EXECUTIVE SUMMARY

  1.  Stagecoach Group is the current operator of South West Trains and Island Line on the Isle of Wight. We are currently involved in the process of bidding for the South Western franchise, which will cover both South West Trains and Island Line.

  2.  In this submission we address particularly two of the Committee's principal questions: how well does the process for awarding franchises work; and are franchise contracts the right size, type and length.

  3.  On the first point, introduction of the franchise structure was intended to free the railway from an annual round of budget-setting. But the corollary is that there is a need to determine budgets and plans for the duration of the franchise during the bidding process. This can of course be complicated, and so time-consuming and resource-intensive, and has led to some comment about bid costs. There is a particular issue with "over-heating" in the specialist consultancy sector to support these bids.

  4.  The cost issue is compounded by the fact that the Department for Transport has not had a procurement model settled from one franchise to the next.

  5.  The resulting high cost of bidding in the end impacts on the cost of the franchise. Any proposal that would streamline the process, even to a limited extent, would be welcomed by all train operators, including Stagecoach Group, and would also benefit taxpayers and the travelling public.

  6.  On the second point, the main issues are the length of each franchise and how prescriptive are its terms. Operators are resourceful, and will adapt to the circumstances presented to them. But longer franchises allow for improved planning, and the possibility of greater and more imaginative investment on the part of train operators.

  7.  The degree to which the franchise is prescriptive also has a bearing on how imaginative investment plans will be. In particular operators are resistant to over-regulation on the revenue and timetable sides, since that limits their freedom for manoeuvre and to deliver the management of capacity.

  8.  We accept the current structure of franchising, but believe that there are changes that can be made that will ultimately benefit the travelling public and taxpayers. The Committee's inquiry is timely, and we welcome it. We look forward to its conclusions, and to learning from its report.

INTRODUCTION

  9.  Stagecoach Group is one of the world's leading transport operators with train, bus, tram and express coach operations in the UK and North America. Our rail division includes being franchise holder for South West Trains and for Island Line on the Isle of Wight, as well as a 49% holding in Virgin Rail Group, which runs the West Coast and CrossCountry franchises.

  10.  We are proud of the way in which we have managed the South West Trains and Island Line franchises. Earlier this year we were awarded HSBC Rail Business of the Year, and we were named the Passenger Operator of the Year at the National Rail Awards in September 2005.

  11.  Stagecoach Group is currently bidding to retain the South Western franchise, which incorporates the existing South West Trains and Island Line. As the Committee will understand, this has placed considerable demands on our resources, and we have not been able to prepare written evidence as fully as we would have liked. Nevertheless, we trust that this memorandum is of use to the Committee.

How well does the process for awarding franchises work?

  12.  Stagecoach Group has recently been involved in the process of bidding for the Inter City East Coast, Greater Western, Thameslink, Great Northern, and Integrated Kent and South Western franchises. Stagecoach has operated the South West Trains franchise from 1995, receiving a four-year extension to the franchise in 2002. Our comments below derive from our experience as an operator and as a bidder.

  13.  Prior to the introduction of the franchise structure the railway was subject to an annual round of budget-setting by the Department of Transport. It was argued that this inhibited long-term planning and constrained investment. The franchise system was intended to move the railway away from short-termism, and it has generally been successful in doing so.

  14.  However, the consequence is that budgets for each franchise must be set prior to its award, and they must be valid for the duration of each franchise. Thus the plans and documentation tend to be long and the process of compiling them is time-consuming for all bidders, and is therefore costly.

  15.  Current invitations to tender for franchises also require respondents to prepare a large number of very detailed documents. Indeed, just to get on a tender shortlist and receive a prequalification document requires the submission of two or more substantial folders of evidence.

  16.  In addition, some aspects of the franchise bid require the input of very specialist consultants. Their numbers are necessarily limited, and with typically five companies short-listed for each tender they are in high demand. This can lead to "over-heating" in the consultancy sector, further inflating costs for the whole rail sector. If consultancies are guaranteed a stable base of franchise work then costs will come down over time. If there is feast and famine then we expect the average cost of consultancy to rise. This is particularly the case if a high level of detail is asked for in the Invitation to Tender.

  17.  Another factor driving up costs is the fact that the Department for Transport (DfT) has not made use of a settled procurement model for different franchises. Indeed, all bidders have experienced that the evaluation model can evolve through "clarification" during a bid process, leading to frustration and abortive cost. Greater uniformity in the technical specification of each tender, and in the methodology of bid assessment, would help to reduce the cost of bidding and thus the cost to passengers and taxpayers.

