Memorandum submitted by Transport for
London
1. SUMMARY
1.1 Transport for London (TfL) welcomes
the opportunity to respond to the Transport Committee's inquiry
into rail franchising. TfL's response is based on a need to tailor
those franchises serving London to meet its diverse needs. These
include not only the mainstream commercial and economic drivers
but also those of improving social inclusion and accessibility
of the transport system. Therefore franchises must be structured
accordingly. The differing requirements of franchises with a majority
of long distance traffic against those with a customer base of
suburban traffic must be taken account of to meet London's future
growth requirements. Thus the franchise structure must be capable
and flexible enough to deliver the specific requirements for a
particular sphere of operation whether it has a commercial basis
or is founded on the need to achieve efficient, effective integrated
transport to, from and within a major conurbation.
1.2 In terms of process TfL believes there
should be improved engagement between the Department for Transport
(DfT), potential operators and major regional and local stakeholders.
It is essential that the relevant principal transport planning
authority (such as TfL, in the case of Greater London) is able
to influence outputs and selection of franchises where these play
a key role in the effective provision of multi-modal transport
in densely populated urban areas.
1.3 TfL believes that the franchise renewal
process and relevant terms, conditions and duration must be geared
to ensure that public funds are not wasted through the franchise
process requiring costly and repetitive start-up costs for operators.
This could be addressed by a more appropriate allocation of responsibilities
and variable franchise terms. Risk allocation must take account
of the relative costs between different options and the need for
private investors to achieve a satisfactory rate of return. In
some cases this indicates that responsibilities for longer-term
investment (eg in stations) should rest with funding authorities
rather than the franchisee.
1.4 In terms of competition, TfL advocates
that where capacity is scarce or where investment has been specifically
provided to meet specific needs (eg on London's radial and orbital
routes) it would be inappropriate to promote active competition
to the detriment of those services performing socially necessary
and general transport accessibility functions particularly in
urban areas and conurbations. The first call must be to provide
an integrated, sustainable transport system geared to promote
modal shift to public transport and the achievement of challenging
environmental targets. TfL believes there is a good case for examining
the benefits of vertical integration where sole-user operations
are in place (eg community lines) but on multi-user railways the
case is less strong.
2. INTRODUCTION
2.1 The challenges facing London's transport
over the next 20 years are significant; London is forecast to
grow significantly in population. Employment is also forecasted
to grow, particularly in the high productivity cluster within
central London. Enabling this growth is critical to supporting
London's position as the capital city and its contribution to
national economic output. The existing rail services and infrastructure
have severe constraints and there is a pressing need for more
efficient delivery directly linked to multi-modal planning.
2.2 TfL believes there is a need for a cohesive,
integrated transport planning approach for London and those major
population centres which lie just outside the Greater London Authority
(GLA) boundary. Our modelling shows that there will be employment
growth within London of at least 0.9 million up to 2026 and that
this is concentrated in central London and the inner Thames Gateway.
Population growth (predicted at one million to 2026) is more evenly
distributed and thus rail is the only mode which will be able
to meet this increased demand, particularly on the radial corridors
to and from the centre.
2.3 There are also large regeneration and
development proposals planned for areas just outside London, eg
the Thames Gateway and along the London-Stansted (Lea Valley)
corridor. This growth will place additional demands and requirements
on the existing public transport infrastructure and especially
rail.
2.4 TfL is developing Rail Corridor Plans
covering each of the London-based rail franchises and routes and
is working in close cooperation with Network Rail in the development
of their route plans. Longer term, TfL is also developing a Rail
2025 plan for London and thus there is a framework of both medium
and longer term proposals for rail which the franchise structure
must be capable of working with.
2.5 Nearly 70% of all UK rail journeys are
made to/from or within London totalling over 502 million in 2003-04
and of these, 48% (244 million) were wholly within the London
region.[1]
Furthermore, 64% of rail journeys per year (129 million allocated
to the South East region are made to or from London. Therefore
the franchise mechanism must recognise the importance of rail
to the economic benefit of London and that it must also work within
an integrated planning framework which will require outputs different
to those of pure commercial benefits focussed on a single rail
mode.
