Rail 2020 - Transport Committee Contents

4  Franchise reform

Government proposals

51. The coalition agreement on which the current Government is based included a commitment to "grant longer rail franchises in order to give operators the incentive to invest in the improvements passengers want".[82] The rail Command Paper sets out the Government's reform agenda in more detail. New franchises would involve "less intrusive day-to-day management of the franchise" by the DfT; more flexibility about how to configure services; better alignment with the interests of Network Rail and passengers; a mechanism for sharing profits with the Government; and, possibly, regulation by the ORR rather than DfT.[83]

52. These changes reflected a view that the DfT was too closely involved in the regulation of train services, because of over-prescriptive franchises. In addition, it was argued that longer franchises would encourage increased investment by operators and the development of long-term relationships with Network Rail and others.[84] The Government also sought to respond to problems which had arisen with its predecessor's experience of franchising. These included the failures of two successive East Coast Main Line franchises and the number of franchisees experiencing 'cap and collar' arrangements which protect them from lower than forecast revenues but also reduce or eliminate the incentive to over-achieve.

53. With 14 of the 17 franchises on the network due to be re-let between 2012 and 2016, the Government had an opportunity to reshape more than one half of the railway within a relatively short space of time. In announcing the shape of the new franchising regime in January 2011 the then rail minister, Theresa Villiers MP, also announced a public consultation on the first franchise to be let under the new policy, that for the West Coast Main Line.

Reaction to the proposals

54. The Government's proposals elicited a wide range of responses, from cautiously supportive to complete disagreement. Network Rail described the reforms as "eminently sensible".[85] ATOC described franchise reform as "vital to empowering train operating companies to deliver greater value themselves and jointly with industry players such as Network Rail".[86] However, it did not think that the invitation to tender for the West Coast Main Line franchise had gone far enough in embracing reform.[87] The Chartered Institute of Logistics and Transport agreed:[88]

The West Coast invitation does not bode well for producing imaginative or cost-reducing solutions, as demonstrated by the minimum service specification having been set effectively at current levels, giving no scope for cost reduction by replanning services.

The Institute was also concerned that even under a reformed system there would be little incentive for franchisees to invest in rail during the second half of the contract.[89] TravelWatch NorthWest described aspects of reform as "promising developments" but drew attention to the limited involvement of passengers in the franchising process.[90] Several other witnesses, including the trades unions, argued that franchising led to a fragmented system and that the Government's proposals would make things worse.[91]

Impact of the WCML franchise competition collapse

55. The collapse of the West Coast Main Line franchise competition has thrown the Government's plans for the reform of franchising into doubt. The West Coast Main Line will be run by Virgin Trains for another 23 months.[92] The re-letting of other franchises is also likely to be delayed.[93] The future of franchising is on hold until the DfT receives and decides its response to the review of franchising currently being conducted by Richard Brown.

What now for franchising?

56. We look forward to scrutinising the Brown proposals and the Government's response when they emerge, in the early part of 2013. We do not consider that the system of franchising is fundamentally flawed, but there are a number of significant changes which we think should be considered by the Brown review.

57. Firstly, although we acknowledge that Government micro-management of franchises can be costly and stifle creativity, there is a balance to be struck with democratic accountability. In particular, there needs to be an effective mechanism to reconcile fairly the competing demands for train paths on congested lines, for example between fast and stopping inter-city services, commuter trains and freight traffic. Franchise specification should include a reasonable level of detail about service levels and timetables, so that ministers can be held properly to account for matters which directly affect passengers.

58. However, we are not convinced that DfT as currently structured is best placed and resourced both to set rail policy and do the detailed work necessary to run each franchise competition. This latter task requires focus, commercial expertise and deep knowledge of railway operations. We will consider this issue in more detail in scrutinising what went wrong with the West Coast Main Line franchise, but we have sympathy with the argument that franchises should be let and managed by a DfT agency or arms-length body. Under this arrangement, DfT would specify what it wished to be delivered under the franchise and the new franchising body, employing staff with appropriate specialist, commercial skills, would let and manage the contract. It is important that any change can be made without the need for legislation, since this would further delay the programme for franchise re-letting.

