Rail franchising: Government Response to the Committee's Ninth Report of Session 2016–17

Tenth Special Report

The Transport Committee published its Ninth Report of Session 2016–17, Rail franchising (HC 66), on 5 February 2017. The Government’s response was received on 5 April 2017 and is appended to this report.

In the Government response, the Committee’s recommendations appear in bold text and the Government’s responses are in plain text.

The responses from the Office of Rail and Road and Network Rail are also appended to this report.

Appendix 1: Government Response

The Government welcomes this report from the Transport Select Committee, which sets out the findings of the latest in its series of five inter-related inquiries into the “future of rail”.

This Government has made it very clear that our railways need to adapt and change in order to be able to cope with the growth that they have already experienced and that which lies ahead. This means continuing to deliver a steady programme of improvements, expanding the network to provide more trains, harnessing new digital technology to transform the way our railways work, and ensuring that the interests of passengers are kept firmly at the heart of industry decision making. The Committee’s series of inquiries into the future of franchising is a welcome contribution to that process. The process of rail franchising has evolved continuously since 1996 in order to keep pace with passenger expectations, market circumstances, technological advancements and, in particular, the challenge of serving the historic levels of passenger growth experienced under privatisation.

The investment through franchising has contributed to the United Kingdom having one of the safest and fastest growing railways in Europe. Private sector rail companies have invested billions of their own money to give passengers more trains, more services and more seats, and in 2015 the NAO calculated that the three franchises competitively since the restart of the programme in 2013 had returned over £5bn to the Treasury – an 82% average increase in payments compared to forecasts of what the previous agreements would have delivered.

Following a review of franchising by Richard Brown CBE in 2013, the Department for Transport implemented important and fundamental reforms that supported the successful award of 13 franchises in a little over three years. This achievement was recognised most recently by the Cabinet Office’s Infrastructure and Projects Authority (IPA) who, following a review of its own, recognised that the Department has a well-established cycle for letting new franchises, extending existing franchises and managing contracts in-life. The IPA also recognised that there were sound processes for setting up project teams and that templates existed for the all necessary management tools and contract frameworks.

Therefore, while the Government rejects the Committee’s premise that franchising is no longer fit for purpose, we do welcome a number of the report’s recommendations, several of which reflect work streams already underway at the Department for Transport. This illustrates the Government’s ongoing commitment to continuous improvement in the franchising process, with particular focus on efficiency, accountability, innovation and driving value for money for passenger and taxpayer alike.

Passenger Rail Competition

We recommend that the Department take steps to streamline bidding costs where possible; even if the effect of this on market interest is likely to be marginal. The Parent Company Guarantee is crucial in protecting the public purse and should not be removed or amended significantly. Wider reform is required, possibly through open access operators in appropriate areas, or creating smaller franchises, to attract new entrants into the market and promote competition in rail. Without change it is difficult to see how the current model will be sustainable in the longer term. (Paragraph 26)

The Government agrees with this recommendation, as it recognises that there is value in streamlining franchise bidding costs wherever practical. As noted by the Committee the Government has already taken steps to address this issue, including by introducing the pre-qualification questionnaire passport.

Where appropriate, the Government will continue to investigate other ways to streamline bidding costs, including considering the impact on bidding costs when reviewing future franchise market reforms.

The Government also recognises the need to ensure that franchising remains attractive to bidders while securing a good deal for taxpayers. This is why we are introducing a new risk transfer mechanism for use on selected franchises: the “Forecast Revenue mechanism” (or “FRM”). This mechanism offers protection against shortfalls in revenue relative to the winning bidder’s bid revenue line, and ensures operators share revenue with the Government when revenue outperforms this forecast outside of predetermined variances. By applying FRM on franchises where traditional risk transfer mechanisms would otherwise generate unsustainably large PCS requirements, the Government can ensure that healthy competition is maintained for its franchises.

More broadly the Government is committed to ensuring that passenger services are delivered in a way that is commercially sustainable and meets the needs of passengers and taxpayers and will set out its longer-term strategic approach to franchising in the forthcoming Rail Strategy.

