Memorandum submitted by the Railway Consultancy
Ltd
1. INTRODUCTION
1.1 The Railway Consultancy Ltd is an independent
railway planning consultancy which works with Government, Train
Operating Companies (TOCs) and other rail industry participants.
Our wide range of experience has enabled us to draw some conclusions
about the efficacy of the privatised railway and the range of
franchise types which have existed over the last 12 years. In
addition, two members of staff have particular expertise in this
area. Nigel G Harris co-authored the first analysis of the impacts
of rail privatisation, whilst James M Watts recently completed
a PhD in rail franchising policy. This submission therefore includes
both our own views, and those canvassed during research.
1.2 First, however, one critical observation
must be made. It is invalid to allege any simple correlation between
rail industry structure or franchise type with traffic growth.
Whilst some franchises have undoubtedly been more successful than
others, the main determinants of rail demand in Britain are Gross
Domestic Product (GDP) and employment in Central London. Other
non-rail industry ("exogenous") issues such as road
congestion and petrol prices are also relevant, but sustained
economic growth over the last 10 years has been the driving force
behind the growth in rail traffic, a renaissance not foreseen
by those who originally drew up the plan for the privatised railway
in the early 1990s.
1.3 Once they had decided on a franchising
model for passenger rail services, however, it still remains critical
to clarify the details of this process. For instance: How are
bids to be assessed? What objectives are sought for both Government
and franchisee? This response is designed to assist the Transport
Select Committee's Inquiry into improving this process.
2. THE PURPOSE
OF FRANCHISE
RAIL FRANCHISING
2.1 A number of benefits of the rail franchising
process have been adduced in the past. These include (Wolmar,
2006):
— greater efficiencies accruing with
private sector management;
— the flair and marketing ability of
the private sector;
— easier access to capital;
— greater incentive to invest;
— transfer of risk to the private sector;
— to reduce Government expenditure/provide
Value For Money;
— to reduce political involvement;
and
— to minimise the impact of industrial
relations.
The assumed underlying aims of these are, one
would hope, increases in passenger numbers, revenues and satisfaction,
but these latter aims are not necessarily coincident. They need
to be examined in turn.
Greater Efficiencies in the Private Sector
2.2 Although British Rail was widely criticised
by the media and politicians, early entrants to the privatised
rail franchise market quickly found what academic research at
the University of Leeds had already found, viz. that BR was one
of the most efficient railways in Europe (eg in terms of train-kms
per member of staff). The possibilities for greater efficiency,
in particular, were grossly over-estimated by some of these early
players, a number of whom subsequently either went bankrupt or
left the industry.
Flair and Marketing Ability in the Private Sector
2.3 The ability of the private sector to
market itself is indeed in contrast to what Government agencies
might feel appropriate; for instance, it is difficult to conceive
of a Government department laying on the types of event that Virgin
has, in connection with the West Coast Main Line upgrade. However,
local marketing flair is of less value in a network industry such
as the railways, where some degree of consistency between franchised
elements has benefits to passengers. The detailed knowledge required
to develop successful local (fares, service) initiatives is, we
believe, better provided locally, which has implications for the
type and organisation of franchise.
2.4 The degree to which the private sector
has been able to take advantage of its skills in this area has
also varied. In the early years in which franchises were only
broadly-specified, a number of franchisees took advantage of this
flexibility to reduce services. This was entirely to be expected.
Within the current financial situation of the railways, competing
against a road network taxed in a different way, most train services
are simply not profitable. Conversely, during 2005, the Department
for Transport specified some franchises (eg Greater Great Western)
so closely that it is difficult for the franchisee to take forward
any service development proposals.
Easier Access to Capital
2.5 Although the Government should in theory
have virtually unlimited access to funds for rail investment (and
at low interest rates), in practice this is limited by the Public
Sector Borrowing Requirement. In addition, there is competition
for this money against other alternatives eg hospitals and schools.
In contrast, whilst the private sector must pay higher interest
rates, there genuinely is a huge potential for borrowing for investment—especially
when a key sector of the rail industry (the Rolling Stock leasing
companies) are in the hands of major banks. This therefore is
a benefit of the current arrangements, although somewhat by default.
