House of Commons - Transport - Fourteenth Report

Select Committee on Transport Fourteenth Report

List of Recommendations

The objectives of passenger rail franchising

1. We agree wholeheartedly with the general objectives of improving passenger services and maximising the value for money achieved from Government subsidies. But we do not believe that the current system of passenger rail franchising can achieve those aims in the long term (Paragraph 11)

2. The objectives of the passenger rail franchising system are a self-contradictory muddle, providing no coherent framework or vision for the development of passenger services for future generations. The result is a system that is worth less, and costs more, than the sum of its parts. It is high time that the Government established a consistent and achievable set of objectives and a system capable of achieving them whilst providing good services and value for money to passengers and taxpayers. (Paragraph 15)

3. The key objective of our railways for the next few decades must be to increase capacity, and facilitate growth in patronage through improvements in services to passengers. The only way to achieve this in the long term is to drop the dogmatic pursuit of competition where competition is not possible, and to make honest and tough choices about what the private and public sectors can and should do in future. We expect the Government's forthcoming long-term strategy for the railways to tackle these fundamental issues head on. It must contain a structure and a strategy capable of securing quality passenger rail services to meet demand over the next half a century. (Paragraph 16)

4. Having re-designed franchise contracts to include 'revenue risk-sharing mechanisms', it is crucial that the Government resist any pressures to renegotiate franchise agreements if operators get into difficulties. If it were to bail out operators through renegotiation despite taking over most of the medium- and long-term revenue risks, the Government would have failed doubly. (Paragraph 23)

5. The transfer of risk to the private sector was a core objective of privatisation. But in the current system only a very limited proportion of risks are, in reality, borne by franchise operators. There are also significant inconsistencies about what risks are borne by operators, and which by the Government. The relative lack of risk transfer calls into question the fundamental assumptions and objectives of the franchising system. If risk is not transferred, there is little point in involving the private sector in the running of the railways. (Paragraph 25)

The process of awarding passenger rail franchises

6. We welcome the fact that the Department for Transport is taking steps to better integrate the franchising process with long term strategic plans, Regional Planning Assessments (RPA) and Route Utilisation Strategies (RUS). This is a move in the right direction. We are, however, concerned that the Government has failed to embrace the notion of RPAs, RUS and franchise specifications flowing from a wider strategic plan rather than the other way round. This approach is likely to result in perpetuation of the status quo rather than development based on a strategic vision for what is required and desirable for the future. (Paragraph 29)

7. A broad-based consultation with passengers should be a statutory requirement, and we recommend that the Government include such provisions in its next railways bill. (Paragraph 34)

8. The removal, in the Railways Act 2005, of the statutory right of PTEs to co-sign franchise agreements was a mistake. We therefore recommend that the Government consult PTEs in order to determine what adverse consequences have resulted from it, and take steps to address them. We also recommend that franchise specifications should take account of regional and inter-regional economic strategies. (Paragraph 44)

9. 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. (Paragraph 51)

10. A re-balancing of the importance of cost among the criteria for the evaluation of franchise bids is urgently required. We recommend that the Government develop ways of evaluating cost relative to proposals for innovation and franchise development over and above the basic franchise specification. The re-balanced evaluation criteria should also take into account less tangible costs and benefits such as wider environmental and socio-economic factors. This would serve to reward innovation and development whilst retaining cost as a criterion (Paragraph 57)

11. We are concerned that the drive to extract premiums from some parts of the network will result in further above-inflation fare increases and a deterioration in customer service, investment and innovation. Where rail franchises are profitable, the structure of premium payments to the Government should provide incentives for franchises to invest and be more innovative. We recommend that future contracts include the possibility to make a proportion of the premium payments from a franchise available for re-investment directly into that franchise or into infrastructure used by the train operating company involved. Such reinvestment should be dependent on clear, specific and innovative investment proposals from the operator with a demonstrable benefit to passengers and the environment. (Paragraph 58)

12. We fear the re-franchising process is driven more by consultants and lawyers than by people with an in-depth understanding of the railways and what is required to run good passenger services, now and in the future. We urge the Government to revise its re-franchising procedure to focus clearly on the core requirements, weeding out unnecessary detail. Costs incurred by bidders will eventually be paid by taxpayers and passengers through increased fares, and subsidies or decreased premiums. It is therefore in the public interest to keep the costs of the re-franchising process at the lowest possible level. (Paragraph 63)

13. The Rail Division within the Department for Transport should be staffed so that, on the whole, it can manage the entire process of re-franchising without outsourcing significant parts of the work to external consultants. Consultants should be used only to deal with the occasional special or unusual aspect of a franchise specification and procurement. We recommend that the Department review its staffing requirements and establish clear guidelines for the use of consultants. We would expect such guidelines to be made publicly available with performance against them open to scrutiny. (Paragraph 64)

