
of those has withdrawn from the market in frustration).
4. What input do operators, passengers and other interested
parties have into the design of franchised services?
There is opportunity for input, but it is limited. The RUS
process and the specific consultation exercises the DfT undertakes
prior to launching a franchise competition provide the main opportunities.
We are aware, however, that many external parties, particularly
passenger groups and local authorities, find the DfT disappointingly
unresponsive in these exercises. That is partly because it is
genuinely difficult for the DfT to meet everyone's aspirations—often
meeting one party's wish for an additional service means eliminating
or amending a service important to another party.
Operators have the opportunity to participate in the formal
consultation exercises, but not surprisingly often prefer not
to, in order to preserve competitive confidentiality around their
ideas for franchise delivery. There are, however, opportunities
for informal discussion with the DfT about the specification of
franchises, which we value.
Network Rail has a large influence as the infrastructure
operator, and is prone to adopting a rigid position about what
can and can't be achieved on the network, which can act as a constraint
on the DfT's ability to specify what it wants in franchises. It
is very important that Network Rail is incentivised to work constructively
with government in planning and specifying franchises. The current
industry structure, which places much more responsibility on Network
Rail for punctuality and reliability than for passenger service
and convenience, does not help in this regard.
5. Has there been a smooth transition of franchising arrangements
from SRA to DfT?
On the whole yes. We experienced it directly as the successful
bidder for IKF, which began as an SRA competition and finished
as the first franchise to be let by the DfT. Subsequent to that,
the DfT appears to be meeting its timescales for awarding other
franchises.
Franchise management (as opposed to franchise procurement)
has also made a reasonably smooth transition, although the DfT
appears to be struggling to find the necessary level of resources
to undertake its side of franchise agreement implementation.
6. Are franchise contracts the right size, type and length?
There is no single prescription that works for all franchises
and the DfT are right to keep this under regular review and to
design franchises on a customised basis.
7. What criteria and processes are used to determine the
nature and length of franchise?
We don't know what criteria are used to determine the lengths
of franchises. For example, the two Midlands franchises are seven
years four months and seven years 10 months, which seems an arbitrary
decision for which we have seen no explanation. In general franchises
are too short in length. They need to be of sufficient duration
to permit a franchisee to make real changes, whether through staff
training and reorganisation (referred to above in relation to
achieving customer focussed attitudes right through the organisation)
or through investment in systems, station assets or rolling stock.
The present typical duration of seven years is too short
to make a real difference. By contrast, anything over 12 years
is probably too long in that the commercial risk envelope becomes
too uncertain the further into the future one projects. The optimum
period is probably therefore 10 years, with the possibility of
two additional years at most.
As regards the nature of the franchise, the DfT is moving
increasingly towards a templated contract for franchise agreements,
so that the obligations on each party, the risks, incentives,
levers and rewards are almost identical irrespective of what the
franchise is. This is a sensible approach which helps the market
to mature and bidders to work at continuously improving their
offering. It works well in related areas of government procurement
such as PFI.
8. What criteria and processes are used to evaluate franchise
bids?
The DfT is active in providing visibility into its evaluation
methods, which is to be applauded. They are also open to informal
discussions with bidders to improve understanding further, and
are conscientious about providing feedback after competitions.
These are all positive points. However, the downside is that the
criteria and processes seem to be becoming ever more theoretical.
The process is consultant-led and there is some risk that a bidder
can win through good exam technique. Another effect of this consultant-led
approach is that the requirements of each bid are hugely onerous,
so that it is common for bidders to have to spend at least £2
million on external advisers and consultants in order to prepare
a compliant bid. This ties in with our earlier comment that the
process is overly burdensome.
9. Do franchise holders deliver value for money to passengers
and the government throughout the duration of their contract?
We feel that we have delivered and do deliver value for money
and adhere to the deals we have done. The patronage and revenue
growth that we and others have achieved seems clear and unambiguous
evidence that we are getting something right. However, some bidders
over-bid in their desire to secure a franchise and the government
has to step in. It is probable in these circumstances that value
for money is a casualty. The onus must be on the government to
eliminate overly ambitious bids and not always go for the apparently
cheapest solution.
