INTRODUCTION

  1.  The National Union of Rail, Maritime and Transport Workers (RMT) welcomes the opportunity to provide written evidence to the House of Commons Transport Committee inquiry into "Passenger Rail Franchising".

  2.  The RMT organises over 73,000 members in all sectors of the transport industry and with over 45,000 members employed in the rail industry, the RMT is the largest of the rail unions.

SUMMARY

  3.  RMT's support for public ownership of the rail network is well documented. We are firmly of the view that the current franchising regime is fragmented, financially opaque, poor value for money and provides the train operators with no incentive to commit long-term investment in station upgrades, improvements and enhancements. In short the current arrangements have failed the travelling public. RMT believes that passenger franchises should be returned to the public sector as expire.

  4.  There should be greater transparency in the franchising process. Specifically we believe that Invitation to Tender documents should be made publicly available and that rail trades unions should be included in the list of organisations that can access bids once they are lodged.

  5.  Financial risk should be held by the private sector. Recent "cap-and-collar" franchise awards continue to expose the public purse to inappropriate levels of risk. The policy of indemnifying train operators from losses incurred as a result of industrial action should be scrapped.

  6.  RMT supports vertical integration of the rail network in the public sector but is opposed to private sector horizontal fragmentation of Network Rail's safety and operational powers and responsibilities over the national railway infrastructure.

  7.  The dispute over open access on the East Coast Main Line demonstrates a lack of strategic leadership in the provision of passenger services. The Government should resolve the structural flaws which have led to the dispute in the 2007 Rail White Paper.

What should be the purpose of passenger rail franchising?

  8.  Franchises should provide punctual, accessible and reasonably priced services to the travelling public. However, a series of reports have supported RMT's view that the current franchising arrangements are fragmented, heavily subsidised by the public purse, poor value for money, with fare and ticketing structures that are too expensive and unnecessarily complex.

  9.  The Transport Select Committee's April 2003 report: The Future of the Railway found "The network is now being run by a patchwork of companies, which operate in a variety of ways, with a variety of incentives. It is not for us to judge whether more efficient companies could have performed more creditably; however, the number of franchises in difficulties suggests something is fundamentally wrong with the structure of the industry".

  10.  The July 2005 National Audit Office report: Maintaining and improving Britain's railway stations points out that there is no overarching strategy or single organisation leading on the modernisation of Britain's stations. In February 2006 the House of Commons Public Accounts Committee (PAC) confirmed that "the number of bodies involved in maintaining and improving stations has led to a fragmented approach, lacking overall leadership and strategic focus". RMT believes that the current franchising arrangements act as a disincentive for operators to invest in station improvements and enhancements, particularly when the franchise is in the last few years of life.

  11.  The September 2005 Catalyst working paper: the performance of the privatised train operators explains that initial post-privatisation Government estimates of the level of public subsidies required to fund the franchisees had proved to be "hopelessly optimistic". The report concluded "These companies (the ToCs) are totally dependent on subsidy for their financial survival. They could not cover their operating costs, let alone provide a return to the providers of finance, without generous public subsidies".

  12.  The May 2006 Transport Select Committee report: How fair are the fares? Train fares and ticketing confirmed the RMT's longstanding view that, 10 years after the break-up of passenger services, the franchises operate a fare and ticketing regime that has been an "abject failure" which is "not fit for purpose".

  13.  RMT believes that over the past decade the franchises have failed to deliver what they are designed to do. That is to provide passengers with a quality service. We are strongly of the view that Government should return franchises to the public sector as they fall due.

How well does the process for awarding franchises work?

  14.  RMT believes that the time and energy expended by management teams drawing up bids to retain franchises is an unnecessary distraction from the task of providing a good service to the travelling public. In an interview with the Times on 20 April 2004 Michael Holden, the then managing director of South Eastern Trains, made the point that "bidding for franchises takes management time and time is the most precious commodity we have. We have been able to declutter the agenda and focus everyone on running the railway better".

  15.  In addition the franchising and re-franchising process has proved to be expensive; two parliamentary questions indicating that over £60 million has been spent franchising passenger serivces.