3. What should be the purpose of passenger
rail franchising? Is the current system achieving that purpose?
3.1 TfL believes the objectives of a franchise
must reflect more closely the requirements of sub-regions and
traffics served. A "one size fits all" approach is not
sufficient to meet the diverse requirement of rail operations
in Great Britain. The franchising purpose must recognise the difference
between longer-distance (revenue generating) operations and shorter
distance suburban operations focused primarily on work and societal
needs.
3.2 TfL would emphasise that operators'
strengths need to be more focussed towards meeting the diverse
economic, social, cultural and transportation needs of an area,
particularly important in London. Franchise specifications must
therefore be capable of recognising that the purpose is to deliver
an effective, efficient transport system integrated with other
modes and offering value for money to central and local government
and users. Thus an additional requirement of franchising must
be that it should work under a governed planning framework, at
both national and regional levels. In conurbations the planning
framework must primarily focus on improving the efficiency of
integrated transport rather than, for example, maximising farebox
revenue on an individual mode.
3.3 Service specification itself will also
have different requirements. Services at stations in terms of
comfort, safety and security (and ease of interchange with other
modes in the case of urban multi-modal stations) are different
to those of train services where the focus will be on journey
time and frequency. Again, the drivers for "Metro" type
services in conurbations will be different to those of long-distance
services where station and on-train facilities will have quite
differing requirements.
3.4 The current system of franchising is
not achieving the correct delineation between these differing
drivers. In London, where the Mayor is seeking further specification
responsibilities over rail, including possibly fares setting responsibilities
there is, under the present system, confusion on where risks lie
and the relationship of franchise outputs with other service modes
(eg London Underground). There has been widespread confusion for
rail passengers relating to the introduction of the Oyster "Smartcard"
ticketing system. Part of this is due to the present inability
of the Mayor and TfL to influence operators through the franchising
system, although the Mayor's responsibilities in this area are
now under review. As a result, under the current system, passengers
have not been presented with the integrated transport provision
that is a core requirement within London.
3.5 Therefore inner-suburban franchises
serving cities and major conurbations must be focussed on providing
a good quality, efficient and sustainable transport mode designed
to stimulate modal shift to rail working within an integrated
planning framework where risk is properly targeted and which is
designed to maximise operators' strengths and capabilities in
effective and efficient delivery. Revenue risks for inner-suburban
franchises may well be better managed by public, regionally-based
stakeholders. Possibly this will require a clearer delineation
between commercially viable services and those which have to perform
a societal function. There is no reason why such services cannot
co-exist within the same franchise. However the specification
and purpose must be clear and matters such as, for example, obligations
to prioritise resources or track access must be clearly defined
in the franchise.
3.6 Overall, the purpose of franchising
must be to provide rail passenger transport which is capable of
meeting current demand and growth needs in an effective and economic
way, provides a framework and certainty for improving efficiency
and promotes improved integration of, and accessibility to, the
public transport system. There is no firm evidence that the present
system is achieving this.
4. How well does the process for awarding
franchises work? What input do operators, passengers and other
interested parties have into the design of franchised services?
Has there been a smooth transition of franchising arrangements
from the Strategic Rail Authority to the Department for Transport?
4.1 The engagement of TfL into the design
of franchised services is, at present, limited particularly regarding
discussions with bidders. Whilst liaison with the DfT on planning
matters is improving, TfL's direct influence over franchise specifications
has been variable. It should be clearly understood that TfL, whilst
a major stakeholder, has no grant funding from central government
for investment in rail services. Recent franchise changes, particularly
on the Great Western line have seen plans for a significant deterioration
in some services which were completely contrary to TfL's submissions
through the formal consultation process. However the more recent
proposals for the South Western franchise have seen better engagement
and more account taken of the needs of London in the process.