59. Finally, in the West Coast Main Line franchise competition bidders were expected to make an assessment of economic conditions to the end of the contract in putting forward premium payments. Both First Group and Virgin Rail offered well over £1 billion a year in cash premium payments for the final four years of the franchise. This was widely criticised because any assessment of economic conditions so far in the future is entirely speculative. We see merit in continuing with longer franchises, in order to encourage investment by franchisees, but we recommend that the Government explore options for reviewing contracts every five years. This would enable contracts to be adjusted to take account of changed circumstances, particularly in the economy. Clear parameters for ending contracts early would need to be established at the start of the process and there would also need to be a different approach to evaluating bids for contracts. We suggest this could involve spreading out premium payments over the full length of the contract or weighting payments so that the offer of generous premium payments in ten years or more would be heavily discounted.

60. Any further redesign of the franchise system will take time to get right. We therefore recommend that for those franchises which need to be re-let in the near future, the DfT specifies contracts of medium length, of seven to ten years.


61. Another aspect of franchise reform is the suggestion that franchises could be devolved to local or regional bodies. This would be an extension of existing arrangements, as there are already examples of devolved franchises or concessions in Scotland, Wales, Merseyside and London.[94] In addition, passenger transport executives can be invited by the Secretary of State for Transport to be co-signatories of franchises, giving them some influence over the specification and management of contracts.[95]

62. The Government published a consultation paper on decentralisation in March. This set out desired objectives, such as passenger benefits, value for money, and economic impacts, and proposed five models for decentralisation. It is clear that a key issue will be governance: to which bodies can existing franchises, which invariably cross local authority boundaries, be devolved?

63. The Government's proposals have generally been welcomed. pteg strongly supported decentralisation, arguing that it would lead to "significantly improved local rail services, greater accountability, more integration with wider local public transport networks and better value for money".[96] Transport for London made similar points[97] and the Local Government Association was also supportive, calling for a variety of approaches to devolution to take account of different circumstances.[98]

64. We paid particular attention to the devolution of rail franchising in our visit to Germany. Devolution of rail funding to regional governments was introduced in 1996, since when there has been a rebalancing of expenditure away from intercity services and towards regional rail. However, there is a better fit between the structure of local rail services and the geography of regional government in Germany than there would be in the UK and there are also wide disparities in the quality of regional rail services around the country.

65. We agree that there is scope to devolve control over some rail franchises to local or regional bodies and we support the Government in looking at how to achieve this. The Northern franchise, which is due to be re-let in 2014, is a prime candidate for this approach given that the five northern passenger transport executives are keen to take on responsibility for the network. However, the Northern franchise serves many rural communities as well as towns not in the major conurbations. Their interests must be taken into account alongside those of the big cities. If the services within the current Northern franchise are devolved we recommend that the Government consider whether there are elements which could be individually franchised (similar to the situation with Merseyrail) and look to involve all of the emerging local transport boards in the north in the governance of the franchise. Alternatively, the DfT must retain reserve powers to vary the specification of the franchise to ensure that the interests of the whole region are protected.

82   Coalition agreement, p31. Back

83   Command Paper p48. Back

84   See HC Deb, 19 Jan 11, c43W. Back

85   ROR 12 (Network Rail) paragraph 3.2. Back

86   ROR 25 (ATOC) paragraph 16. Back

87   Ibid, paragraph 18. Back

88   ROR 14 (CILT) paragraph 13. Back

89   Ibid, paragraph 12. Back

90   ROR 18 (TravelWatch NorthWest) paragraph 3.1. Back

91   ROR 24 (trades unions), ROR 4 (Jonathan Tyler) and ROR 11 (Tyne Valley Users' Group). Back

92   HC Deb, 6 Dec 12, c1019. Back

93   HC Deb, 15 Oct 12, c46. Back

94   Rail Decentralisation pp13-14. Back

95   Ibid, p15. Back

96   ROR 10 (pteg) paragraph 2.27. Back

97   ROR 20 (Transport for London) paragraph 6.8. Back

98   ROR 19 (Local Government Association) section 7. Back

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Prepared 4 January 2013