INTRODUCTION

  This paper sets out Hornagold & Hills' views on the issues surrounding UK passenger rail franchising, how it has evolved and the way forward. It considers some of the challenges facing the industry and proposes some items for the consideration of the DfT.

What should be the purpose of passenger rail franchising?

  The primary objective of rail franchising is to lease the operation of a section of railway for a set period. The train operating company (TOC) will provide as a minimum a level of service specified by the DfT and will assume all "farebox" risk. The franchise should be a vehicle for obtaining the most value for money for any given subsidy whilst providing the appropriate level of service to the customers and harnessing the best entrepreneurial flair of the private sector.

How well does the process for awarding franchises work?

  There does appear to be extensive public consultation on the franchises in the year preceding issue of tenders, although we would challenge how much of this is a tick in the box exercise instead of real debate. For example it might focus on stopping patterns at a particular station—of real concern to the passengers affected, but not of strategic importance.

  The transition from the SRA to DfT has gone relatively smoothly and included transferring numbers of staff involved in the franchising process. As long as the knowledge acquired from previous bidding is fully utilised, we believe that this will provide a sound basis and knowledge repository that can be called upon to improve the bidding process. This should ensure that previously encountered issues are avoided during the franchising process.

Are franchise contracts the right size, type and length?

  Our view is that shorter franchises at the time of bidding cannot achieve the longer term business case benefits that longer franchises could deliver. An example of this is where the payback of an investment cannot be realised in NPV terms in the short franchise—in that case it is unlikely to be included in a bidders base case.

  We consider that where investments are agreed in the latter years and perhaps even in the franchise extension period these do not generate the same benefits for the DfT as if they were included at the time of initial bidding.

  There is considerable scope for improving the process of franchise bidding still further. Items that the DfT should consider:

—  Avoid issuing more bids concurrently—consideration for franchise bidding team workload optimisation and limited technical expertise nationally (eg timetabling, modeling).

—  Ensure that datarooms are fully populated at the start of bidding to ensure a balance between the incumbent and the new players bidding.

—  Ensure that the process for bid evaluation is sufficiently and comprehensively presented to bidders at the outset. Issuing changes during the three month bidding is a major and distracting challenge for bidders that must be avoided to allow bidders to focus on their deliverables.

—  Ensure that an efficient and industry leading Q&A system is in place that does not disadvantage those bidding.

—  Ensure that more accessibility to the incumbent TOCs facilities is possible at the optimum time to suit bidders. Restricting for instance site visits only leads to unknown risks and assumptions.

  The recent move for bid evaluation being based on performance/cost/revenue with a focus on deliverability should be an improvement over 2005 bids. If it works it will give more certainty that the winner is capable of delivering and we support this.

  DfT bidders feedback to unsuccessful bidders is constructive and essential and will result in improved bids.

  It is accepted that the new franchise is an opportune time to incorporate major changes eg revenue protection through gating or demand management through smart card technology. We would suggest that where a clearer requirement is necessary that this is more explicit in bid documents to ensure comparable bids during evaluation and in delivering what the railway actually requires rather then a bidders interpretation. This is one area where risk ownership may not necessarily be in the ideal location.

  There is a need for an industry wide forum for sharing of best practice and lessons learnt amongst operators. There is scope for the DfT to specify some minimal industry wide standards for TOCs to adhere to present a consistent industry face to the customer (yellow banding of first class, use of route indicators, etc).

Do we need more competition and vertical integration?

  There are increased risks with open access operations being introduced during a franchise period without consideration of the existing franchise operator. If the existing operator incurs financial loss as a direct result of the open access, it may send out a negative signal to future franchise bidders who would need to take it into account at the time of bidding. Open access agreement within the terms of the franchise agreement should not present a problem and can be a solution to improve the offer for passengers although one might question the long term benefits.

  Recent technical journals have written about cascade planning for rolling stock. This demonstrates that there is perhaps inadequate integration between train, rolling stock and track operation. Recent moves away from sourcing rolling stock from ROSCO's to achieve better returns is an interesting development as TOC's seek better commercial terms and packages.

  Closer integration is essential to balance the longer term investment and solutions necessary for the railway vs the short term opportunities that the TOC alone can facilitate or drive. The industry leading South West Trains class 455 refurbishment could not for instance have been achieved without the TOC, ROSCO and DfT (SRA at the time) agreement to consider benefits beyond the existing franchise period into account—this was achieved with a section agreement.

  There have been instances where station ownership has been taken on board by a county during the Railtrack and Network Rail transfer. In that instance this could not have been achieved without the TOC and DfT working together and establishing an alternative necessary owner.

  One area where franchise agreements are already used to facilitate national changes in standards is safety. It appears obvious to incorporate essential changes in safety technology eg GSMR providing the DfT can accept the time delay of mobilisation and precise timing of franchise start dates.

  Any move towards vertical integration will need to address the potential conflict that may exist between the short-term commercial interests of the train operator and the longer-term investment needs of the infrastructure. The organisation given responsibility for maintaining and renewing the railway infrastructure will need to be free of the current short term commercial pressures of the existing franchise system.

CONCLUSION

—  The purpose of passenger rail franchising needs to be examined and questioned as to whether it is the most effective way of structuring rail operations.

—  Lessons must be learned from previous franchise bids when awarding future franchises.

—  Shorter franchises cannot achieve the longer term business case benefits that longer franchises could deliver.

—  Any move towards vertical integration will need to address the potential conflict that may exist between the short-term commercial interests of the train operator and the longer-term investment needs of the infrastructure.

11 June 2006