Greater Incentive to Invest
2.6 Franchisees, however, have limited incentives
to invest. There are relatively few commercial opportunities for
investment in the railways because current operations are largely
unprofitable, which is itself a consequence of wider transport
policy (eg the lack, as yet, of road pricing).
2.7 Although in some cases the Government
might require a franchisee to develop a franchise through investment,
this is largely using only the project management skills of the
private sector. Investment by franchisees on their own initiative
has been rather limited, a key factor in this being the relatively
short length of franchises. If a project takes two years to complete,
then there are only five years of payback within a typical seven-year
franchise; it is therefore unsurprising that relatively little
such investment has occurred, except in the 20-year Chiltern franchise.
2.8 Moreover, the fragmented state of the
railway means that many projects founder. Greater effort is needed
to bring all parties to the table, whilst all participants are
looking (not unreasonably) for a financial return. Compensation
of a disadvantaged franchisee by one making a super-profit gain
from a project is only likely if the Government intervenes to
encourage them. Alternatively, a developer (unlikely) or PTE (only
where appropriate) may have to shoulder the capital cost—for
instance, at the recently-opened Liverpool South Parkway, where
original discussions included up to seven different train operators.
Transfer of Risks to the Private Sector
2.9 In practice, risks have not been transferred
to the private sector. This is partly because of the importance
of the railways in providing services for the City of London and
Central Government to get to work. More widely, however, one must
consider which risks really are within the ambit of the franchisee
to control. With GDP and Central London employment two of the
key drivers of rail demand, and both outside franchisees' control,
transferring risks associated with these is only possible if the
private sector prices in their impact (ie increases the price
offered to Government) within their bids.
2.10 Recent franchise types with break clauses
may also effectively limit risk transfer. If a franchise is re-examined
after (say) five years, and the franchisee wishes to exit because
the franchise is a commercial disaster, it is in a relatively
strong position relative to the Government. The franchisee can
limit its future losses by foregoing the exit penalties, whilst
the Government is likely to have to pay a higher subsidy/receive
a lower premium from an alternative bidder, and it may decide
from the position at that time, that renegotiating with the incumbent
is more cost-effective.
2.11 A further constraint on the transfer
of risk is arising through the Department's use of "cap and
collar" type arrangements. These are designed to avoid train
operators making excessive profits or losses, thereby returning
a proportion of these to the Government in circumstances in which
(implicitly) the franchise payment regime was miscalculated. When
times are good, this is equivalent to a form of taxation on these
excess profits; however, some of the effective marginal values
are rather high (eg as much as 87.5%), at which point there is
no real incentive for a TOC to make investments. When times are
bad, however, this system further reduces the risk actually incurred
by the private sector.
Reduction in Government Expenditure
2.12 Because of the difficulties in improving
efficiency, but the requirement to make a return to share-holders,
there has not been a reduction in Government expenditure on the
railways. In fact, our early analysis showed that the additional
costs of the over-complex privatised industry structure appeared
to dominate the benefits, by about £5 billion pa (Harris
& Godward, 1997). The two largest categories of extra cost
are interface costs (eg the requirement for companies to administer
arrangements with another external body) and profit margins along
a chain of command (any improvement in efficiency through specialisation
has to exceed the "slices" of profit taken by sub-contractors).
2.13 That estimation took place prior to
Railtrack's mismanagement of the infrastructure, which led to
the Hatfield accident and the response to it, and Network Rail's
subsequent extra effort and expense in bringing the system into
a fit state. With net annual franchise payments to TOCs reaching
around £2 billion by 2003-04 (excluding additional payments
to Network Rail), compared to payments to British Rail of around
£1 billion, we can be absolutely sure that the objective
of reducing Government expenditure has not been met.
Reduction in Political Involvement
2.14 It is also sometimes claimed that franchising
has the benefit of distancing the Government from day-to-day problems,
be these of industrial relations or poor operational performance.
There is some credence in this argument, although there is increasing
criticism of the Government's lack of a holistic transport policy
in which the railways might function to their maximum advantage.
