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25 Feb 2010 : Column 165WH—continued

When I went to Warrington Bank Quay, my office produced a return ticket costing £215. When I said, "No, I want to go standard, not first class," they said, "That is standard. First class is much more." A £215 ticket to Warrington and back is not good value. As for the £1,002 first-class open return fare from Cornwall to Scotland quoted in the papers, I understand that the company sold only one ticket, to a journalist who wanted to carry out the journey. Perhaps the Minister has gone on that trip. Why do the train companies not do themselves a favour? Nobody will pay that much for
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a ticket, so why have it in the book? Why not just cut the price by two thirds? They might actually sell a couple of tickets.

Chris Mole: I just want to assure the hon. Gentleman that, apparently, the publication of that figure in the first instance was an error. The fare was corrected in December.

Norman Baker: I give way to the Committee Chairman.

Mrs. Ellman: Does the hon. Gentleman agree that it is also to be regretted that there has been a reduction in the times during which off-peak saver tickets can be used? For example, on the Liverpool to London route-I am sure that it happens in other areas as well-fewer trains can now be used for off-peak services. That is another, hidden way of reducing services and value for the passenger.

Norman Baker: That is exactly right. Some train companies have introduced super-saver fares to persuade the Government that they need not worry so much about off-peak fares. As soon as the train companies have their way on off-peak fares, the super-savers disappear or become almost unobtainable. We must be careful. Train companies are using their flexibility on unregulated fares to the maximum to push them up in a completely unhelpful way. There is a serious issue of regulation for the Government in how they deal with the comparison between regulated and unregulated fares. There is a case for introducing a ratio, so that walk-on fares never cost more than a certain multiple of the pre-booked advance fare. That might be one way to deal with the problem. Things certainly cannot be allowed to carry on as they are.

There is another issue-it is a techie issue, but Passenger Focus raised it with me yesterday-about the distribution of ticket moneys. I understand that an incentive exists for the train companies to sell advance fares because they keep the money, whereas they have to share more of the money from walk-on fares. I do not understand how that works, but it certainly seems to be an issue. If it is true, there might be a case for saying that the train companies should keep the money from the walk-on fares and share the money from the advance tickets. That might be a better way of encouraging them to keep walk-on fare prices down.

The fares issue will not go away. It will be the biggest inhibitor of train travel in the years to come. It would be tempting for a Government of no matter what colour, faced with a difficult financial situation after the next election, to push up rail fares to skew even further the balance between what the passenger pays and what the taxpayer pays. That would also be a way to limit business on the railways to restrain the clamour for further enhancements. That was British Rail's policy back in the 1970s and 1980s. We do not want to return to those days.

Social desire for mobility, the environmental case and the business case all demand an expansion of the railways at a price that people can sensibly and realistically afford. That needs a change in Government policy to ensure that the railways do not simply become a plaything for those who are better off than the people who use them now.

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4.14 pm

The Parliamentary Under-Secretary of State for Transport (Chris Mole): It is a pleasure to serve under your chairmanship, Mrs. Anderson. I welcome the opportunity to have this debate, which comes at a good time. Three new franchise competitions will be launched this year: Essex Thameside, which currently trades as c2c, Greater Anglia and the East Coast franchise. We have heard some interesting contributions from the Chair of the Select Committee on Transport, my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman), from my hon. Friends the Members for Sheffield, Hillsborough (Ms Smith) and for Selby (Mr. Grogan), and from the two Opposition spokespersons.

The National Audit Office report on rail franchising, published in 2008, found that the franchise system had delivered good value for taxpayers and generated keen competition for franchises. We remain committed to raising operational performance through the rail franchising process. By 2014, for example, we want punctuality to reach 92.6 per cent. or better. However, the performance of the franchise system in the recession raises inevitable questions and highlights major issues about how franchise contracts and competitions handle risk and responsibility.

To set out our thinking and potential changes in the next round of franchises, the Department for Transport published "The Future of Rail Franchising" on 20 January this year. We are still debating the issues, so the views of the Committee are particularly timely and valuable. Franchising must strike difficult balances between competing objectives. The Committee report recognises that when it points out that contractual controls on services, ticket offices and fares protect passengers, but prevent operators from responding in a downturn by reducing services and costs. The Government have invited views on that and several other key matters considered in "The Future of Rail Franchising". Operational challenges vary between franchises, as does the scope for investment, new stock or major service change. That is why each franchise must be considered separately.

There is no division between the Secretary of State and me on the question. The point that I was testing with the hon. Member for Wimbledon (Stephen Hammond) was about the Conservative line, which seems to be that if we extended franchises to 20 years or more irrespectively, it would somehow solve all the problems. The hon. Member for Lewes (Norman Baker) may have suggested the same in the past. However, I welcome the recognition that the KPMG report has brought new thinking on how variations in the economy during the life of a franchise might enable the management of risk sharing over the length of the franchise.

