Memorandum submitted by the Halcrow Group
Ltd
1. SUMMARY
We should state at the outset that passenger
rail franchises have, in our opinion, been one of the notable
successes of rail privatisation. They have reduced costs (those
under their control), significantly grown revenues and introduced
a wide variety of innovative products. There is, however, room
for improvement whilst the energies of those responsible for administering
and monitoring the wider rail system will always benefit from
being focussed on where they can have maximum benefit.
We have attempted to address each of the questions
posed by the Committee. Our main points are as follows:
— We consider there to be two main
purposes of rail franchising:
— The delivery of value for money
from the public funds invested in the rail sector; and
— Development of a rail system
to meet the nation's strategic needs.
There is good evidence that the franchising
process is achieving the first purpose; the second is not being
effectively met:
— The franchising process is working
reasonably well and the change from SRA to DfT Rail has been relatively
smooth. DfT Rail has made a number of significant improvements
to the process. One major concern is over the cost to bidders
and possible barriers to entry for new bidders.
— Competition is critical to the success
of franchising in particular and the privatised rail system in
general. By this, we refer to competition in the procurement of
franchises and not rail-rail competition for the carriage of passengers.
In general, a good level of competition has been maintained over
the past few years and this remains a strong argument for not
reducing further the number of franchises or lengthening their
terms.
— A case for greater vertical integration
within the industry may exist. This must, however, enhance and
not reduce levels of competition which we believe are key to ensuring
value for money.
2. INTRODUCTION
Halcrow is delighted to have this opportunity
to contribute to the Committee's inquiry into passenger rail franchising.
Halcrow has been involved in the privatised
rail industry since the early 1990s, indeed, Halcrow acquired
the first part of BR to be privatised when it bought Transmark,
BR's transport consultancy, in 1993. Since the mid-1990s, Halcrow
has worked with a variety of public and private sector rail clients
providing a range of services in support of the franchising of
Train Operating Companies (TOCs). Halcrow also works with Network
Rail, Roscos, and other industry clients. In 1996, Halcrow bid
in its own right (unsuccessfully) to operate the Cardiff Valleys
Railway Company, one of the smaller TOCs to be franchised. Halcrow
is currently providing technical support to DfT Rail on the re-franchising
of South Western (currently South West Trains and the Island Line
franchises).
The following sections of this memorandum address
each of the Committee's questions in turn.
3. MAIN RESPONSE
3.1 What should be the purpose of passenger
rail franchising?
We have interpreted this question as pertaining
to the franchising process and not rail franchises per se (which
are concerned with safe, efficient and reliable operational performance).
We consider there to be two main purposes:
— The delivery of value for money from
the public funds invested in the rail sector; and
— Development of a rail system to meet
the nation's strategic needs.
There is good evidence that the franchising
process is achieving the first purpose and has been doing so for
some time. Subsidy levels have continued to fall over the past
decade, notwithstanding changes to the accounting procedures and
investment needs of the infrastructure owner. The number of franchises
moving out of subsidy and into premium payments is steadily increasing,
whilst passenger numbers have grown by over 25% since privatisation.
Maintaining a high level of competition amongst bidders has been
central to achieving value for money goals. This will be a critical
issue going forward.
We believe that the second purpose has been
less well achieved. There have been many effective and innovative
developments within privatised TOCs over the past decade, including
more flexible fares regimes, customer service improvements, procurement
of much improved rolling stock, etc However, franchisees have
limited control over the wider rail system, which is characterised
with a number of interfaces. The franchising process has not been
particularly successful in enabling working across these interfaces
to bring about material strategic development of the system. The
high cost of the West Coast Route Modernisation, failure to deliver
Thameslink 2000 and ongoing capacity constraints in SE England
are put forward as evidence of this failure.
The SRA under Sir Alasdair Morton (1999-2002)
attempted to drive strategic network development through TOCs
but this attempt failed amid the general upheaval following Hatfield.
It also failed to recognise the importance of public sector leadership
of major transport strategies and over-estimated the ability of
the private sector to deliver strategic rail development.
The rail system is now approaching the point
at which strategic development is key to future growth and success.
Therefore this second, strategic, purpose is of growing importance
as the system approaches capacity and the need grows for greater
patronage of sustainable public transport.
The decision to take back franchising within
the DfT provides an opportunity to address some of the strategic
failures of the last decade. However, rail is a notoriously complex
and demanding industry. Strategic development will require a coordinated
approach to the industry as a whole (not just franchising) along
with considerable investment of time and capital.
3.2 How well does the process for awarding
franchises work?
The process seeks to achieve a balance between
allowing the market latitude to determine how it will operate
and develop a franchise and providing clear leadership on those
policy objectives that the franchise is expected to achieve. To
some extent, changes to the franchising process over the past
decade have reflected changing emphasis in this trade-off.
The process, as it stands, works reasonably
well and has improved in a number of important ways (eg: through
being better aligned with the EFQM process used in other areas
of Government procurement), although there is concern about the
cost and complexity of the bidding process. There is now evidence
that, under the DfT, lessons from other areas of Government involvement
in PPPs, such as the Pfi programme, are being applied (eg: through
the transfer of staff from other Pfi departments to DfT Rail).
Bid costs and complexity are a concern, as these
have the potential to pose major entry barriers and foster duopolies,
to the detriment of competition within the market.
Inputs of various stakeholders into the design
of franchises?— The formal consultation process mirrors
that carried out in other fields of Government transport planning.
Stakeholders have the opportunity to put forward views, though
there is no guarantee that these will be reflected in the design
of franchises. This is probably right and we consider it more
important that clear policy leadership is provided than franchises
be over-sensitive to the needs of various minority groups.