Minimisation of Industrial Relations Problems
2.15 It is thought that some Conservatives
believed that rail privatisation would break the power of the
railway trade unions, largely through the fragmentation of the
industry and the consequent reduction in barganing power. In fact,
the picture has been mixed. Whilst national rail strikes are less
likely (unless, as currently occurring, the dispute is between
workers and Network Rail), wage levels have risen substantially
in real terms for some grades. In particular, one must acknowledge
the tactics of drivers' union ASLEF, who have used comparison
with other train operators to force up salaries. This has been
made possible by the relative difficulty of training up new drivers,
and the relative ease of drivers transferring from one operator
to another. Where TOCs have been poorly managed, there have been
problems with insufficient staff—even though it is possible
that spare staff existed elsewhere in the country.
Maximising Passenger Volumes
2.16 Whilst this might be an appropriate
strategy for a Government seeking an environmentally-sustainable
transport policy, it is clearly not an automatic outcome of the
franchised railway. Now that many of the obvious "quick wins"
have been gained, capital investment is often needed, in order
to permit increased traffic volumes. As this is generally not
likely to be commercially-viable, the additional funds potentially
provided through direct project funding (eg of the Channel Tunnel
Rail Link), Government's Community Infrastructure Fund and Network
Rail's £400 million discretionary fund are to be applauded.
Maximising Passenger Revenues
2.17 With many train service costs effectively
fixed (underpinned by minimum service specifications), this is
certainly a key area for TOCs. It is also potentially helpful
for the industry as a whole, because it maximises the income needed
to sustain both operations and investment. On the other hand,
it does not take into account expenditure and investment decisions
taken in other transport modes (nor, of course, the externalities
of any mode).
2.18 Some TOCs have apparently been slow
in managing issues such as minimising fare evasion, but most have
exploited loopholes in the fares regulation system, in order to
maximise income from groups of passengers without a real alternative.
First Capital Connect's recent decision to impose ticket restrictions
during the evening peak is a classic case of this.
2.19 However, a potential problem here is
that existing franchisees may benefit from positive short-term
responses, whilst passengers' longer-term negative responses (eg
buying another car) may fall on the next franchise incumbent.
It is not necessarily the case, therefore, that revenues are being
maximised in the longer-term, nor that this is desirable.
Maximising Passenger Satisfaction
2.20 It might appear, at first sight, that
maximising the satisfaction of one's customers was a pre-requisite
for any commercial business. However, this is not strictly the
case—some of the expenditure required to achieve that satisfaction
may not be commercially-worthwhile. Some passenger needs are still
clearly unmet (eg addressing peak overcrowding), whilst others
are becoming more important, as public expectations rise.
2.21 How passenger needs might be incorporated
into a franchise specification depends upon the nature of both
the type of franchise and passenger needs themselves. Nevertheless,
the current franchising process does include a feature whereby
bidders are asked to price up options beyond the base franchise
specification. Passenger needs can be incorporated into these
options and subsequently reviewed during the franchise; this approach
was initiated under the 15-year enhanceable franchise for Wales
& Borders. Value for Money and affordability are clearly both
important considerations in the assessment of such bids.
3. THE PROCESS
OF FRANCHISING
Franchise Types and Objectives
3.1 The franchising process has, over the
years, varied significantly in the aims of franchises, and the
types of agreement set up to achieve them. Since 1999 the strategies
have included:
— Long-term 20 year franchises (2000-01)
where operators committed to Infrastructure Upgrades (IUGs) and,
where appropriate, rolling stock replacement.
— Short-term two year extensions (2001-)
(the maximum franchise extension permitted under the 1993 Railways
Act, without having to go out to competitive tender).
— The Enhanceable Franchise concept
of 15 years (2001-02).
— Management contracts of two years
during merging of franchises or at the end of franchises whilst
they are being re-negotiated (2001-).
— Short-term five to seven year prescriptive
service delivery contracts (2002-).
— Early termination and forming of
an interim SRA controlled holding group, with the possible objective
of returning the operation to the private sector (2003-).
— Devolvement to a PTE in relation
to administration and operator selection for a 25-year Enhanceable
Franchise (2003-).