John McDonnell: To ask the Secretary of State for Transport what total costs have been incurred by the Government and Government agencies in the franchising and tendering of passenger rail services since 1997. (176270)

Mr McNulty: Between April 2001 and April 2004 the Strategic Rail Authority (SRA) has spent £40.7 million on franchise replacements and extensions. This includes the full costs of tendering and implementation. Prior to the SRA's inception in 2001 total spend, in the period between 1998 and April 2001, on franchising was £6.095 million. (7 June 2004)

John McDonnell: To ask the Secretary of State for Transport what total costs have been incurred by the Government and Government agencies in the franchising and tendering of passenger rail services since April 2004. (29262)

Derek Twigg: Costs incurred in the specification and tendering of passenger franchise services since April 2004 are £14.4 million. (22 November 2005)

  16.  Furthermore, the process for awarding franchises is insufficiently transparent. In February 2005 RMT requested a copy of the Integrated Kent Franchise (IKF), Invitation to Tender document. The request was rejected on the grounds that disclosure would, or would be likely to prejudice the commercial interests of the SRA or of others. The SRA concluded that it would not be in the public interest to make the ITT's available and told RMT that the Stakeholder Briefing Document which had previously been made publicly available, "sets out in some detail what the SRA is asking of bidders".

  17.  The Invitation to Tender documents were finally released to the RMT after the franchise had been awarded to Govia. There were some important differences between the ITT and the Stakeholder Briefing Document. Bidders were asked to consider changes to ticket retailing policies and procedures. As the Committee will be aware, South Eastern Trains had already brought forward proposed Schedule 17 changes to booking office opening times and staff numbers, which had led to industrial action ballots being called by RMT and, our sister rail union, TSSA.

  18.  Bidders were also told not assume any limit on the extension of Driver Only Operation (DOO), except on the CTRL west of Ebbsfleet where an additional person per unit will be required for emergency evacuation in the event of an incident in the long tunnels on this section of the route. The ITT goes on to say "should bidders propose to extend DOO, then their bid must clearly show the cost of any infrastructure or rolling stock enhancement and their industrial relations handling plan". (Emphasis added). RMT contends that these differences between the ITT and the SBD represented a key reason for the refusal of the SRA to make documents publicly available. Huge sums of public money, in the form of Government subsidies, are available to successful bidders. RMT therefore believes that Invitation to Tender documents should be made publicly available in order that stakeholders can scrutinise the assumptions and criteria that bidders are being asked to make.

  19.  The ITT also deals with disclosure of information contained in the bids. It lists a series of bodies and organisations that, once a bid is submitted, can access the information in the bids, excluding commercially sensitive information. The organisations in question include DfT, Treasury, HSE, TfL, LCR, Network Rail, ORR, RPC, Regional Planning Bodies, affected Local Authorities and the Disabled Persons Transport Advisory Committee. However, trades unions are excluded from the list. As representatives of the railway workforce affected by re-franchising exercises RMT believes that the trades unions should be added to the list of organisations that can access information contained in bids.

Are risks suitably apportioned between the Government and the franchise holders?

  20.  The 2003 Transport Select Committee report: The Future of the Railways maintained "The new generation of franchises must be structured in a way which prevents franchisees returning for ever more public money, and ensures that costs are properly anticipated and controlled. Revenue risk should be assumed by the private sector wherever possible".

  21.  RMT has on a number of occasions expressed the view that on both the privatised rail network and in relation to the Public Private Partnership on London Underground, risk is not appropriately transferred to the private sector. The Virgin West Coast and Virgin Cross Country "cost-plus" contracts are but two examples of where services are provided for a guaranteed rate of return to the franchise holder.

  22.  We are concerned that recent franchise awards continue the process of the public sector retaining revenue risk. On the face of it the £1.1billion premium payments that First Group has agreed to pay the Department for Transport over the length of the franchises appears to be a very good deal for the taxpayer. However the "cap-and-collar" arrangements associated with the repayment regime transfers risk from private to public if First's revenue projections are not met.

  23.  In relation to Greater Western, Christian Wolmar explained the "cap-and-collar" arrangements in the 18 January 2006 issue of Rail Magazine. "This works in such a way that broadly, 80% of any large shortfall—or excess profits—will be borne by government. The formula is that First takes the whole risk of the first 2% shortfall, then half the risk of the next 4%, but only 20% of the rest. So it loses little if there is a really big shortfall". RMT is extremely disappointed that Government is continuing the practice of awarding franchises that do not transfer financial risk to the private sector.

