Reform Of Rail Franchises Needed To Do More For Passengers And Taxpayers30/10/2009
Reform of rail franchises needed to do more for passengers and taxpayers
Sixteen years after privatisation, Britain’s train companies are calling for reform of the system of franchising rail services to free them up to do more for passengers and taxpayers.
In a report published today, the Association of Train Operating Companies (ATOC) argues that smarter franchises need to go together with other policies to continue improving the attraction of rail compared with cars and air travel, all in the context of constrained public finances.
The report sets out six areas for reform which would strengthen the commercial signals for train operating companies (TOCs) to build on the industry’s success in generating record levels of investment, customer satisfaction and punctuality. Less inappropriate micro-management by civil servants and greater use of longer franchises, among other reforms, would:
- Increase the focus on improving quality for passengers. More focus by the Government on setting franchise outputs (such as improved passenger satisfaction levels, punctuality targets and peak time capacity) and less on the specific ways of achieving them (such as detailing the timetables to be run) would free TOCs to find the best ways of giving passengers what they want. Longer franchises would also foster more TOC managerial focus on improving services for passengers, rather than looking ahead to the next bid.
- Speed up the delivery of improvements. Experience suggests that in the case of stations, for example, TOCs – with more streamlined decision-making - could deliver improvements faster than Network Rail. TOCs’ record of working with rolling stock companies to lead £4.5bn worth of train orders in the years after privatisation to create one of the youngest vehicle fleets in Europe also suggests they should take on a bigger role from the DfT in procuring and refurbishing trains.
- Give taxpayers a better deal for their money. Longer franchises would improve the prospects for attracting more private finance into rail, by giving operators more time to benefit from any investment they might make to improve service quality. Giving TOCs more of a role in delivering station improvements, thanks to their lower overheads and approach in scoping projects, could save £250m or more from Network Rail’s prospective spend in this area. Measures to improve risk sharing between TOCs and Government would also bring greater financial stability, to the benefit of both.
Michael Roberts, Chief Executive of ATOC, said: “At a time when the challenge facing all public services is how to deliver more for less, we have a window of opportunity in the railways to empower private train companies to do just that.
“By implementing a package of focused reforms in time for the next franchises which have to be let, the Government can increase the scope for train companies to bring innovation and commercial nous into improving the railways.
“Equally, we would keep the existing mechanisms to deal with any company that fails to perform: terminating a franchise under our proposals would be no more difficult for a longer franchise than for a shorter one. And our proposals for better risk sharing are precisely that – a continued sharing of risk between public and private sectors.
“What drives our proposals is a belief that giving train companies a greater stake in the railways – for example, in terms of longer franchises and wider areas of responsibility – is not only good for passengers and taxpayers, it is also fitting given their role as major public transport players with strong track records of delivery at home and abroad.
“This approach also frees other key players, such as Network Rail with their priorities of network management and enhancement, and Government as guardian of the public purse, to focus more on what they are best at.
“In this way, we believe franchising can evolve without the need for a more radical, destabilising overhaul which all the main political parties wish to avoid, and so better equip the industry to deliver a railway fit for the 21st century.”
Notes to editors
1. The report, ‘Franchise reform, a better railway for passengers and for taxpayers’, is available on request.
2. Details of ATOC’s six key areas for reform of franchising are below:
- Allow train companies greater flexibility to give passengers what they want
Too many franchises are over-regulated and micro-managed by the Department for Transport (DfT), which specifies timetables, frequency of trains, rolling stock and even the number of ticket vending machines.
DfT should continue monitoring franchises closely, but by concentrating less on inputs and more on setting outputs for TOCs to deliver in the most effective way, covering areas such as passenger satisfaction, and capacity provided in peak hours.
Such an approach is consistent with advice on Government procurement, has been used before in delivering rail improvements, and is appropriate for a market made up of major players with a track record in delivery. Allowing TOCs more opportunity to innovate would help them to deliver better services to passengers faster, offer scope to cut the overall cost to taxpayers of providing rail services – and potentially cut by one third the £24m spent by DfT Rail and National Networks (2007/08) on consultants.
- Adopt longer franchises as the norm
Longer franchises are already used successfully in Britain: the three TOCs with the highest scores on performance and passenger satisfaction today have franchises of 15 years or more.Longer franchises may not always be suitable, but we think the norm for franchises should be 15 years, and possibly 20 years in some cases, as allowed under EU law – backed up by mechanisms which exist to protect passengers and taxpayers where a TOC fails to meet its commitments. Longer franchises would help in three ways.
They would foster more TOC managerial focus on improving services for passengers, rather than looking ahead to the next bid. They would facilitate more private sector investment, by giving operators more time to benefit from their outlay – and strengthen TOCs’ current commitment to the long-term development of the network by giving them a greater stake in the railways.
- Focus more on awarding franchises on the basis of quality, not just price
In line with official advice and overseas practice in rail franchising, we want to see DfT showing more commitment to the principles of best value procurement than appears to be the case at present.
This would mean DfT giving more weight, when considering bids, to proposals which commit to higher service quality at an acceptable price to Government, and not just the size of premium or subsidy due to be paid.
While the DfT’s approach in recent years has helped drive down the cost to taxpayers of procuring rail services, we think our proposals would do more for passengers in terms of encouraging and rewarding ideas from TOCs for better services; and would ultimately benefit taxpayers by improving the quality of bids for franchises.
- Structure franchises to improve financial stability
The worst recession since the 1930s has led to revenue growth significantly below projections made in franchise bids. A lack of flexibility means operators pay the same costs at a time when revenue is falling.
ATOC believes better risk–sharing is vital to promote stability in the industry. We identify seven options, including an earlier start to revenue support in a franchise, linking franchise payments to GDP and making a greater (but still limited) proportion of Network Rail charges variable.
Such options would allow TOCs to focus more on delivering long-term service improvements, to the benefit of passengers. By reducing the systemic risk in any future recessions of having to re-let franchises, taxpayers also stand to gain by enabling the DfT to plan ahead financially for the long term with greater confidence.
- Enable train companies to take on greater responsibility for station, depots and rolling stock
We believe that the expertise and structure of TOCs, combined with their closeness to the market and to operations, would enable them in many cases to deliver station and rolling stock improvements more quickly and cost-effectively than under current industry arrangements.
On stations and depots, experience suggests that were TOCs to take on more of a role from Network Rail in delivering improvements, then their approach on scoping projects, lower overheads and more streamlined processes could save as much as £250m-£500m from Network’s Rail’s prospective spend in this area.
Such a move would also help Network Rail focus more on the vital job of managing and enhancing the network – very much the areas of its core expertise – ultimately to the benefit of passengers and taxpayers alike.
On rolling stock, despite the trend in recent years which has seen DfT progressively taken over the role of procurer, TOCs have a positive record built up before then of working with ROSCOs to lead the ordering of £4.5billion worth of new trains. Giving TOCs the responsibility of managing procurement would lead in our view to faster delivery of rolling stock and better cost efficiency in the commissioning of new trains.
- Sustain a mix of small and large franchises
Retaining a mix of small and large franchises has advantages. Changes in franchise boundaries can be costly and having a number of smaller franchises can help make the UK market more attractive to bidders than a market dominated by larger franchises might otherwise be.
There has been a general move towards larger franchises, but we think it essential that the DfT continues to assess the costs associated with changes to boundaries – and that there should be no automatic presumption in favour of further merging of franchises.
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