10. Are risks suitably apportioned between the government
and franchise holders?
Broadly speaking yes. This has been worked on in the light
of experience and we feel comfortable with the current allocation.
It is pointless to have the private sector running franchises
if they will not take risks. We do not, however, wish to take
unmanageable or foolhardy risks. During the life of the SRA there
was definitely a tendency for the government to seek to overburden
franchisees with risk, but the DfT now has a much better approach.
11. What is the scope for improving services through the
franchise agreements?
Franchise agreements almost always build in continuous improvement
targets and we are obliged to meet them. That provides a strong
and clear incentive for continuous service improvement. In terms
of additional train services, the real scope varies between franchises.
For example it is certainly easier to provide additional services
in a rural franchise where there is spare capacity than in a heavily
congested SE commuter service. Franchise agreements are in any
case only part of the story, as Network Rail, other operators
including freight operators and the ORR all have a locus in determining
whether additional services can or should be run.
The DfT is giving PTEs the authority to buy more services—that's
a sensible thing to do. If they want additional services, they
can and should pay for them.
12. Do we need more competition and vertical integration?
We would welcome more competition than there is at present,
whether through open access operators or more active players in
the passenger rail business. But in return we would expect longer
franchise periods, lower bidding costs and lower exit costs from
the industry. This last point is a difficult one, but we believe
that a franchisee should have the right to serve notice of ending
a franchise if it is proving commercially unsuccessful. At present
the rights are all on the side of the government in terms of bringing
a franchise to an early end.
On vertical integration, we are doubtful that there is much
to be gained from it at present, given that we are still in the
early days of the current industry structure, which clearly places
responsibility for infrastructure and its operation with Network
Rail.
13. Is franchising compatible with open access operations?
It should be. We are a commercial business and accept that
we operate in a competitive environment. We shouldn't be protectionist.
But where open access is possible it is essential that bidders
should have as much information as possible in order to accept
and appropriately price that risk as part of the franchise competition.
14. Should train, rolling stock and track operation be
more closely integrated?
We see no pressing case for this, believing instead that
the industry should continue its efforts to make the current structure
work well, which we believe is perfectly possible. There is no
sense in train operators owning a fleet of trains with an asset
life of 30-40 years while operating franchises of less than 10.
Similarly, as passenger transport operators we have little interest
in owning infrastructure that places heavy capital requirements
on a business and fundamentally changes the risk profile that
our investors buy into.
The current industry structure needs time to settle further,
but it is fundamentally logical and sensible. The infrastructure
is owned and operated by a state backed company that is not required
to make a commercial return and is able to access low cost capital
to support the maintenance and development of the network. The
expensive rolling stock is owned by commercial parties that are
able to take a long term view of assets and their useful lives.
And the passenger facing operations are managed by transport groups
that focus on efficiency and customer service.
We see an analogy with a successful enterprise like Bluewater
Shopping Centre, where the supporting infrastructure (road, energy,
communications, water) is provided by utility companies; the property
asset is owned by a long term player in real estate; and the outlets
are leased on a shorter term basis by retailers who must provide
an effective customer service or risk going out of business.
That is not to say that the present system could not work
better, perhaps by means of limited further integration. For example,
it may be possible to achieve further integration in the operation
of the infrastructure between Network Rail and train operators
(but not the funding or ownership). But the current industry structure
is sound and should be allowed a further period of time to mature.
CONCLUSION
Passenger rail franchising has gone through a number of twists
and turns since 1996, but is demonstrably delivering success in
terms of growing rail patronage and revenue. It has also brought
private sector expertise and innovation into the railway. The
franchising process now has the opportunity to stabilise and mature
under the industry structure established by the Railways Act 2005.
The DfT should be allowed time to achieve this, without coming
under pressure to introduce significant changes in the short term.
The industry structure as a whole should also be allowed time
to stabilise and mature—it is little more than a year since
the 2005 Act came into force and too early to contemplate another
period of restructuring in the industry.
19 June 2006
| 