At present the Mayor or TfL have no influence over the selection
of bidders or on the viability and effectiveness of the outputs
proposed by bidders in the final process. Whilst the Mayor is
due to gain further responsibilities over rail at present this
is not intended to extend to the franchising process itself except
in the case of the North London Railway. TfL believes this hinders
the delivery of efficient outcomes for London's public transport
planning and wishes to see a more formal engagement with DfT and
bidders in respect of those franchises supplying the majority
of London's rail services within the GLA boundary. This is particularly
important at the ITT stage, to ensure that London's requirements
are adequately reflected in bids.
4.2 The transition from the Strategic Rail
Authority (SRA) to DfT appeared to be achieved relatively well.
The arrangements for working with DfT are certainly no worse although
in some areas (eg Great Western—see above) there are judged
to have been some inconsistencies in communicating changes to
key stakeholders and these may need further attention.
5. Are franchise contracts the right size,
type and length? What criteria and processes are used to determine
the nature and length of franchises? What criteria and processes
are used to evaluate franchise bids? Do franchise holders deliver
value for money to passengers and the Government throughout the
duration of their contracts? Are risks suitably apportioned between
the Government and franchise holders? What is the scope for improving
services through franchise agreements?
5.1 TfL has not been formally included in
the evaluation of franchise bids and the relative apportionment
of risks and value for money of existing franchises. Therefore
it is difficult to comment on some of the committee's questions
in this area.
5.2 However, TfL believes that there needs
to be clear understanding of what franchises are expected to deliver
and the length of a franchise must be commensurate with achieving
that delivery in the most efficient and cost-effective manner.
In 3.1 and 3.2 (above) TfL has already drawn attention to the
fact that specifications must be tailored better to local and
regional needs.
5.3 TfL's view is that franchise operators
are not resourced to undertake the longer term planning or economic
forecasting essential in developing and delivering transport strategies
for large cities. As a result there is a compelling argument for
these matters to remain within the scope of funding/planning authorities
who are able to take the longer term view. In turn this dictates
that franchises need to be of a management contract nature and
thus there is less necessity to let these as longer-term contracts.
5.4 Against this, shorter-term franchises
do not incentivise longer term capital investment and planning
because operators are seeking to maximise shareholder returns
over the shorter life of the franchise only, and not beyond. Accordingly,
overall margins sought under these shorter franchise periods increase.
In our view, where shorter-term franchises are contracted to invest,
the higher financing costs inevitably deliver worse value for
money than a longer term franchise or Government borrowing option.
Shorter-term contracts also have recurrent bidding costs estimated
at between £2-4 million for each bidder and similar amount
for the DfT. Assuming that most bidders are working within the
franchise system somewhere it is fair to state that these costs
will eventually be borne by the franchise funding arrangements.
5.5 Individual start-up costs for any new
operation will also be significant. New branding, signage, uniforms,
staff transfer costs—some of which does little to improve
the product—costs in the region of £2-5 million depending
on the size of the franchise. For London, with nine franchises
undertaking suburban operations this could equate to over £30
million every seven years, money better focused on improving the
quality of stations and services. This reinforces the belief held
by TfL that rail in London should have a single brand identity
which does not change with every new operator/franchisee.
5.6 There appears to be little risk borne
by franchisees under current arrangements, evidence so far has
seen commercial deals rescued by the SRA, in the case of South
Eastern Trains or by reversion to management contracts. In both
cases, Government has taken on board the risks whenever franchises
are failing to deliver against their commercial objectives. This
must be changed and contracts must reflect a fair balance of risk
between franchisee and funder.
5.7 The scope for improving services is
now extremely limited under the current arrangements. Franchisees
are expected to deliver to a service specification tightly defined
by DfT and with stringent controls on changes. Whilst this gives
greater certainty and arguably gives better control on matters
such as performance it takes out the entrepreneurial aspect and
questions whether all franchises supported by public funds should
be based on the management contract model with specification and
investment in the hands of the funder.
6. Do we need more competition and vertical
integration? Is franchising compatible with open access operations?