3.2 The diversity of approaches adopted
has not been entirely through choice, since the industry has had
to react to numerous crises, eg the collapse of Railtrack in 2001
and the growing realisation of TOCs' financial fragility, due
to over optimistic bidding from the first round of franchising.
Little in the way of underpinning evidence exists in the public
domain as to the rationale used by the awarding authority in formulating
the ground rules for a franchise competition or changing the format
of a franchise during the bidding phase, as seen with both the
South Central and South West Trains franchises (both originally
supposed to be 20 year franchises, subsequently reduced to operate
under the Short-Term Prescriptive Service Delivery style contracts
(Watts, 2006)). We believe that the lack of public accountability
of the awarding authority as to the strategy underpinning the
franchise process is unacceptable, since taxpayers' money is being
used to fund rail services. This was supported by local stakeholders
and bidders alike, during consultations/meetings undertaken as
part of the research.
3.3 In addition, there has, from time to
time, been comment from potential bidders as to the difficulty
of bidding against criteria which are both unclear and vary over
time. We observe from the variations in this process differences
in the level of service development in the railway, and believe
that it is inequitable that these should be dependent merely upon
the depth of the Government's budget at the time of letting.
3.4 The different types of franchise are
thought inherently likely to provide different types of outcome;
Harris (1999) described a number of different types of competitive
strategy which bidders might adopt. However, in responding to
any bid process, it should be noted that there is a potential
for the process to generate sub-optimal outcomes. Franchisees
making unrealistically-optimistic bids (in order to win the franchise)
may suffer bankruptcy later on, whilst those with a better understanding
of the real situation may not win in the first place.
3.5 We would not recommend the overly-prescriptive
type of management-only contract. We believe the benefit of private-sector
involvement is reduced, when the contract is reduced to one of
management only. Moreover, there is a danger that civil servants
based in London will take decisions which would better be taken
with more locally-based railway staff with a better knowledge
of local conditions.
3.6 Where franchises have been set up to
assume that existing service levels and numbers of trainsets will
continue throughout the period, problems are arising where growth
is occurring owing to exogenous factors. This is because some
marginal developments (such as the addition of extra vehicles
for peak period traffic) are not actually profitable, so the TOC
has no incentive to act, and there are limited other options.
If crowding penalties are not in place, the quality of travel
will fall; it is unclear to what extent significant real fare
increases can be used to deter demand, within the overall "RPI+1"
fare increase limit.
3.7 It should also be noted that the industry
has been forced to muddle along for 10 years with the inherent
incompatibility of franchising and open access competition, an
issue which has only really come to prominence with the GNER/Grand
Central debate of 2006. Either one has protected franchises for
the operation of part of the network, or one has competition for
particular train services; the only sensible ways out of the current
impasse are through legal decision or a compromise organised by
Network Rail as infrastructure provider, and neither of these
are entirely satisfactory.
4. THE ASSESSMENT
OF BIDS
4.1 Analysis of the criteria and processes
used in the franchise bid evaluation process was the underlying
element of Watts' research (2006). Since 1999 there have been
numerous sets of franchise selection criteria, outlined in documentation
from the sSRA, SRA, DETR, DTLR and DfT. An inherent weakness of
these documents/press releases has been the failure to specify
in any detail the selection criteria requirements (including their
respective weightings in the bid evaluation process) in any depth,
beyond that best value for money and affordability issues are
primary criteria. Typical requirements placed upon bidders as
seen in "The Statement on Passenger Rail Franchising"
(December 2001) included commitments to:
(a) better performance and reliability;
(b) reduction in overcrowding;
(c) better services and facilities;
(d) improved safety and personal security;
(e) improved accessibility for disabled people;
(f) putting passengers first; and
(g) improved passenger information and retailing
(DfT, 2001).
However, not all of these generic concepts have
been quantified, although most of them could be, an issue we first
raised with the SRA about five years ago.
4.2 There has been some discussion about
the quality and quantity of information required for bids, and
the extent to which the information being supplied does really
enable accurate assessment to occur. These criticisms were perhaps
most forcefully expressed during a period a few years ago when
a number of apparently-perverse franchise decisions were made.