  18.  The DfT has been open to change and has—for example—held trade days where bidding groups can feedback on DfT's processes. Whilst this supports continuous improvement in principle it can create continuous change from franchise competition to competition in practice. This has increased costs.

  19.  This memorandum is not a criticism of the franchising process per se. As we have said, we do understand the need for robust budget-setting and planning before franchises are awarded. However, judging from train operating company owning groups' reports and accounts, it is the case that the cost of bidding is high. In the end costs incurred in bidding are reflected in the cost of the franchise, and thus impact on DfT finances.

  20.  Therefore, streamlining and simplifying the bidding process, even to a limited extent, would be of direct benefit to taxpayers. Our initial proposal is that DfT establish a settled procurement model which is used for different franchises. We look forward to the other recommendations of the Committee.

Are franchise contracts the right size, type and length?

  21.  Our concerns in respect of this second question are the duration of franchises, and the degree to which their terms are prescriptive. Although train operating companies are resourceful and adaptable, there are clear benefits for taxpayers and the travelling public if franchise lengths and conditions are optimised.

  22.  It is self-evident that train operating companies will only plan for investments that will deliver improvements during the term of the franchise. Franchises of shorter durations inevitably discourage investments for radical change. Instead train operating companies focus on incremental, relatively small-scale improvements. It is equally evident that longer franchises allow companies to plan greater and more imaginative investment, particularly in relation to managing for capacity.

  23.  For example, the 20-year Chiltern Railways franchise is often rightly cited as including plans for investment which were far more wide-ranging than were contained in shorter franchises elsewhere. Clear benefits for passengers and indeed for taxpayers, in terms of the rail service delivered and particularly in station and capacity improvements, have resulted.

  24.  It was originally mooted that the new South West Trains franchise to run from 2002 would be for 20 years. Stagecoach Group's proposals for the franchise included plans for investment which would have led to a step-change in the service provided. This was particularly the case in relation to capacity, where we planned for platform extensions at many stations to permit a 10-car railway. It is not surprising that the one year franchise extension plus three year new franchise that was eventually agreed did not include such measures.

  25.  To develop the point, Stagecoach Group also supports the idea of vertical integration within franchises, bringing together those responsible for the operation of trains, and those responsible for the track. That was the proposal for the 20 year South West Trains franchise proposed in 2002. Such integration would, in particular, help in the co-ordination of the investment required for capacity improvements, since it would allow consideration of platform extensions alongside the need for longer trains and more rolling stock.

  26.  There is also a case—which the Government has to an extent taken up—for fewer and bigger franchises. The travelling public, and the taxpayer, want a joined-up railway in which services complement one another, and in which operators are best placed to respond flexibly to demand, delivering additional capacity where it is required. Bringing together smaller franchises, such as is the case with the Greater Western franchise, helps to provide that flexibility.

  27.  Another issue to be considered is the degree to which franchises are prescriptive. If operators are unduly trammelled by franchise conditions that will also affect how imaginative their plans will be.

  28.  Particular concerns relate to the regulation of fares and the specification of timetables. Having freedom, to a degree, to set fares allows operators to manage demand. There is of course a good case for controlling peak fares, but outside the peak it is important that fares can be increased or decreased to respond to demand, and to maximise usage. Having this freedom has, for example, allowed Stagecoach Group to institute its megatrain service on South West Trains, and now on Virgin Trains services.

  29.  Similarly, over-prescription in relation to the timetable constrains operators in the services they can deliver. It is clearly the case that on some lines, particularly close to London, variations in the timetable are not possible due to a lack of capacity. But it is important to allow operators to be responsive to passengers. Setting the timetable in stone at the beginning of the franchise may mean that such responsiveness is impossible. We also firmly believe that Train Operators are best placed to optimise timetables.

  30.  In short we believe that franchises should balance the need for Departmental oversight and management with being of sufficient length, structure and flexibility to allow operators to plan for investments that will deliver significant change. They must also give operators room for manoeuvre.

CONCLUSION

  31.  Stagecoach Group accepts the current structure of franchising, but believes there are areas in which improvements might be made that would improve both the structure and the process. We have described some of those areas in this memorandum; other stakeholders will doubtless have other proposals.

  32.  There are lessons that can be learned from the on-going round of recent and forthcoming franchise awards. Therefore the Committee's inquiry is timely. We look forward to its conclusions, and to learning from its report.

29 June 2006