Our response on open access is set out under Recommendation 2, whilst our response on smaller franchises is set out under Recommendation 4.

We recommend that the Department and the ORR work together, as they develop the financial framework for the railways over Control Period 6 (2019–24), to present a comprehensive set of reforms to track access charges. These reforms need to manage the differing requirements of OAOs and franchisees and ensure that operators, taxpayers and passengers get a fair deal. A specific proposal for a PSO levy should be put out to consultation over the next 12 months, so that a new regime can be introduced from April 2019. We further recommend that timetabling spaces for open access services are determined upfront during franchise development prior to the publication of the Invitation to Tender. This will provide the certainty that industry needs to plan, particularly at the bidding stage of franchising but it will also help to encourage OAOs. (Paragraph 42)

The Government agrees with this recommendation. We recognise that open access has a role to support franchising in the delivery of passenger services, particularly in serving new markets and driving innovation.

We fully agree with the Committee, and the Competition and Markets Authority (CMA), that there need to be important reforms to create a fair, level playing field between open access and franchised operators. This will allow passengers to benefit from even greater competition, whilst protecting Government’s ability to support vital social services and to invest in the rail network on behalf of taxpayers and all rail users including freight.

That is why we are working with the ORR as part of the Periodic Review 2018 process as they develop options for potentially reforming track access charges. We have been clear that we would like to see all operators make a fair contribution towards the fixed costs of the network from the start of Control Period 6 (2019–2024). We welcome the ORR’s initial consultation options in this area.

We have also been considering the public service obligation (PSO) levy as a way to allow open access operators to make a contribution towards the costs of running vital social services, where they are able to. On 21 February we published a consultation1 asking for views on the levy and options for its implementation. We will consider all responses before deciding how to proceed with the levy.

Putting these reforms in place is crucial before considering a greater role for open access, including the recommendation of timetabling spaces in invitations to tender which we will look to discuss with the ORR. Any changes will need to be consistent with broader steps to create a more joined up approach between track and train. We also need to ensure there is the right balance of services overall to deliver clear benefits for passengers and value for money for taxpayers. This will mean making sure that a system exists which recognises the benefits of open access but also strikes the right balance in terms so that the impacts of open access on performance, capacity and the franchise market can be effectively mitigated.

It is also important to recognise, as the CMA did, that open access may not be appropriate on much of the rail network. For instance on predominantly commuter routes where capacity constraints and the particular desire of passengers for a ‘turn up and go’ service pose additional challenges for introducing greater on-rail competition.

Taxpayer support and the transfer of risk to the private sector

We recommend that in response to this report, the Department publish updates on the financial losses to the taxpayer from the TSGN franchise and set out the options available to recoup these losses. Given the exposure of the taxpayer to the failings of this franchise, it is unacceptable for the Department to maintain its current ‘arms-length’ approach. We recommend the Department intervene to ensure that all possible steps are being taken to stop the haemorrhaging of income. In response to this report, as well as setting out the steps the Department is taking, a full explanation should be given of the range of options considered in dealing with this franchise and why the current ‘arms-length’ approach was deemed suitable. If GTR is officially found to be in breach of its contract, we recommend the Department consider restructuring the franchise and determine who is best placed to operate it. Ultimately any potential restructure should rectify the contractual shortcomings of the current franchise, realigning the incentives and focus of the operator back to the passenger and reducing the financial exposure of the taxpayer. (Paragraph 54)

The Government partially agrees with this recommendation.

Each year the Office of Rail and Road (ORR) publish a statistical release on Rail Finance. This sets out which franchises have paid premiums to the Government and which required Government subsidy. The Transport Select Committee will be aware that the Department receives a net income from the TSGN franchise, which contributes to the overall railway budget.

