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Westminster Hall

Thursday 25 February 2010

[Janet Anderson in the Chair]

Rail Fares and Franchises

[Relevant documents: Eighth Report from the Transport Committee, Session 2008-09, HC 233, and theGovernment Response, HC 1004, Session 2008-09.]

Motion made, and Question proposed, That the sitting be now adjourned.-(Kerry McCarthy.)

2.30 pm

Mrs. Louise Ellman (Liverpool, Riverside) (Lab/Co-op): The Select Committee report that we are discussing reflects long-standing concerns about the rail franchise system and rail fares, and follows previous inquiries on those topics in 2006. The key issues for consideration are the absence of any real transfer of risk from the public to the private sector, a complex and expensive fare structure for many, and inadequate passenger support services that are seen to be at risk at this time of recession.

The inquiry was held as the recession impacted on rail, and one of the consequences was to make the 9 to 10 per cent. passenger growth projections anticipated in the last rail franchise round unrealistic. Indeed, while our inquiry was sitting, it was reported to the Public Accounts Committee that several train operating companies were displaying what the Department for Transport called red-light warning signals. Specific concern focused on the east coast main line, which had already lost one franchise operator when GNER defaulted and National Express was awarded the contract. At our meeting on 17 June 2009, the Secretary of State for Transport, Lord Adonis, assured us that no TOC was reporting financial difficulties or seeking renegotiation of its contract. Our Committee strongly holds the view, which we reiterated at the time, that franchise operators in trouble should not be permitted to renegotiate what they had agreed.

Two weeks later, on 1 July, it was announced that the Secretary of State had refused National Express's request to renegotiate contracts on the east coast main line. The contract was to be relinquished, and the Government would establish a publicly owned company to run the east coast main line service until refranchising in 2010. The Transport Committee supported that decision-we had made strong representations against renegotiation-but we stated clearly that we wanted the franchise to remain in the public sector so that there could be a comparator for private sector franchises. We were told that that would require new legislation, but we have not seen any intention to go ahead with it, which we certainly regret.

What are the key issues in our report, and where are we now with the major points that were raised including, first, the important question of risk to the taxpayer? There is still a lack of information about the financial stability of the franchise operators. This is of particular concern in the current economic climate and for the medium-term future. It is important because the level of contingent liabilities in transport is high, and much of it relates to rail.

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In essence, the cap-and-collar revenue and risk-sharing agreement keeps the financial risk with the taxpayer. TOCs should not be allowed to escape their responsibilities through special vehicle financial arrangements if they default. We felt that National Express should not have been able to retain its two other franchises if it defaulted on its commitments on the east coast main line, but it appears that the franchises are to be allowed to run their course, although extensions that might have been agreed will be denied.

Stephen Hammond (Wimbledon) (Con): I have listened carefully to the hon. Lady. I wonder whether she would care to give the Committee's view on this. As I understand it, the special purpose vehicle was not connected to the holding company as a direct result of the initial franchise negotiation. It was because of the way that franchising is undertaken, and not something that is necessarily a fault of the company. The fault is with the negotiation that was done at the time of the franchising renegotiation.

Mrs. Ellman: I thank the hon. Gentleman for his comments. The Committee has continually criticised the way in which franchise agreements have been put together, and our comments deal with that. This goes back to the question of risk. If some of the thinking behind the franchise arrangements is that the burden of risk should be transferred from the public to the private sector but the franchise arrangements do not reflect that, the criticism lies with those who arrange the franchises.

Stephen Hammond: I thank the hon. Lady for that answer on risk. Again, this goes to the heart of what franchising is. Relatively short franchises are set up under special purpose vehicles. Does she accept that if they were set up so that the franchise is against the holding company, there would be a heavier element of risk to the company, with the obvious result that the Government would see less in premiums? What is the Committee's view on that?

Mrs. Ellman: I thank the hon. Gentleman for his additional comments. The Committee has always been concerned that if the premiums demanded were too high and risked reducing services or jeopardising the TOCs, that, too, would be an error in the franchising process, and we have drawn attention to that in previous reports.

Our report also deals with passenger services and the threats to them. The range of services includes refreshment facilities, station security and booking offices, the provision of which impacts on passenger safety. There have been many complaints about TOCs trying to reduce passenger services in an attempt to reduce their costs and, in some cases, the Secretary of State has stepped in and not allowed that to happen. Passenger Focus, which does excellent work in the interests of the travelling public, has highlighted these issues, and it is encouraging that the new chairman of the Office of Rail Regulation, Anna Walker, has made public statements expressing her concern about the reduction of passenger services.

