THE CRITERIA FOR BID SELECTION
46. The criteria and weighting of different factors
in the evaluation of franchise bids have changed significantly
and frequently since the first round of franchises. The Railway
Consultancy commented that criteria had often been problematic
because of a lack of empirical measurement and inadequate clarity
and public accountability about the criteria used.[87]
Since the Department for Transport took over the role of franchise
selection from the SRA, efforts have been made to make the process
clear and transparent through the publication of relevant documentation
on the Department's website.[88]
47. In the current system, bidders who have passed
through the pre-qualification process are subsequently invited
to submit a full bid on the basis of the detailed specification
for the franchise. The Department emphasised that the franchise
specification is critical because it ensures a "level playing
field" where bids are directly comparable because they are
based on, and measured against, one set of output and performance
requirements. The Department highlighted that the evaluation is
based on an analysis of "the reliability of operational deliverability
and the achievability of the bid revenue". These factors
being equal, the most competitive bid, providing the best overall
deal for the taxpayer, is selected.[89]
Innovation
48. Mr Segal of the MVA Consultancy argued that the
criteria for selecting bids were weak because they did not promote
innovation. He explained that if a bidder had "some great
brilliant idea which is not quite formally compliant", it
would not be considered in the evaluation process.[90]
Once a bidder had met the moderately high quality threshold, quality
effectively ceased to be a key factor in the choice of bids: "somebody
who is one inch above the threshold is just as likely to get it
as somebody who is a foot above the threshold."[91]
49. GNER countered this argument by arguing that
it is better for new requirements and innovative ideas to be included
in the franchise specification because that would bring "the
combined commercial ingenuity of all bidders to bear on a specified
issue" and enable the Department to select the bidder who
can provide the new service at the best value for money. As an
example, the recent South West franchise competition was mentioned,
where bidders were challenged through the specification to make
their systems compatible with Oyster smart-ticketing.[92]
50. We are concerned by evidence that the franchise
bidding process is failing to encourage bidders to innovate when
putting together their bids. Given that franchise contracts are
highly specified, leaving very little room for innovation and
development once a franchise has been awarded, it is particularly
worrying that the system also fails to reward innovation at the
bidding stage. Surely, one of the basic objectives of having regular
re-franchising competitions is to ensure that fresh thinking and
innovation is brought to bear on the provision and management
of rail passenger services.
51. In more general terms, we were concerned to find
that examples of innovation by franchise operators mostly fell
a long way short of real innovation. When we asked train operators
to provide examples of their innovative advances, he heard of
only one example of real innovation. This was a case of
timetabling problems being resolved innovatively to facilitate
extra services. Other examples mentioned were revenue protection
and wi-fi internet access on trains.[93]
Revenue protection, however, is no innovation, and should be considered
as a basic performance requirement, whilst wi-fi hardly revolutionises
services for the majority of passengers. Increasing innovation
is one of the stated key objectives in involving the private sector
in running the passenger railways. The Government must ensure
that real innovation contained in franchise bids is rewarded,
even where it goes beyond the strict requirements of the franchise
specification.
Cost - subsidies and premiums
52. There was broad agreement among witnesses that
cost had risen right to the top of the Government's list of priorities
when letting franchises.[94]
On subsidised parts of the network, the emphasis is on reducing
subsidies whilst on profitable parts of the network, the focus
is on maximising the premium paid by the franchise operator to
the Government. The Railway Forum emphasised that the shift towards
some parts of the network effectively raising money for the Treasury
marked a fundamental shift in the balance of railway economics
away from the traditional model where the Government consistently
pays franchises modest, if declining, subsidies.[95]
Several franchise operators had noticed the shift in priorities.
National Express told us that they were concerned about "the
lowest subsidy or the highest premium line […] emerging as
the dominant reason for awarding a franchise" emphasising
that wider questions of best value, deliverability and meeting
many other policy initiatives that Government is promoting"
should be properly taken into account also.[96]
Even the rail regulator, the ORR expressed concern, emphasising
the importance of encouraging innovation and responsiveness, emphasising
that "franchise tendering exercises which focus on the level
of premium or subsidy to the exclusion of other desirable qualities
may not always achieve this."[97]
Passenger Focus was concerned that the trend towards franchises
paying premiums would be to the detriment of passengers because
operators would cut services in order to meet their premium obligations.
Railfuture Northeast summed up the concerns:
"The evidence available from the recently
awarded GNER and [Greater Western] franchises suggests that whatever
window dressing may be applied, the evaluation of franchises is
now dominated by direct financial return to the Government. This
is unhelpful not only because the return is so far into the future
that some may consider it illusory but also because it fails to
give adequate recognition to the wider economic needs of communities
or to the qualitative benefits of supporting services needed and
offered."[98]
53. In 2004-05, the Government made net franchise
payments to Train Operating Companies (TOCs) of £878 million
and Passenger Transport Executives (PTEs) of £277 million,
a total of £1,155 million in direct subsidies for passenger
rail operations (see Table 1). Franchise net payments made up
some 30% of total government support to the railways in 2004-05.[99]
54. Franchise net payments vary significantly among
the TOCs. In 2004-05 Virgin CrossCountry received £118.5
million whereas ONE paid the Government £45 million.[100]
They also vary significantly depending on the stage of the franchise
contract. In the new Greater Western franchises, First Group will
receive £97.4 million in subsidy during the first year of
the contract, but in year 10 it has to pay £427.7 million.[101]
Variation in franchise net payments leads to variation in subsidy
per passenger kilometre. In 2004-05, ARRIVA Trains Northern received
a subsidy of 16.1 pence per passenger km, whereas Gatwick Express
paid the Government 8.1 pence per passenger km for the opportunity
to operate a profitable route.[102]
Table 2: Government
funding for the railways in £million (actual prices unless
otherwise indicated)