As the ORR set out in its latest statistical release:

“The second highest premium paid to government was by the franchise Govia Thameslink Railway (Southern merged into GTR on 26 July), with £279 million which equated to a total of 3.8p per passenger kilometre. If combined with the Southern figure of £95.7 million (for the period 1st April and 25th July) the total is £374 million for 2015–16.”[1]

Although the Department for Transport bears the revenue risk for the TSGN franchise, the operating costs and profit risks rest with the operator, not the Government. This means that all operating losses of this franchise are borne by the shareholders of GTR’s parent company.

As the Committee has rightly identified, ongoing official and unofficial industrial action on Southern has caused a significant downturn in passenger revenue on the franchise. Details of revenue losses stemming from industrial action were provided by the Government to the Transport Select Committee on 17 November 2016:

The Department continues to monitor progress of the franchise closely. During the course of the TSGN franchise agreement, the Department can issue penalties for performance breaches and has already levied these for short formations and cancellation in a previous penalty period. Penalties are assessed each year. We will continue to challenge the operator on its revenue and marketing plans to help ensure the TSGN franchise returns to revenue growth, particularly on the Southern network.

A range of franchise structures were considered when the Department for Transport awarded the TSGN franchise. A ‘management contract’ style franchise was selected because of the scale and complexity associated with the delivery of the Thameslink programme on this network. A ‘management contract’ is different to other rail franchises but is not unusual, for example, it mirrors the structure TfL uses to run London Overground.

If a franchisee does not meet its contractual commitments, it would be at the Secretary of State’s discretion to make a decision about the future of the franchise, in accordance with the provisions in all franchise agreements. The Secretary of State would need to be convinced that it is in passengers’ best interests to remove a franchise from a train operator. The Secretary of State would have a duty to act reasonably and protect the passenger interest in this situation.

There are no plans to strip GTR of the TSGN franchise. Taking the franchise away from GTR would only create uncertainty and cause further disruption. However, the Department has previously stated that it is unlikely that a franchise of this scale and complexity would be let in the future.

The Department acknowledges the committee’s recommendation to explore all options and continues to consider a range of those that might deliver earlier passenger benefit and a more sustainable level of acceptable operating performance.

The Department for Transport has recently announced significant investment which will see more trains running on time, delivering the level of reliability passengers expect. A £20 million investment package announced in September 2016 will improve infrastructure on the network. The Secretary of State also announced a further £300m programme of works in January 2016 to ensure that network performance and resilience improves. We have been clear that this investment will not go to GTR. We are also working to improve the service for GTR customers, and have recently improved compensation measures to reflect the period of disruption experienced by passengers.

Franchising has brought major investment to our railways and helped to create one of the safest and fastest growing networks in Europe. But we can make improvements and the Transport Secretary has been clear that it will take new ways of working, more investment and better collaboration across the industry to tackle the challenges ahead.

Structure of franchising

We recommend that, as franchises expire, the Department considers whether they can and should be restructured to align better with the specific market they serve. (Paragraph 62)

The Government agrees with this recommendation. The Government is committed to continually improving the franchise model so that it delivers benefits for passengers and value for taxpayers. The size and structure of individual franchises are considered as part of each franchise competition, taking into account relevant factors.

At a strategic level, the Government will consider whether the pattern of more numerous and smaller franchises suggested by the Committee is the right one. The geography of franchises needs to be considered in the light of a number of factors including potential for better alignment between track and train to benefit passengers; operational efficiency across the network; and commercial factors.

While the UK rail market is a diverse one it is not segmented, the same infrastructure, and often the same train, is used by a number of different markets. Greater specialisation within the market would need to be considered carefully to avoid fragmentation or inefficiency that may mean some passengers experiencing a more disjointed service.

We recommend that the Department, upon the expiry of existing franchises, seeks to procure longer franchises where a franchise’s operational risks are relatively low and historical performance has been strong. This would have the dual benefit of enabling operators to improve efficiencies and provide more space for the Department in a highly congested franchising schedule. It is important that the necessary enforcement levers against underperformance, as well as change mechanisms for infrastructure works, are contracted for by the Department for franchises with longer terms. The Department should also find more innovative ways of contracting with operators to mitigate the unpredictability of financial risks over longer term horizons. (Paragraph 68)

The Government partially agrees with this recommendation.