We intend that the next rail franchises will be let for a minimum of 10 years. Bidders will be able to make proposals for terms longer than 10 years in return for commitments to additional investment. That will allow us to receive the benefits of continuity and longer-term partnership. However, we would not want to rule out shorter franchises in future. There is no single right length for a franchise, as changes on the network can make the future of the business hard to predict for prospective bidders.

One of the most important issues that we are considering is the allocation of risk. The franchise system must be designed to deliver for passengers and taxpayers across
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the economic cycle, not just in a downturn. The recent downturn has tested the performance of the current system in exceptional circumstances. National Express's inability last year to continue its East Coast franchise due to economic conditions was regrettable. The current franchise system takes account of the fact that franchisees may face financial difficulties, and is designed so that core passenger services are not disrupted if an operating company defaults. The cost of terminating the East Coast franchise will be recovered from a performance bond maintained by National Express East Coast. The overall cost to the taxpayer will depend on factors such as ticketing revenue over the next 18 months, but the Government will receive all the revenues.

That high-profile default and subsequent contractual termination must be viewed against the broader canvas of franchising as a whole. However, events have led us to reconsider the current franchise arrangements designed to ensure that the train operator remains solvent and cannot walk away from the contract without a monetary penalty. We therefore propose to increase the amount of the bond that franchise operators provide to cover the Department's costs in the event of default. We will also re-examine how parental guarantees are calculated, so that owning groups are required to stand behind losses incurred by the operator to a predetermined level. We propose to make it easier for operators to invest their own money during the life of a franchise and receive part of that investment back after the franchise ends. In assessing bids, we intend to place greater weight on additional ideas and options generated by bidders.

Stephen Hammond: I am interested in the Minister's last two remarks, and wonder whether he will explain them. I am intrigued by the size of the performance bond that National Express gave the Department, which I understand was £40 million, although he may not be able to give an indication of that. What increase in the performance bond does he think would be necessary for a longer-life franchise? He just slipped in a remark that operators might be expected to put in extra investment, which they might get back. Will he explain that thinking?

Chris Mole: On the first point, we would want to be sure that what we were getting from the business not only covered the administrative costs associated with refranchising, which is the primary purpose of the bond, but recognised that the taxpayer would not be getting the benefit of a premium payment, which they might have got had the franchise continued for longer. We would have to assess how much that came to and build it into the franchise. Of course, there is a cost associated with asking the bidders to do that. On the anticipation that operators might invest more money, I understand that there are concerns among operators about whether they will realise the benefits of investing in stations, for example, during the life of the franchise they hold or whether those benefits will accrue to the operator that takes on the franchise afterwards.

Stephen Hammond: Is the Minister implying that he would expect a residual value at the end of a longer franchise that may have to be transferred and that a performance payment might be needed from the new franchisee to cover that residual value?

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Chris Mole: I think the hon. Gentleman has put it quite well.

Norman Baker: It is helpful for the Minister to recognise that conundrum. I draw to his attention the fact that the cap-and-collar arrangements also discourage train companies from investing, because a great deal of the benefits they accrue is deemed to be generated profit and therefore returns to the Department. Is there a way to ring-fence the innovations of train companies so that they are not caught by those arrangements?

Chris Mole: We would always seek to avoid such protection arrangements that produce perverse incentives, such as discouraging operators from investing in the promotion of additional journeys because the benefits would not accrue to them, but return to the Department.

As I was saying, in assessing bids, we intend to place greater weight on additional ideas and options generated by bidders. We are looking at rewarding franchisees that come up with investment or improvement proposals to be delivered after the contract term. We need to keep a strong focus on performance and make sure franchisees deliver for passengers. All rail franchises incorporate performance requirements, which we monitor closely. We aim to ensure that all rail franchise commitments are delivered, that franchise agreements are complied with and that, if appropriate, the taxpayer is reimbursed when operators do not deliver the obligations in their franchise agreements.

Mrs. Ellman: Does the Minister agree that Passenger Focus does excellent work in monitoring how passengers feel about the experience of rail travel, and that its concerns should be taken up and its recommendations considered seriously?

Chris Mole: If my hon. Friend has a little patience, I will come to that matter in a few paragraphs.

The Department adopts a stepped approach to enforcement to ensure that any action taken is proportionate to the contravention. We have a range of tools, including the Secretary of State's powers to make an enforcement order or impose a financial penalty. If an operator falls below the defined levels, we can require them to produce a remedial plan to restore performance, but if deterioration continues, the Department can terminate the franchise. It remains our position that we do not renegotiate franchises. We expect operators to abide by the requirements of their franchise agreements.