Whilst it is indeed true that bids cost around several million
pounds, successful bids normally include a degree of planning
for the franchise which would have to occur in any scenario.
4.3 Reducing the number of franchises probably
reduces the amount of administration associated with franchise
letting and bidding. This is in addition to the economic benefits
of larger franchises, which follow the logic initially suggested
by Preston's (1994) analysis. However, some of the economies of
scale have subsequently been secured across owning groups eg through
the provision of training centres.
4.4 However, there are some variables which
do not appear to enter the franchise assessment process. Despite
employment law protection, staff morale can still be affected
by the uncertainty surrounding their future under a new owning
group. Administrative costs are also incurred by many other parties
(suppliers etc) when a franchise changes hands. There is, therefore,
a case for giving the incumbent a slight advantage over competing
bids.
Other Recommendations and Directives
4.5 The Transport Committee should be aware
of two strands of previous relevant work concerning the management
of rail franchise awards.
4.6 The Welsh Affairs Select Committee
has undertaken two separate inquiries into the award process for
the Wales and Borders franchise: "Transport in Wales"
(Session 2001-02) and "The Provision of Rail Services in
Wales" (Session 2003-04). The 2003-04 inquiry revealed (based
upon a written memorandum from the SRA) that, for the Wales and
Borders franchise that the franchise selection criteria were:
(a) Rail passenger services—outputs
and constraints;
(b) Delivery and mobilisation;
4.7 The inquiry also noted that there appeared
to be two sets of criteria:
(a) Set 1: Criteria which are displayed in
the "Invitation to Tender" (ITT) documentation, SRA
objectives etc that are in the public domain and which bidders
are expected to meet in submitting bids; and
(b) A second set of criteria for evaluating
bids (once received) that are unrelated to fulfilment of the first
set of criteria and withheld from the bidders in the franchise
competition. This contravenes DfT Directions and Guidance to the
SRA of 2002, in that bidder must be made aware of the government's
objectives and franchise bid assessment criteria (HOC, 2004a).
4.8 There were two significant recommendations
stemming from the Committee's Inquiry (HoC, 2004a). First, the
DfT's Direction and Guidance had not been followed due to the
split by the SRA of the criteria and scoring and marking system;
these should have been combined to enable bidders to understand
the objectives set by the DfT and what was required of a bidder
for a franchise. Secondly, the SRA should publish a full summary
of the negotiations concerning the award of the Wales and Borders
franchise including the level of services offered by Arriva at
each stage; this would allow taxpayers to be aware of funding
levels for existing services and the cost of providing improvements.
4.9 The Government's response to these recommendations
(HoC, 2004b) was that the SRA had the responsibility for ensuring
that bidders were made aware of criteria and it was the SRA's
decision whether or not weightings of criteria were made public.
Government noted that it would be not in the SRA's or bidding
parties interests, to disclose information concerning franchise
negotiations since it could weaken both parties' negotiating positions
and the SRA's position in future franchise competitions. In light
of the transfer of franchising responsibilities to the DfT it
is recommended that the Committee investigates to what extent
the above mentioned recommendations have been taken into account
by the DfT in the existing franchising regime.
4.10 In May 2004 and June 2005 the SRA published
documents entitled "Strategic Rail Authority Franchise Replacement
Process". Both documents outlined in some depth the mechanics
of franchising. This included flow charts of typical criteria
and sub-criteria utilised in evaluating bids, including some indication
of weightings. Criteria include: Service performance (50%), Service
quality (20%), Other passenger service obligations (12%), Franchise
management (11%) and Migration (7%) (SRA, 2005). Despite this
information being provided, a number of weaknesses could be cited
with both documents, in that:
(a) the criteria and weightings provided
were for illustrative purposes and these would vary on a franchise
by franchise basis;
(b) specific areas are vague and left for
interpretation, eg "Franchise management, 11%" (SRA,
2004); and
(c) no methodology is provided as to the
chosen criteria and sub-criteria or weightings.
