4 Franchise reform |
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".
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.
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. 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".
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".
However, it did not think that the invitation to tender for the
West Coast Main Line franchise had gone far enough in embracing
reform. The Chartered
Institute of Logistics and Transport agreed:
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
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.
TravelWatch NorthWest described aspects of reform as "promising
developments" but drew attention to the limited involvement
of passengers in the franchising process.
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.
Impact of the WCML franchise
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.
The re-letting of other franchises is also likely to be delayed.
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.
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
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".
Transport for London made similar points
and the Local Government Association was also supportive, calling
for a variety of approaches to devolution to take account of different
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
Command Paper p48. Back
See HC Deb, 19 Jan 11, c43W. Back
ROR 12 (Network Rail) paragraph 3.2. Back
ROR 25 (ATOC) paragraph 16. Back
Ibid, paragraph 18. Back
ROR 14 (CILT) paragraph 13. Back
Ibid, paragraph 12. Back
ROR 18 (TravelWatch NorthWest) paragraph 3.1. Back
ROR 24 (trades unions), ROR 4 (Jonathan Tyler) and ROR 11 (Tyne
Valley Users' Group). Back
HC Deb, 6 Dec 12, c1019. Back
HC Deb, 15 Oct 12, c46. Back
Rail Decentralisation pp13-14. Back
Ibid, p15. Back
ROR 10 (pteg) paragraph 2.27. Back
ROR 20 (Transport for London) paragraph 6.8. Back
ROR 19 (Local Government Association) section 7. Back