The Government is committed to continually improving the franchise model so that it delivers benefits for passengers and value for taxpayers. The length of individual franchises is considered as part of each franchise competition, taking into account relevant factors. Often franchise specific factors are particularly pertinent, for example allowing franchise periods to align most effectively with the delivery of major upgrades such as HS2, Crossrail or London Bridge redevelopment.

The Committee highlights a number of the challenges faced by longer franchises such as forecasting demand over an extended period with any certainty and the need for reopeners to both adjust for this and to take account of any under-performance that might set in in the absence of competition for the franchise.

Departmental capabilities

We recommend that the Department publish a rail franchising public engagement strategy. This does not have to be exhaustive. A short document and associated webpage would provide the public with a clearer view on how to engage with franchising. We also recommend that the Department engage with relevant rail user groups on a more substantive basis at the beginning of the consultation process. (Paragraph 96)

The Government agrees with this recommendation which supports the Department of Transport’s determination to put passengers at the heart of rail franchising. Officials regularly review the franchise consultation documents to make them as user-friendly as possible. However, they need to strike the right balance between size of document and including enough information to support the reader in providing considered and helpful responses.

On each franchise competition prior to issuing the Invitation to Tender (ITT), the Department undertakes a formal, written consultation typically lasting 10 to 12 weeks. The consultation is undertaken in line with Cabinet Office Consultation Principles. It enables passengers and stakeholders to have their say on rail services and their views are taken into consideration when developing the specification for the future franchise.

Franchise consultations are widely publicised through a range of channels including posters and leaflets at stations, websites, social media and key stakeholder communication channels. Ministers also write to all MPs, MSPs and AMs with constituencies on the franchise route to ensure they are informed of the consultation which serves their parts of the UK. They are asked to share the consultation with their constituents.

A consultation document is published on GOV.UK and contains questions around options for the future franchise. Respondents are able to respond in a variety of ways including through online survey and by writing it in to the Department either in email or by post. Alternative formats such as braille, audio, CD, etc., are made available upon request.

During the consultation the Department also organises a series of events for the public and stakeholders to come along to speak to the officials about the consultation and ask any questions to help inform their response.

After close of each consultation the Department analyses the responses and then, at the same time as the ITT, publishes the Stakeholder Briefing Document (SBD). The SBD consists of a summary and detailed analysis of the responses to the consultation and explains how the public and stakeholder views have been used to inform the specification for the next franchise.

Prior to the formal launch of a public consultation, the Department will have already been engaging with key stakeholders in the rail industry including potential bidders, Transport Focus, unions, Local Authorities, Members of Parliament, rail user groups, community rail partnerships and devolved governments (where applicable).

We recommend that the Department publish a scoring system, possibly in the form of a weighted index, following a franchise competition. This would omit commercially sensitive details but give the public and industry a better understanding of the basis, in terms of quality and price, on which a franchise has been awarded. (Paragraph 100)

The Government agrees that this may potentially assist with the public and industry gaining a better understanding of the basis, in terms of quality and price, on which a franchise has been awarded.

Our commitment to transparency must be balanced with the need to respect the commercial confidentiality of bidders. We will investigate ways in which the final scores could be presented showing the differential from the winning bid. Once we have developed a proposal we will consult with the Rail Delivery Group (RDG) to obtain their views and understand whether commercial sensitivities are addressed by the proposal.

The Department will revert back to the TSC following our consultation with the RDG

We recommend that the Department, Network Rail, Greater Anglia and Manchester Airport Group work together to develop plans for journey times improvements on the Stansted Express. Improvements would heavily and directly benefit MAG and as such it should consider making a funding contribution to the associated cost. The wider role of third-party investment in rail will be examined in our Rail Governance and Finance inquiry. (Paragraph 105)

The Government agrees with this recommendation. The team at Greater Anglia are already actively engaging with Manchester Airport Group regarding train services to Stansted Airport.

The Department welcomes the suggestion that the groups named work together to reach a position where investment can be made to the line, with the aim of enhancing Stansted Express services, where the aspirations of stakeholders are and achievable.