14. The Government must consider, in cooperation with the OFT and the Competition Commission, the suggestion of incorporating competition considerations into the specification of franchises. It must also monitor the effects of the new process for referral to competition authorities only once a franchise has been awarded to ensure that the late referral does not limit the range of remedies available to the Competition Commission. It is vital that the Commission has the full range of structural remedies at its disposal to prevent abuses of dominant position by monopolist operators. (Paragraph 70)

15. The absence of new entrants into the passenger rail franchising market is a clear indication of unreasonably high barriers to entry. Whilst we agree with the Government's policy to include past performance as a criterion for new franchise awards, we are deeply concerned that a small number of companies have come to dominate the franchising market. There is little evidence of the Department positively encouraging new entrants, and we recommend that steps be taken to bring new companies into the franchising market. (Paragraph 72)

The management of the passenger rail franchising system

16. We welcome the move towards a general set of base specifications that are used across all franchises, with a separate set of specifications setting out requirements that are franchise-specific. The base specifications should remain strictly limited to essential conditions. Franchise-specific conditions should be allowed to vary widely so that the tightness of service specifications can be tailored to the circumstances of individual franchises. Taxpayers are entitled to expect that heavily subsidised franchises have tighter specifications than ones that pay a premium. (Paragraph 78)

17. The aim to attract private companies who are prepared to take commercial risks, provide innovation and adapt to market circumstances is fundamentally at odds with the need for the Department to guarantee the consistent delivery of a quality public service and value for money for taxpayers and passengers. On the one hand there is a need for loose and flexible franchise specifications with room for innovation and risk, and on the other hand there is a need for very tight specifications and targets. Franchise operators have very limited flexibility to innovate, and they assume only a relatively small part of the overall risk. This tension cannot be fully resolved within the current framework, but the Department could mitigate the problem to some extent by reassessing the gains and losses of its current approach with a view to achieving greater flexibility. (Paragraph 83)

18. We recommend that the Government move towards medium-length franchises of up to fifteen years with one or two in-built break-points where contracts may be terminated if performance is unacceptable. We believe longer franchises will enable greater stability, increase the willingness by TOCs to invest, and reduce the cost of re-franchising. The Government already deploys break clauses, and we think they are the key to having longer franchises without losing the ability to set incentives and targets for TOC performance. (Paragraph 90)

19. With the creation of the two new Midlands and the Cross Country franchise, the number and sizes of franchises across the network is broadly sound. Any further re-mapping should be undertaken only if there are compelling operational reasons for doing so. (Paragraph 93)

20. The Government must ensure, through franchising contracts, that franchise operators keep their costs tightly under control. (Paragraph 97)

Vertical integration

21. We did not receive any compelling evidence to determine whether vertical integration would improve passenger services. We believe that vertical integration across the entire network, and in conjunction with the current franchising model, would be a retrograde step. But we also believe that vertical integration may have some merit in self-contained regions, such as Merseyside. We therefore recommend that Network Rail and the Government, with advice from the ORR, design and carry out pilots of vertical integration on self-contained parts of the network, where a sound case for such pilots can be made. It is essential that Network Rail supports such pilots. We look to the ORR and the Government to ensure that pilots are encouraged and given the best possible conditions of success. (Paragraph 106)

Open Access

22. Rail services need to be planned and coordinated. It is crucial that all decisions on access to the network cohere into a long-term strategy optimising the passenger benefit of the network. This is all the more true for parts of the network where capacity is scarce. Whilst open access services can bring significant benefit to passengers on some routes, it is imperative that such access is not allowed to reduce the capacity and jeopardise the efficiency of the network as a whole. (Paragraph 114)

23. Where open access is granted to the network, the ORR must ensure that timetables are coordinated between open access and franchised operators so that passengers reap the full benefits of the services available. (Paragraph 115)

24. It is a very serious flaw that open access decisions appear to be made without due regard for overall network strategy and existing contractual obligations. We appreciate the importance of the ORR acting as an independent regulator, but decisions about network access must never be made in a vacuum. We recommend that the ORR and the Department for Transport establish clear lines of communication about network capacity and access, and the scope for extra paths to be allocated, be it to a franchise or an open access operator. (Paragraph 116)

25. Unlike many other and more predictable risks, the risk that a successful open access bid will reduce the 'fare box' and limit track access of an incumbent franchise falls entirely with the franchise operator. This makes little sense given the probable size of the risk premium that will be priced into franchise bids as a result. The risk of new open access operations should be shared between the Government and the franchise operator. We recommend such an arrangement because it would create an incentive for the Department to coordinate policy in this area more closely with the Office of Rail Regulation which grants open access rights, and to be more explicit about the open access potential in the course of the re-franchising process. (Paragraph 121)



© Parliamentary copyright 2006	Prepared 5 November 2006

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