Has there been a smooth transition to DfT
Rail?— The transition has probably proceeded better
than many expected and appears to have been reasonably effective.
3.3 Are franchise contracts the right size
and length?
We see this key issue as seeking a balance between
the efficiencies and scale economies that result from, perhaps,
fewer, larger, longer contracts and maintaining an active and
competitive market, with opportunities for new entrants. We believe
strongly that the interests of the Government and the wider community
are best served by, first and foremost, ensuring that competitive
forces are as strong as possible. We would council caution over
further reductions to the number of franchises or increases in
their length.
Criteria and process to determine length—The
current process attempts to foster competition at the bidding
stage and to reward good performance with an extension to franchise
length.
The maximum franchise length has been reduced
over the past few years from 15 to 10 years. We would support
this move as something likely to increase competition and enhance
value for money.
Franchises have an element of performance management
built in, with good performance having the potential to be rewarded
with an extension of several years (normally up to three). Our
observations suggest that this approach is successful in incentivising
franchisees to perform and, if anything, should be enhanced and
strengthened.
What criteria and processes are used to evaluate
franchise bids?— Bids are evaluated against a set of
researched operating criteria (ie: factors that DfT would like
bidders to provide) within an EFQM appraisal framework. The operating
criteria are a mix of general and franchise specific items covering
those issues of particular relevance to each TOC, such as crowding,
rolling stock procurement, staff management, revenue generation,
etc The EFQM framework provides a strong link with OGC best practice
and represents a robust and transparent method for scoring each
bid. We believe this is an effective and fit-for-purpose approach.
Our only comment is that, after several years' of significant
changes to the evaluation methodology, a period of stability and
consistency would be of benefit.
Do franchise holders deliver value for money?—
Reasonable evidence exists that most do, although there are a
number of areas of concern. Declining subsidy levels and growing
passenger numbers suggest that the UK rail network is delivering
greater value for reduced State inputs. Performance is also improving
(in general) whilst investment is also starting to grow.
Areas of concern are as follows:
— Fares are rising, in particular peak
fares, and this could have a detrimental economic impact in the
absence of compensating fare reductions (eg: off-peak). We would
favour minimal increases to the average "basket of fares",
with increases in some areas being compensated for by significant
reductions elsewhere. Smart cards allow significant potential
in this respect. We strongly recommend that economic evaluation
be used to ensure that major changes to fares always generate
net benefits to society at large and are not simply mechanisms
to raise revenue at the expense of overall value for money.
— Franchisees are constrained by the
capacity and performance of the infrastructure network. The point
is approaching at which major investment in and significant improvements
in performance of the infrastructure will be required if the system
at large is to continue to generate economic benefits. We believe
Government and DfT will generate increased benefits from greater
focus on these issues than more marginal improvements to operating
franchisees.
Are risks suitably apportioned?—
In general we believe risks are well apportioned. We believe some
additional scope exists for strengthening and broadening performance
management of franchises, for example, by including a wider range
of quality factors in the formal performance management system
(eg: in addition to service reliability). These may include "soft"
measures such as passenger attitudes, and "harder" measures
such as station cleanliness and booking office performance.
Scope for improving services?—
As noted above, enhancements to the performance regime may be
beneficial. However, greater focus on infrastructure performance
and development will, we believe, deliver a growing return over
the coming decade.
3.4 Do we need more competition and vertical
integration?
Open access—We have major reservations
about the net benefits of open access operations. There is not
strong evidence that rail-rail competition is a significant factor
in delivering greater value. It also tends to divert and dilute
scarce industry resources. Franchisees may also begin to build
the risk of open access competition into their bids, which could
reduce value for money. We believe the rail industry as a whole
should be viewed as an integrated system that is primarily in
competition with other modes such as car and air.
Integration of operations, rolling stock,
etc—This is a complex issue that does not lend itself
to a simple answer. We would suggest the following:
— Franchises are one of the successes
of rail privatisation and are delivering growing value.
— ROSCOs have been less successful
and the high cost of rolling stock is a serious constraint on
further development of the rail system.
— Infrastructure management has not
been a success to date, the assets being expensive to maintain
and develop and the performance of a single monopoly owner being
difficult to gauge.
— Infrastructure development has also
not been a great success, with WCML Route Modernisation being
significantly over budget, late and possibly over-specified whilst
other major projects, such as Thameslink2000 remain at the planning
stage.
— We are not convinced that competitive
forces are maximised in either the rolling stock or infrastructure
management markets, or that regulatory forces are adequately compensating
for this.
— Greater integration could be of benefit
if the benefits of the operating franchises can be retained and
spread to the management of rolling stock and infrastructure.
In particular, if greater direct (or indirect) competition can
be introduced to these areas through more integration, we believe
a case could be made.
4. CONCLUSION
We have attempted to address each of the questions
posed by the Committee, however, we make two major points on a
number of occasions that deserve prominence in this summary:
1. competition is critical to the success
of franchising in particular and the privatised rail system in
general. By this, we refer to competition in the procurement of
franchises and not rail-rail competition for the carriage of passengers.
In general, a good level of competition has been maintained over
the past few years and this remains a strong argument for not
reducing further the number of franchises or lengthening their
terms.
2. whilst significant improvements and value
for money have generally been achieved by the operating franchises
over the past decade, the point is approaching at which the network
infrastructure will become the principal constraint on any further
material enhancements to the quality of service or capacity. The
ability of the franchises to drive further significant improvement
will become severely limited. The focus of Government and the
wider industry should therefore move to the area of network development.
A final significant point is that the transition
from the SRA to DfT Rail appears to have gone well, probably better
than many expected. However, the main criterion of success will
be DfT's ability to address the significant issue of major network
capacity enhancement upon which the long-term success of franchises
will ultimately depend.
26 June 2006
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