We do not recommend moving to a single measure upon which to measure operator performance but we do recommend the Department streamline franchise specifications, taking an outcome-based approach. This would provide operators with more flexibility in delivering tailored services to passengers based on individual market requirements, which change over time. It would also reduce the burden on prospective operators in the bidding process and on the Department in developing the ITT and in the monitoring and enforcement of a franchise. However, it is also important, where an individual franchise warrants it (e.g. on largely urban, commuter-heavy franchises), that detailed commitments can be set out, related particularly to service quality provisions, in franchise agreements with the expectation that the TOC will be held to them. (Paragraph 111)

The Government agrees with this recommendation.

Our prime concern is to secure the best possible outcomes for passengers, at a fair price for taxpayers. As the Committee notes, our franchises serve a diverse range of markets, and different approaches are needed in different circumstances. Many aspects of our specifications are already focused on outcomes rather than inputs, as the Committee recommends – in particular the benchmarks we routinely set in our franchise specifications for punctuality and reliability performance, and for passenger satisfaction.

Outcome-based specification is likely to be more suitable where there is a clear and predictable relationship between the actions a franchisee might take and the measurable changes in outcomes (such as performance or passenger satisfaction) that will result. Those relationships are not always clear and predictable in practice, creating uncertainty for bidders in assessing the likely costs of achieving a given outcome, and introducing greater subjectivity and therefore more risk into the bid evaluation process.

We are therefore testing a wider use of outcome-based specification, including through the use of an alternative approach to specifying service quality in the East Anglia franchise; we are considering how to approach this for future competitions in light of the lessons we have learnt. At the same time, it is entirely appropriate that our contracts are designed in a way that clearly defines and protects a minimum level of service for passengers – for example in respect of the overall quantity of train services to be provided and the length of the operating day. Especially where the taxpayer is subsidising the provision of socially- or economically-desirable services that are not commercially viable, it is vital that we specify the intended minimum level of service robustly.

We therefore agree with the thrust of the Committee’s recommendation that we should continue to develop our approach to specification on a case-by-case basis, but that we should where possible strive to focus those specifications on outcomes. However, we should also continue to contract robustly the minimum service levels and standards that we intend to secure for passengers, especially in markets (such as commuter routes or more rural lines) where commercial incentives are less strong.

We recommend that in future contracts, terms are drafted in a way that has a clearer definition of what qualifies as force majeure and is commensurate to the degree of control of an operator has in dealing with an industrial dispute. (Paragraph 116)

The Government disagrees with this recommendation. This Department considers that the definition of a Force Majeure Event is sufficiently clear and appropriate in its scope. The protection for a Force Majeure Event related to Industrial Action extends to unofficial Industrial Action. However, the Franchisee is required to demonstrate the occurrence of such unofficial action to the reasonable satisfaction of the Secretary of State.

The Franchise Agreement is designed to ensure that relief for a Force Majeure Event is only granted in appropriate circumstances. These requirements include evidencing the steps the franchisee has put in place to prevent the occurrence of, and/or to mitigate or minimise the effects of the event and to restore passenger services.

In relation to all force majeure events the franchisee is under a duty to use all reasonable endeavours to avert or prevent the occurrence of the relevant event and/or to mitigate and minimise the effects of such event on its performance of the Passenger Services as soon as reasonably practicable after the onset of the occurrence of such event.

We recommend that the Department outline, in detail and with a timeline, its plans to incorporate these reporting provisions into existing contracts. We also recommend that when the Government publishes the promised performance benchmarks, it does so in an easy to access format which is not hidden away separately on individual operator websites. The data must be centrally located on a dedicated and visible webpage that shows the performance of all operators and makes clear whether operators are failing to or are at risk of failing to deliver the services the Department has contracted them to provide. It must also be possible to track any agreed changes to the levels and quality of services and a clear rational for each such agreed change should be easy to find. This has implications for the transparency of the entire franchising process. (Paragraph 120)

The Government agrees with this recommendation. The Department has already committed to improving the transparency of performance data available publically, in addition to performance data and information already published on various media.