We welcome the inclusion of important passenger services such as improved stations, added CCTV, and cycle and car parking in the new South Central franchise for Southern Railways. We hope that it will be a model for future franchises. Recent statements by the Secretary
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of State encourage us to think that that might be the case. I shall make particular reference to the recently published Department for Transport document, "The Future of Rail Franchising", which discusses passenger services, the length of franchises, risk-many of the matters referred to in our report-and three new franchises that are under consideration. We would like the proposals in the document to relate to franchises as a whole, and I shall refer to that later in my contribution.

The third area that we looked at was fares. We repeated our long-standing, strong concern about the complexity and cost of fares and about the difficulty many people experience accessing cheaper tickets. We recognised that there are many good deals to be had, but for the passenger who perhaps does not have access to the internet and cannot arrange their journeys in advance or at specific times and days, the increase in fares is horrendous. We repeatedly expressed concern about this.

We are pleased that the Secretary of State accepted our recommendation to continue the retail prices index plus 1 per cent. formula for increases on most regulated fares. That was particularly important because, at a time when inflation was set to fall, there were reports that the train operating companies were attempting to have that formula removed so that they could increase fares, when they ought to have been reducing them.

We were also pleased that the Secretary of State promised to remove the basket of fares which allowed individual fares to rise by up to five times as much as the national increase. That promise was carried out and the basket for regulated fares has gone, but it is not at all clear whether its removal is for one year only-this year-or for the foreseeable future, so I seek clarification on that.

In July 2009, the RPI stood at 1.4 per cent., and most regulated fares fell in 2010-the first fall since privatisation-but there were concerns that the train operating companies would seek to recoup this through cuts in services or increases in unregulated fares. Last November, the Association of Train Operating Companies announced that overall fares would rise by an average of 1.1 per cent. for 2010, but this has masked major increases in some areas, particularly in unregulated fares. For example, the increase in the price of a First Great Western London to Swindon supersaver ticket by a massive 15 per cent. at a time of falling inflation is unacceptable.

The Parliamentary Under-Secretary of State for Transport (Chris Mole): I assume that the Committee accepts that, although there may be one or two exceptions in the unregulated fares area, 60 per cent. of tickets are purchased on regulated fares. Therefore the vast majority of the travelling public have seen a fall in their ticket prices from January this year.

Mrs. Ellman: I thank the Minister for his intervention, but the logic of his comment means that 40 per cent. of passengers are travelling on unregulated fares. An increase of 15 per cent. can cause great hardship. Indeed, there are other examples, including the London to Liverpool anytime single fare and the London to Manchester anytime return ticket, the costs of which have increased by 6 per cent. These figures should not be taken lightly.

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Norman Baker (Lewes) (LD): I support the hon. Lady's Committee on this, and the Minister's intervention concerns me. Although it is true that regulated fares have decreased because of inflation this year, the decrease has by definition been marginal, whereas the increase in unregulated fares has in many cases been large, as the train companies have sought recompense for the reduction in regulated fares. Consequently, as the hon. Lady says, there has been a massive increase in some fares way beyond inflation, which is unacceptable to the public at large.

Mrs. Ellman: The hon. Gentleman makes an important point, and I accept the thrust of what he is saying. I hasten to add that First Capital Connect, Merseyrail and TransPennine froze their fares, and they should be praised for doing so.

There is concern that this year, in contrast to its previous practice, ATOC rather mysteriously refused to publish its unregulated fare increase by operator. In past years it has published such information, but this year they did not do so. When information about fare increases was requested, it agreed that it had the data, but it declined to give out the information or publish it. That unacceptable practice has led members of the public to wonder whether it masks high increases in unregulated fares. I call on ATOC to publish all train fare increases by operator as it has done in previous years.

According to information from the House of Commons Library, rail fares in January 2010 were 41 per cent. higher in real terms than in January 1987, and we should be concerned about the rising trend in rail fares. I recognise that ATOC has embarked on a review of fares. I am glad that it has responded to the concerns expressed by our Committee and by many others, including passenger representative groups, such as Passenger Focus. That review is welcome, but we will have to see what the outcome is.

I repeat the Committee's previous calls for the Government to review the distribution of taxpayer and passenger contributions to fares, because although I may criticise the individual train operating companies for what they are doing, and sometimes for trying to hide what they are doing, I also recognise that the Government, too, have a responsibility in respect of deciding to fund the travelling public. It is important that the public have adequate information so that high individual increases cannot be hidden.

Rail is a success story, with ridership at its highest level for 60 years. Rail received a subsidy of £3.86 billion last year, and it is essential that that sum brings value for money. It is always important that the public receive value for money for public investment, and that will be increasingly critical in the years ahead. It is encouraging that a number of the Committee's key recommendations are advanced in the Government document called "The Future of Rail Franchising", which was issued in January by the Department for Transport. For example, it proposes franchises of 15 years, and perhaps longer, but they would be conditional on the train operating companies showing what additional benefits and investments they will bring and having adequate break points, so that steps can be taken to remove those franchises if the operating companies do not fulfil their promises.