There have been calls for the East Coast franchise to remain under Government control as a public sector comparator. That is not possible, because legislation requires franchises to be put out to competition. Data from the months of public operation will of course help us to learn more about the business. However, I do not believe that robust conclusions about public versus private ownership could be drawn from a longer period of public operation.

Norman Baker: I accept that a legislative bar exists, but does the Minister accept that it would not be complicated or time consuming to remove it?

Chris Mole: Whether or not that is the case, I am not sure that it would be good for the industry to inject such uncertainty into the framework. I am also not sure what could be compared with the East Coast franchise if we
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made it into a longer-term public comparator. Among the dozen or more franchises, not a great number are comparable with the East Coast, which is a majority long-distance operator. There are many commuter, short-distance and regional franchises.

Generally, our approach to franchises is about recognising that they are all different. For that reason, I am unconvinced that a comparison could be achieved. Perhaps the Southern franchise mentioned by my hon. Friend the Member for Selby could provide a decent comparison with other commuter franchises into London as they are broadly of the same nature, but I do not think it can be argued that there can be much comparison between the East Coast franchise and the South West Trains franchise.

Ms Angela C. Smith: The Minister ruled out the possibility of a comparator on the grounds that it is anti-competitive. It has been suggested that we allow an arm's length company to compete with private train operators. Surely that would be a sensible and undogmatic way forward.

Chris Mole: I do not believe that we could make that happen at this time.

Stephen Hammond: The Minister will probably not thank me, but I will try to come to his aid. First, if such a company had to bid against other bidders, the Government would face the suspicion of a conflict of interests. Secondly, to have such a public company would be to plough a huge additional subsidy from the taxpayer into the industry. How could we be sure that that would provide the best value for money for the taxpayer?

Chris Mole: Whether it did or did not, there would be the suspicion of a conflict of interests and there would be such accusations.

Ms Angela C. Smith: I thank the Minister for giving way a second time; he is most generous. As I said earlier, there are models to prove that his objections are not the case. Local government has operated models for some time that allow competition between arm's length companies and private sector operators. They show it is possible to prevent the appearance and reality of conflicts of interest and of the unhelpfulness of subsidies to arm's length operators.

Chris Mole: I am grateful to my hon. Friend for that clarification. I understand more clearly the point she is trying to make. I fall back on the belief that such a move would inject uncertainty into the industry, which would be unhelpful and would not ensure that we got the best services and value for the taxpayer in the longer term.

Mrs. Ellman: I have something of significance to add to the argument. Is my hon. Friend the Minister aware that I received a letter from the Secretary of State in January this year on this very topic? The end of the letter states:

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Will he publish the criteria and details of how the comparative value would be assessed? Does he agree that the statement in the letter I received from the Secretary of State suggests that it is, indeed, possible for the franchise to remain in the public sector?

Chris Mole: I think that that is a different assertion from suggesting that the franchise should be awarded to some kind of arm's length public sector operator. What that letter is saying is that if we are not satisfied we will get a bid that offers better value, it would not be in the taxpayer's interest to award the franchise to a business that is going to cost the taxpayer more. That is simply common sense. The implication is that we would have to return to the market and start the process again. However, this time, given the success of the South Central franchising process, we are confident that the market will bring forward bids that will satisfy our expectations. I will look into how much of the information that my hon. Friend has asked for can be published, but she will be aware that the commercial sensitivity around a lot of these processes will disable us from exposing what a bidder's content might be in terms of their business plan, financial viability and so on.

Norman Baker: I am sure the Minister does not want to give way, but I am grateful to him for doing so, nevertheless. He is dancing on the head of a pin. To make the assessment that the Secretary of State has just been quoted as wanting to deliver, a bid must be effectively constructed by East Coast in order to make a comparison. If the bid is effectively constructed and it can "win" because it is deemed to be better than that of other companies who are bidding, that is a bid by any other definition. Is it not the case that what we are arguing for is, in fact, being considered by the Secretary of State? Is this another example of where his policies are rather different from those of the Minister?

Chris Mole: I am astonished that the hon. Gentleman can reach that conclusion from those exchanges, because it is not the one I would have reached. I certainly do not believe he should put that interpretation on what the Secretary of State intends.

Moving on, there remains a strong argument for sharing some measures of wider economic risk with franchisees. Train operators have a number of levers to increase revenues, but they cannot control the economy. We are considering improving the mechanisms within the contract that protect train operators from the effects of recession and ensure operators do not make windfall profits in good times, which was the point the hon. Gentleman made.

The recently-let South Central franchise is a good example of a passenger-focused franchise. Southern has announced an investment of £28 million to improve facilities at stations. That investment will meet the contractual requirement to refurbish 34 stations, and will provide new cycle and car park spaces. More passenger-focused franchises will become the norm. We have given Passenger Focus an enhanced role within the specification process, which emphasises the importance that the Department places on passenger needs. I hope that addresses the Select Committee Chair's point.

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