4.11 The impact of EC Directive 2004-17
(31/03/04) upon the re-franchising process is significant in terms
of the contracts award procedure/criteria used. The specific requirements
of Section 55 of the Directive are set out in an Appendix to this
note. Interpreting this in the context of the UK rail franchising
process suggests that key requirements placed on the awarding
authority include:
(a) Disclosure of the exact nature of the
criteria being used in the bid assessment process.
(b) Disclosure of the weightings/rankings
of the criteria for the UK franchising regime in relation to the
assessment of bids.
4.12 Despite the Directive stipulating the
need for transparency and clarity of the weighting/ranking of
criteria used in bid assessment measures, a number of potential
shortcomings can be cited with it. First, no specific requirement
exists compelling awarding authorities to provide the exact weightings
of the criteria. The clause allowing them, at their discretion,
purely to provide a ranking of priorities to bidders, fails to
provide the stated transparency of the bidding process. Secondly,
no requirement is placed upon the awarding authority to disclose
the weighting/ranking methodology for each criterion. Therefore
a criterion may be assigned a specific percentage value, yet the
scoring methodology in meeting such a percentage is unclear. Again,
this represents a lack of transparency. Thirdly, the application
of the Directive towards the private franchising of rail services
within the UK and Europe is very unclear, and no specific mention
of its application directly on the UK rail franchising market
is provided. However, the SRA's documents may be seen as a response
to this directive.
4.13 Nevertheless, consultees to the research
expressed a number of criticisms:
— The weightings/requirements for the
"technical" and "financial" assessments are
not currently transparent and can be subject to market manipulation.
77% of consultees were unhappy with this.
— The existing bid evaluation process
sees different elements being assessed by different people (often
independent consultants, appointed by the awarding authority).
69% of consultees expressed a concern at this, in that the existing
arrangement fails to enable a central consensus to be made concerning
the overall quality of a particular bid.
— The existing franchising regime possesses
too many Key Performance Indicators (KPIs). 62% of consultees
felt that this represented excessive micro-management by the awarding
authority.
— Criteria and KPIs should not be too
specific, as this stifles innovation in the bid design phase for
the bidder.
— Indicative costs of compliance with
franchise criteria/KPI should be clearly indicated.
— KPIs, where provided, should not
be pre-determined, due to the differing franchise base conditions.
4.14 There are contradictory views about
the requirement for standardisation of franchise agreements. Many
consultees felt that the agreements often did not take into account
the vastly differing base conditions and operational environments
of different UK rail franchises. However, it was accepted that
many areas of the agreement could not be altered, due to the common
legal requirements placed upon operators. Moreover, experience
with track access contracts (which are often negotiated "back-to-back"
with franchise agreements) has demonstrated that a consistent
style is essential if other parties (eg Network Rail) are to perform
in a non-disciminatory way, for instance in the allocation of
train paths. Despite this, it is not to say that service improvement
requirements could not be written into new franchise agreements.
Any improvements included in franchise agreements would need to
ensure that VFM was still maintained and were presented in a manner
that did not constitute excessive micro-management from an operator
perspective.
4.15 Examination of the German franchising
process (Wettbewerb), where tendering for regional lines occurs
at a regional level by the Lander, revealed vast differentiation
in franchise agreement content. This is despite guidance concerning
the Wettbewerb process, having been issued by Federal Government.
5. COMPETITION
AND VERTICAL
INTEGRATION
5.1 Whilst the EU Directive of 1991 specified
that infrastructure and railway operations should be accounted
for separately, Britain and a number of other countries have actually
split these responsibilities between different companies.
5.2 The underlying consensus amongst both
local stakeholders and a number of senior figures within the franchising
environment who were canvassed, was that total vertical (re-)integration
of franchises raised a number of potential operational difficulties
such as:
(a) arrangements for maintenance;
(b) operational integrity—prioritisation
of rail services at major junctions/delay attribution issues;
(c) cost impact upon franchisees—the
need for additional subsidy to maintain franchises; and
(d) the economic viability of undertaking
any infrastructure upgrades when the return on investment would
exceed the franchise length.
5.3 We can understand these difficulties,
and would generally agree with them. However, it was noted that
franchise areas where the incumbent operator was the sole operator,
vertical integration can be appropriate; this has effectively
happened on the Isle of Wight.