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The document suggests that there should be a new look at the transfer of risk from the public to the private sector and at the possibility of higher performance bonds being required, and whether other steps should be considered. It also refers to the importance of improved passenger services as part of the conditions of awarding a franchise. The document mentions three new franchises to be awarded, which could set a trend for the future, and I hope it does.

Rail is increasingly important. The issues raised in the Committee's recent report, "Rail fares and franchises", have been raised in the past, although these are given new urgency because of the current economic climate. The report highlighted some of the problems in the franchise system. I call on the Government and the rail industry to continue to respond to our concerns in the interest of the taxpayer and of the travelling public.

2.48 pm

Stephen Hammond (Wimbledon) (Con): It is a pleasure to take part in this debate with you in the Chair today, Mrs. Anderson.

I welcome the Select Committee's report on this crucial issue and welcome the opportunity, albeit somewhat belated, to debate it this afternoon. The timing of the Committee's report and investigation was perhaps fortunate for those who are not Ministers and unfortunate for those who are, because it came at the time of the second failure of the operator on the east coast main line franchise and, thereafter, the forced renegotiation of services. That was perhaps the ultimate illustration of some of the consequences of the franchising system that the Government have put in place. As the hon. Member for Liverpool, Riverside (Mrs. Ellman) said, in 2006 the Transport Committee's report concluded

In 2009, the Committee concluded in its report that there remain

The conclusion that there are underlying problems is undoubtedly correct. Franchises are too short, too specified, discourage investment and innovation, and have not delivered the sort of capacity needs that the network requires.

Chris Mole: The hon. Gentleman and his colleagues on the Conservative Front Bench frequently suggest that the Government micro-manage and interfere too much in franchise operation. Would he care to suggest what aspect of over-specification he would drop, and what protection for passengers he would lose from the process?

Stephen Hammond: It is not a question of losing protection. Network safety is dealt with by the Office of Rail Regulation, and train operating companies must meet specifications in terms of intention to tender. Does the Minister agree that his predecessor said that 14 civil servants in his Department were writing timetables? Is that a necessary specification? He probably believes that it is a necessary specification, so I will leave it at that.

I absolutely agree with the hon. Lady that franchises are too short. Most are around seven years, and the latest-Southern-was for around six years, or slightly less. If that is compared with a train's useful life, the
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problem becomes immediately apparent. Beyond the issues raised by the hon. Lady, short franchises stifle investment and innovation, and operators are, not surprisingly, unwilling to commit their own money above the specified premia bonds because they are unlikely to get a return on their investment before their franchise ends. Longer franchises would foster more TOC managerial focus on improving services for passengers, rather than just looking ahead to the next bid. That, of course, also implies that longer franchises reduce the costs of bidding and tendering, which should facilitate more investment in the franchise, giving investors more time to benefit from their outlay and to provide a better quality of service to passengers.

All too often, Network Rail does not view the operator and its passengers as its first concern. The current short franchises undoubtedly misalign the objectives and incentives of the industry. If operating companies had franchises of at least 15 years, Network Rail would be forced to consider the operator as a long-term partner and, again, there would be benefits for passengers. As the Minister said, the Opposition's long-standing position has been that franchises across the network should generally be let for 15 to 20 years. I agree with the Select Committee's proposal that franchises should be let for up to 15 years, but that that should be towards the minimum end rather than the maximum end. I welcome the fact that in their document in January the Government joined us in that position.

A longer franchise must not be a licence for operators to do what they like for 20 years, and that point was ably picked up by the Select Committee. Clearly, the regulator will need powers to ensure that performance measures are met, and I stress that those should not be just the current performance measures. I would like more inclusive performance measures to include not only trains that are late, but trains that are cancelled. That would allow franchises to be removed from train operating companies if they consistently failed to deliver for their passengers.

Looking at how things can be done differently, Chiltern's franchise was let on a rolling basis for 20 years, which allowed Chiltern to make considerable and imaginative investment in long-term improvements, and to work closely with Railtrack previously and then Network Rail. It has invested in new trains, extra car parking places, better platforms, better stations, better buildings, and better performance for passengers. One of life's lessons is that it is a question not of how much money is spent, but of how it is spent, or not of how much is bought, but what is bought. A qualitative assessment as well as a quantitative judgement is required. An incoming Government will have to consider how, when they award future franchises, they will place emphasis on the quality of plans in each bid in terms of investing in rail improvements to increase capacity, improve services and attract more passengers. The assessment of franchise bids must be qualitative as well as quantitative.

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