Should train, rolling stock and track operation be more closely
integrated?
6.1 TfL's view is that in London, with infrastructure
capacity at a premium, high forecasts of demand growth and a pressing
need for more investment in the railway, it is not acceptable
to allow "cherry picking" of valuable capacity. TfL
expects to invest significant amounts of capital in improving
London's railway infrastructure; it would be unacceptable for
works paid for by the public purse and designed to improve public
transport in London to be used for commercial gain by operators
who have made no contribution to the investment. Whilst open access
is a cornerstone of EU policy on rail this should only be undertaken
within the framework of a robust regulatory system which takes
full account of public and social interests and accepts the need
for investors to have first call on the utilisation of the enhancements
they have paid for. Furthermore, the national system of revenue
allocation (ORCATS) can allow disproportionate apportionment of
ticket income, particularly where open access operators are granted
rights over route sections where established franchised operations
are in place. If open access is to continue, an improved method
of revenue allocation must be put in place which recognises the
role of the incumbent franchisee and its investment in the core
business.
6.2 In certain circumstances TfL believes
that it would be appropriate for closer integration of operations.
TfL's findings are that rolling stock procurement and operation
may be more cost efficient under the direct management control
of the funder (eg TfL) and/or train operator rather than through
the current practice of utilising Rolling Stock Leasing Companies.
In terms of train and track integration there may be instances
where closer integration will deliver improved efficiencies, particularly
where there is a sole train operator and the role of the railway
is purely to address societal needs. However, where a number of
operators run over the same infrastructure and this has a mix
of commercial and socially necessary operations, the existence
of a separate infrastructure controller to manage delivery and
performance is likely to represent the best option given the present
structure of Great Britain's railways and the split between franchised
and commercial (eg freight) operations in existence.
6.3 It must be noted that the recent changes
to Network Rail's role in taking a greater lead in medium-distance
planning through the Route Utilisation Strategy process has improved
the industry's overall approach in this area and has already started
to deliver benefits which were assumed to be only capable of achievement
through vertical integration. Operational integration between
Network Rail and train operators has also improved and would suggest
that enforced vertical integration may not achieve a significant
benefit over the service delivery being enjoyed at present.
7. CONCLUSION
7.1 TfL is firmly of the opinion that the
current policy on franchising is in need of review and change.
7.2 The present arrangement where London's
rail franchises are expected to deliver a mix of commercial and
societal requirements is confusing. There should be a clear demarcation
of commercial and social requirements with the latter closely
specified by local transport planning authorities in the major
conurbations and regional authorities of Government outside of
those areas. The contribution of rail to the mobility of urban
areas and the role of transport authorities such as TfL must be
recognised in franchises. Their purpose should be designed to
better reflect and engage with the overall transport planning
process and to promote integration of public transport.
7.3 There needs to be better and more formal
engagement with stakeholders on the process, particularly with
investors such as TfL, and the outputs must reflect the local
planning objectives for the cities and regions rather than being
defined wholly by central government.
7.4 In terms of the size, type and duration
of franchise TfL believes that there must be clarity between the
societal service requirement and commercial service initiatives
and the type of franchise could go further to reflecting this.
Depending on what the type of franchise is will indicate the optimal
length for a franchise. TfL has highlighted that frequent bidding
and start-up costs will inevitably increase the overall charge
to the taxpayer.
7.5 Open access operations are likely to
deliver little added value to suburban train operations based
on societal service provision and will thus result in abstraction
from franchised operations rather than add to the overall value
of rail as a mode of transport.
7.6 Vertical integration of track and train
operations, given the present split of franchises and the existence
of commercially-based train operations, is assessed to present
no major advantages at the present stage but there may be instances
(eg community rail) where such changes may give economic benefits.
However integration of rolling stock procurement and train operations
may deliver benefits and is deserving of further examination.
20 June 2006
1 Source-National Rail Trends Yearbook 2004-05 (amended)
SRA/ORR. Back
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