FRANCHISING ‘HAS not yielded all the competitive benefits initially envisaged by the Government in the early 1990s’, says the House of Commons Transport Committee. The committee has called for a series of changes, including a greater role for open access operation, an overhaul of the management of franchises and introduction of smaller franchises with longer franchise terms.
The committee says it is concerned by ‘serious shortcoming with [the Department for Transport’s] capability and capacity’ to manage franchising and says there has been ‘insufficient’ progress since 2012 to warrant proceeding with the current structures and personnel in place. It has called for a review examining whether franchise monitoring and enforcement should move to the Office of Rail and Road, with particular criticism of the ‘disastrous outcomes’ on the Thames link, Southern and Great Northern (TSGN) franchise.
With respect to this franchise specifically, DfT is criticised for ‘inadequate planning, inaccurate assumptions and weak performance incentives’ along with ‘serious deficiencies in…monitoring and enforcement’ of the franchise. The committee says transparency in franchise monitoring ‘appears to be very poor’, and has called for better drafting of force majeure arrangements in franchise agreements, in the light of ongoing uncertainty regarding Govia Thames link Railway’s force majeure claims following industrial action.
The committee believes DfT ‘does not have sufficient capacity to revoke a franchise from an operator, particularly of the size and complexity of TSGN’, with a weak penalty regime meaning there appear to be ‘very few levers with which to manage performance and enforce a contract’. It has called for an update of DfT’s franchise enforcement policy by May 2017, including the consideration of new ways of enforcing the contractual terms of a franchise, such as contracting for the reallocation of capacity to an alternative operator in the event of sustained poor performance or default.
The committee’s report is also critical of the management contract agreed for the TSGN franchise, from which DfT is expected to receive ‘considerably less revenue’ than originally anticipated and which the committee says has exposed the Department financially. For example, it is highlighted that a £38 million net revenue fall over the current financial year ‘could have been reinvested in rail services’ but will be ‘lost to the public purse’. The committee has called for the Department to end the ‘haemorrhaging of income’ and to explain why the current ‘arm’s-length approach’ to the franchise was seen as suitable
The committee has called for a greater role for open access, which it says ‘may be an avenue for new and smaller entrants to the market’ and suggests open access operators ‘may be able to serve a role in franchise enforcement’ through reallocation of capacity away from underperforming franchises. However, it says that reforms to track access charges are needed prior to any expansion, and has called for the DfT to work with the Office of Rail and Road to introduce a new charging regime at the start of Control Period 6 in April 2019, with the use of a public service obligation levy suggested.
A further conclusion is that current franchises are too big to provide ‘a clear enough market focus’ for operators while their relatively short length reduces ‘the incentive of operators to both invest and drive down costs’. While immediate and widespread reform is seen as ‘neither practical nor feasible’, the committee recommends that franchise contracts should be reviewed so that they ‘present less risk to the taxpayer, are not unnecessarily complex, and are focused on the market they serve’. The report also casts doubt over the success of alliances, which are ‘ultimately limited by the misalignment between franchises and Network Rail Routes that prevents the establishment of deeper commercial arrangements’
DfT’s capacity to procure the forthcoming West Coast Partnership franchise, which will include both classic services on the West Coast main line and the early operation of HS2 services, is also questioned. While acknowledging the benefits of bringing these services together under a single operator, the committee highlights ‘competition and planning risks associated with operating a franchise of this magnitude and complexity’ and also questions the lack of consultation or publication of a business case justifying the decision to proceed with the combined franchise. The committee believes WCP will be ‘a significant resource burden’ which has ‘the potential to jeopardise other franchise competitions’ and has called for further direct awards to high-performing franchises to lighten the load of competed franchise renewals over the coming two years.