  24.  Finally, franchise holders also benefit from the Government decision to indemnify train operators for losses incurred as a result of industrial action. To date over £23 million has been spent by Government in compensation payments. The financial incentive for franchise holders to dig in their heels in the hope that they will be indemnified should industrial action result, does not encourage good industrial relations and should therefore be scrapped.

Do we need more vertical integration?

  25.  The 1 April 2003 Transport Select Committee report: The Future of the Railways called for a public sector Railway Agency to combine the strategic functions of the SRA and control of the railway infrastructure. RMT also supports the vertical integration of "wheel and steel" in the public sector.

  26.  We are however, completely opposed to horizontal fragmentation, which would see the franchise holders controlling the tracks over which their services operate. RMT remains convinced that a single infrastructure controller, currently Network Rail, is the most appropriate way to set and monitor national operational and safety standards on the rail infrastructure. Recent improvements to Moving Annual Average train punctuality figures, now approaching figures achieved pre-privatisation in the early 1990s, have been aided by Network Rail returning maintenance functions in-house. Network Rail has reported delays caused by infrastructure falling by 17% and 8.7% in 2005 and 2006 respectively. In all, delays caused by Network Rail have fallen 28% since the company took control. RMT would not want to see these continuing improvements threatened by an unnecessary and potentially expensive fragmentation of the railway infrastructure.

  27.  RMT believes that some train operators would simply "sweat the assets" on the railway infrastructure, particularly in circumstances where their franchises were coming to end and the existing operators were either not bidding for or were not short-listed for the replacement franchise. RMT has serious concerns that horizontal fragmentation would repeat the Railtrack experience where the company systematically underinvested in order to maximise returns to shareholders. The result was a catastrophic degradation of the railway infrastructure.

  28.  In relation to the proposed vertical integration of Merseyrail RMT agrees with Network Rail which argued that proposals to split the national infrastructure would prove to be more expensive given that separate contracts would have to be drawn up for supplies and for track maintenance and renewals equipment.

  29.  The Committee will be aware of concerns that the RMT has raised in the past in relation to the rolling stock manufacturing and maintenance sector. Since privatisation rolling stock orders have been placed worth more than £4.5 billion. The Rolling Stock Leasing Companies, the only remaining wholly unregulated part of the rail industry, have at the same time made excess profits.

  30.  Regrettably the past period has also seen significant job losses and plant closures at sites including Derby, Washwood Heath and Eastleigh. This is unacceptable state of affairs which Government should take steps to address. As a priority Government must breathe life into the railway workshop sector, protect the highly skilled workforce and encourage domestic production of new rolling stock. As franchises fall due and are returned to public ownership Government should develop a publicly owned rail manufacturing and maintenance division.

Is franchising compatible with open access operations?

  31.  The current dispute between GNER, the Office of Rail Regulation (ORR), Grand Central and the DfT is indicative of deep-rooted problems in the franchising regime.

  32.  For the Strategic Rail Authority to award the East Coast Mainline (ECML) franchise to GNER, promising extra half-hourly London-Leeds services and then see the ORR award Grand Central open access paths on the ECML and refuse the GNER London-Leeds services demonstrates a lack of strategic leadership in the organisation and delivery of passenger services This absence of leadership reflects the structural flaws inherent in the current privatised network. The 2007 Rail White Paper provides Government with the opportunity to address these structural flaws and take overall responsibility for all passenger services on the network.

CONCLUSION

  33.  RMT believes that the current franchising arrangements have failed to provide value for money for the tax-payer and the fare-payer. Franchise awards are shrouded in commercial confidentiality and the franchising process has cost the public purse over £60 million since 1998.

  34.  In addition risk is not borne appropriately by the train operators, who according to the May 2006 issue of Modern Railways made operating profits of £306 million in 2004-05.

  35.  The current dispute in relation to open access routes on the East Coast Mainline demonstrates the lack of strategic leadership and serious structural flaws inherent in the privatised rail industry. The 2007 Rail White Paper provides the Government with the opportunity to take the necessary steps to resolve these issues.

  36.  RMT supports the vertical integration of the rail network in the public sector and is firmly of the view that at the heart of the 2007 Rail White Paper should be a commitment to return franchises to the public sector as they expire. We stand completely against the horizontal fragmentation of the network. Recent improvements to network performance have been delivered thanks in no small part to Network Rail bringing maintenance in-house, leading to reduced delays caused by infrastructure failure. Controlling the whole network has enabled the company to plan strategically across the national railway infrastructure.

20 June 2006