Work is ongoing to deliver the minister’s commitment to the committee to publish information about each rail franchise’s performance against its contractual benchmarks.

Public Register copies of all Franchise Agreements and Train Service Requirements (or Service Level Commitments) are available on the .GOV website. The Public Register copies of all Franchise Agreements contain full schedules of operational performance targets including PPM, cancellations and capacity benchmarks. Any change or variations to Franchise Agreements are updated on the Public Register.

Certain information is redacted from Franchise Agreements available on the Public Register, imposed by the need to preserve commercial confidentiality and a predictable environment in which rail companies can operate and invest with confidence.

The ORR already publishes a range of information and statistics about railway performance, rail usage and safety. The ORR website contains information for railway passengers such as train fares, train station car parking charges; safety-regulated issues such as station platform gaps and crowding on trains; service disruption and train journey information. ORR also publishes a range of statistics about railway performance, rail usage and safety to support performance evaluation, analysis and decision-making for the railway industry. The range of statistical products produced reflects the needs of ORR’s users. For those with a general interest in rail, the ORR also produces statistical releases that provide commentary and interpretation on trends across a variety of rail-related themes.

Additionally, Network Rail publishes up to date performance statistics both nationally and by operator.

We recommend that the Department learn lessons from this episode and that it overhaul its contracting approach to performance penalties to ensure that penalties are more proportionate to the revenue obtained from a franchise. As a starting point, it must no longer contract for a breach level cap on penalties in the way it did so on the TSGN franchise. There may be wider issues affecting other franchises but it is difficult for us to make any other specific recommendations as we have only seen performance penalties for the TSGN franchise. (Paragraph 123)

The Government agrees with this recommendation. In recent years the Department has specified performance regimes in its Franchise Agreements for operational performance targets, which automatically apply a financial penalty or incentive payment depending on whether the operator has failed to meet or exceeded its performance benchmarks. Depending on the specific regime in each franchise, any financial penalties made under this regime may be re-invested in passenger benefits. The aim is to ensure that the operator is incentivised to deliver at least the planned standard of punctuality and reliability for passengers.

The level and rate of progression of the financial payments are set on a franchise-by-franchise basis, taking account of a number of factors, including the levels of revenue and risk expected for each franchise. Whilst the Department agrees with this recommendation it should be borne in mind that some kind of cap will remain appropriate, primarily because if performance were to deteriorate below the floor level for the regime the operator would then be reaching the point at which it would become exposed to contractual enforcement action from the Department. This could involve a requirement to produce a Remedial Plan, which would set out measures to be taken at the operator’s expense to address the performance deficit. It would involve an element of double jeopardy for the TOC to be incurring further financial payments under the regime as well as enforcement action. In addition, in the Department’s view imposing unlimited additional financial risk on the franchise would not be in the public interest and could impact adversely on the number, value and quality of franchise bids.

The Department keeps under review its approach to these performance regimes and associated benchmarks. In particular, it is currently considering, first, whether there is a case for increasing operators’ risk exposure under the regimes so to sharpen the incentive mechanism; and second, what could be done to improve the alignment of performance metrics and incentives as between the train operators and Network Rail. This work is also taking account of the anticipated changes in the basket of industry performance metrics for the next rail Control Period from 2019 onwards. The first fruits of this review will conclude with the East Midlands franchise competition, but the Department will continue to refine the regime in the light of developments and experience.

As an immediate priority, we recommend the Department update its enforcement policy by May 2017. In doing so and given the potentially high costs of running an operator of last resort, we recommend the Department consider new ways of enforcing the contractual terms of a franchise. For example, the Department should consider contracting for the reallocation of capacity to an alternative operator in the event of sustained poor performance or default. This could potentially mitigate the cost of running an operator of last resort and also provide a very genuine enforcement threat against poor performance. (Paragraph 127)

The Government disagrees with this recommendation. The DfT is currently studying its Enforcement Policy in light of lessons learned from the TSGN franchise. At this stage the Department cannot provide a definitive response as to whether its enforcement policy requires updating. The Department will provide an update to the committee in summer 2017.

