122. Our inquiry identified two distinct sets of tasks to which the Government must dedicate itself. First, the Government must conduct a strategic review of the long term needs of rail passengers, and an honest appraisal of the structure best suited to fulfil these needs over the next several decades. Second, a number of immediate issues need to be resolved in the short term in order for the current system to function in the best possible manner for the time being.

123. More than a decade after rail privatisation and the introduction of franchising of passenger services, we remain to be convinced that the system has achieved its objectives, or that it is indeed capable of doing so. Passenger numbers have increased significantly, but the evidence suggests this has not resulted primarily from any improvement brought about by the franchising system. There is little evidence that competition has produced significant increases in innovation or improved the value for money for taxpayers and passengers. The Government is committed to competition, and yet there is very little real competition within the system, partly because capacity is scarce. There is little innovation because franchise contracts are so tight that there is no room for flexibility. In reality, there is also little evidence that risk has been transferred from the public to the private sector. The more risk that the Government transfers to private operators, the more money will they charge to do the job. It is not feasible to combine a policy of increasing the level of risk transferred to the private sector with the policy of maximising premiums and minimising subsidies.

124. Passenger rail franchising, far from being a model capable of delivering quality rail services for the next half century, appears to be a policy muddle. For that reason, it is vital that the Government's new long-term strategy for the railways, due to be published in the summer of 2007, should identify the needs of rail passengers in the future as well as the structure that will be best able to fulfil them.

125. In the short term, we welcome the Government taking steps to link franchise specifications to strategies for the network, but still more needs to be done to imbed the process into the broader context of transport and regional policy. We also welcome improvements in the willingness to consult with passengers and local and regional authorities, but we recommend further improvements. The Government must ensure that the re-franchising process becomes less costly and concentrates on core requirements only. The Government must ensure that innovation is rewarded, and it should take action to encourage new entrants to the rail franchising market.

126. With the completion of the recent re-mapping exercise, the length and size of franchises is broadly right. Further change should be avoided unless compelling reasons arise. The Government should, however, move towards medium length franchise contracts of around fifteen years in order to bring about greater stability, to increase the willingness to invest, and to reduce the relative cost of re-franchising.

127. We found little conclusive evidence in support of vertical integration of the rail network in general, but it may be a useful option for some self-contained regional networks. We recommend that pilots be carried out on such regional networks.

128. Open access is good for passengers in areas poorly served by the franchising structure. But it is essential that decisions on open access fit into the wider strategy for the network and the utilisation of the network. Planning and coordination are vital for the efficiency of the network, and open access operators have to fit into this structure. We believe the Government and the ORR must work more closely together to make coordinated decisions about access, be it for franchise or open access operators. Franchise operators are left to bear the entire risk of open access operators affecting their routes; this is not sensible, especially given that the Government has retained an overwhelming share of many other risks in the sector. Given the size of the premium that future franchise bidders are likely to demand from the Government, it would be sensible for the Government and operators to share this risk.