5.4 In the meanwhile, there was strong support
for greater integration between TOC and Network Rail operational
staff, through creation of Integrated Control Centres (ICCs).
Integrated Control Centres (ICCs) were deemed as an important
mechanism for trying to reduce delays per operational incident.
Greater integration is, however, not seen as helpful; indeed,
79% of consultees were against greater vertical integration within
franchise specifications, although 57% of them welcomed the possibility
of investing in train service performance, which was seen as the
TOCs' core business.
5.5 Short of renationalising the whole railway,
therefore, it appears to us that only minor "tidying-up"
is likely to be worthwhile. This needs to address the current
confusion on the East Coast Main Line (where the Department appears
to have let a franchise to one operator, and ORR approved access
rights for another, without consultation either with each other
or Network Rail), but we believe that such situations can be managed
through negotiation—especially if the criteria are made
public and transparent. Renationalisation would also need to retain
the benefits being generated in the railfreight sector, where
competition does appear to be providing the desired outcome, but
where track access on a predominantly-passenger network is a key
issue.
6. CONCLUSIONS
6.1 There have been a wide variety of franchise
types since rail privatisation in Britain in 1994. Although the
importance of exogenous factors such as the growth in GDP means
that one should not infer a simple direct relationship between
the type of franchise and its outputs, particular franchise types
make some actions more or less likely. For instance, longer franchise
periods are more likely to encourage investment, whilst the risk
to Government can be minimised through the insertion of break
clauses.
6.2 There are a number of reasons which
underpinned the original choice of the passenger rail franchising
model, but for most of them the outcome has been at best patchy.
6.3 There is a balance between the necessary
commercial freedom of franchisees and the need for Government
to specify services. We believe that there is a sensible point
at which benefits can be had by both parties, but the pendulum
has swung in recent years from too much freedom to being overly
prescriptive.
6.4 The franchising process until now has
not been transparent, but this is necessary, for a number of reasons.
First, it should reduce bidding costs and uncertainty; secondly,
it should maximise the likelihood of achieving the desired objectives,
and thirdly, it has been recommended by both the Welsh Affairs
Committee and the European Union.
6.5 Some tidying-up of arrangements with
the current franchised railway would be helpful, but we cannot
see any alternative within the current general framework which
would be significantly better.
6.6 Meeting end user needs can be achieved
through the specification of options in franchises, but is subject
to Value for Money and affordability constraints.
Annex
REQUIREMENTS OF
EC DIRECTIVE 2004-17, SECTION
55
(a) Contracts must be awarded on the basis
of objective criteria which are transparent, non-discriminatory,
offer equal treatment and ensure tenders are assessed in conditions
of effective competition. Therefore the primary criteria must
be "the lowest price" and "the most economically
advantageous tender".
(b) To ensure equal treatment in the award
of contracts, based upon established case law, it is necessary
to ensure transparency and that all tenderers are reasonably informed
of the criteria and arrangements which will be applied to identify
the most economically advantageous tender.
(c) The awarding authority is responsible
to indicate the criteria for the award of the contract and relative
weighting attached to each of those criteria. This must be done
in sufficient time for tenderers to be aware of them, when preparing
bids.
(d) The awarding authority may refrain from
disclosing the weighting of the selection criteria in fully justified
cases, where the weighting cannot be established in advance, due
to the complexity of the contract. In such circumstances, the
authority must indicate the descending order of importance of
the criteria.
(e) Where the awarding authority decides
to award a contract to the most economically advantageous tender,
tenders should be assessed to determine which bid offers the best
value for money.
(f) The awarding authority should determine
economic and quality criteria which must help it determine the
most economically advantageous tender.
(g) Determination of criteria depends on
the object of the contract since the awarding authority must assess
the level of performance offered by each tender against the specified
contract objectives and value for money measured.
(h) To guarantee equal treatment, selection
criteria, such as meeting social/environmental requirements, may
enable the awarding authority to meet the needs of the end users,
as outlined in the contract documentation (OJEU, L134/9, 2004).
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