The Secretary of State has a duty under Section 30 of the Railways Act 1993, to maintain the continuity of passenger rail services in the event that a passenger rail franchise terminates and is not immediately replaced. In such circumstances, moving to an Operator of Last Resort is one option open to the Department to ensure that this duty is discharged effectively. Others do include commercial market led solutions which could be pursued subject to any such arrangement being legally robust and providing best value for the taxpayer and passengers.”

We question whether it is effective for one of the commercial partners to a franchise (i.e. the Department) to also be the enforcement authority. In light of this, we recommend that the Government transfer enforcement and monitoring capabilities of franchising to the Office of Rail and Road or another independent body. (Paragraph 131)

The Department disagrees with this recommendation. The ORR has enforcement powers in relation to licence obligations, but not commercial or contractual matters. These rightly should remain with the signatory of the relevant franchise agreement – namely the Secretary of State – who has the right to take legal action where appropriate both as a party to the contract and as a result of powers set out in legislation. Enforcement of contracts within the DfT is always undertaken in the best interests of passengers and taxpayers and according to law. Sometimes passenger and taxpayer interests are in conflict, but as the Secretary of State is custodian of both these interests, he is best placed to strike an appropriate balance between them. In the event of a dispute between the contractual signatories (Secretary of State and franchisee), the courts can be asked to adjudicate.

Unless, within the timescale required, major changes advocated in this report are implemented and the Department is resourced to manage the procurements, we recommend the Department should consider direct awards for its highest performing franchises due for renewal between 2017 and 2019. (Paragraph 135)

The Government agrees that if any potential major changes are required to the current Rail Franchise Schedule, Direct Awards for the best performing franchises should be considered for mitigating any time impacts.

The Department has maintained a very strong delivery record during the past three and a half years, successfully letting sixteen major contracts between competed Franchises and Direct Awards. The Department has extracted good value for money through Direct Awards, as reflected in the recent NAO report. The Department will continue to consider Direct Awards as a means of improving Passenger Experience and providing stability, particularly where major infrastructure decisions remain unclear.

The Department can confirm that the Rail Franchise Schedule, as published on 6 Dec 16, is sufficiently resourced to meet the required franchise timescales.

The South Western and West Midlands franchise competition projects are well established projects. As part of the Department’s workforce planning, the subsequent mobilisation phase activities (i.e. from Contract Award to Franchise Start Date) are transitioned to a dedicated mobilisation team. This early release of project staff from South Western and West Midlands will then enable them to be transferred over to the other 5 projects as required, but primarily this will be the Cross Country and Great Western franchise competition projects.

The Department can confirm that the East Midlands and South Eastern franchise competition projects are fully resourced. The West Coast Partnership requirements are currently being established and the project is being resourced accordingly to meet the project timescales.

Careful consideration is given to the timings of these and all franchise competition projects to ensure that sufficient internal and wider industry support functions are available to meet the EoI/ ITT and subsequent bid evaluations phases of work

The current schedule for the South Western franchise competition should remain as planned. More broadly, we recommend that consistent operational management be maintained during any future major infrastructure works scheduled for major London terminals. (Paragraph 138)

The Government agrees with this recommendation.

When scheduling competitions, the Department does seek to avoid potential franchise handover at times of major infrastructure work or other significant operational changes. For example, one of the reasons we have delayed the start of the new Southeastern franchise to December 2018 is to allow sufficient time after the major Thameslink programme timetable change in May 2018. However, on some occasions it will not be possible to do this due to other constraints, such as the number or duration of infrastructure projects.

Furthermore the franchising team is not in control of when for example, infrastructure programmes slips from their time plans. This can happen at any stage during the franchising process.

We recommend that the Department publish the business case for this decision, clearly outlining the balance of benefits and risks from this decision. We are pleased that the Government published further detail in the recent prospectus on how it intends to structure and operate this franchise in the future. (Paragraph 145)

The Government disagrees with this recommendation. The Department does not routinely publish the business cases relating to major transactions in order to maintain the Government’s commercial negotiating position. The decision to proceed with a combined franchise for InterCity West Coast and HS2 services (the West Coast Partnership) was informed by analysis of the strategic benefits and risks of the approach and an outline value for money and affordability assessment including consideration of alternative delivery models.

The key strategic benefits of the West Coast Partnership are that it:

a)Enables the development of a coherent and cohesive passenger proposition for InterCity West Coast and HS2 services led by the party with best knowledge of the markets and passengers;

b)Provides an industry led solution planning to the complex implementation of HS2 services and transition of services on the rest of the West Coast Mainline in 2026 and a single guiding mind to deliver the transition;

c)Mitigates risks associated with commercial incentive for separate operators to compete for the high value intercity markets rather than improve the regional and commuter offer as anticipated by the HS2 business case;

d)Provides a InterCity West Coast Franchise with an interest in success of HS2 well placed to be an advocate for passengers and work collaboratively with HS2 and Network Rail through the construction project; and

e)Increases market interest in the InterCity West Coast franchise competition to deliver better value through the competition.

The decision to proceed with the combined franchise also identified potential strategic risks that would need to be mitigated, including introducing a new interface in the HS2 project and how to make sure that the right skill sets needed to operate both ICWC services and develop and introduce HS2 services would be available in the same entity. The detailed design of the West Coast Partnership has sought to mitigate these risks as far as possible, for example, the requirement to demonstrate High Speed Rail experience in the Expression of Interest documentation.

Previous stakeholder and public consultation undertaken on the InterCity West Coast Franchise has also highlighted concerns around the risks of a fragmented approach to ICWC and HS2 design and delivery, and the West Coast Partnership has been developed to address those concerns.

There is no express statutory duty to consult the public on the content of rail franchises, whether on the commercial approach or otherwise. The decision regarding whether or not to have a single operator is strategic in nature and the Department, when evaluating the merits of proceeding with separate or combined operations, undertook targeted engagement with key stakeholders including Network Rail, the Office of Rail and Road, High Speed 2 Ltd., Transport Focus and train operating companies which were already pre-qualified to bid under the Department’s procurement process. Input into the decision was also sought from Her Majesty’s Treasury and the Infrastructure Projects Authority.

As stated in the ICWC Consultation Document2and the West Coast Partnership Prospectus3, we expect the West Coast Partnership to be undertaking extensive engagement with users and stakeholders on future HS2 and re-shaped ICWC services to ensure they fully meet passenger and business needs in the future. In addition, the Secretary of State expects to consult as appropriate in relation to the West Coast Partnership in the future.

We recommend that an independent and publicly available review of the Department’s franchising functions be commissioned. In addition to reviewing the Department’s capabilities and capacity, this can include consultation regarding the transfer of the monitoring and enforcement functions to the ORR. This should also outline the Department’s strategic direction for franchising, including but not limited to the way it wishes to structure and plan for future franchises, and how it plans to manage the issue of open access. (Paragraph 149)

The Government disagrees with this recommendation. The DfT already commissions and receives regular independent reviews of the rail franchising programme. These reviews are undertaken to ensure that governance, processes and resources are fit for purpose and support the effective procurement and management of franchises.

The Cabinet Office’s Infrastructure and Projects Authority (IPA) has recently completed such a review, and a follow up review is planned by them in early 2018. In addition, the National Audit Office is expected to conduct its own review of the franchising programme later this year.

Following its recent review, the IPA concluded that despite the work load represented by the current franchise programme – unprecedented since the start of privatisation – there is full confidence in the franchise team and its leadership. They noted that there was a well-established cycle for letting new franchises, extending existing franchises and managing the contracts in-life. They also recognised that there were sound processes for setting up project teams and that templates existed for the all necessary management tools and contract frameworks.

Please refer to recommendation 14 for the Government’s response to the question of transferring monitoring and enforcement powers to the ORR.

24 April 2017