UK: What Next For Train Franchising?

Last Updated: 1 November 2012
Article by Stuart Thomson

Can flaws in the tendering system for train services be fixed with minor tweaks - or will a complete overhaul be required? Stuart Thomson and Francis Tyrrell consider the implications for the DfT and wider government procurement.

Virgin's challenge to the award of the West Coast Main Line franchise to First Group did not even have to be heard by the High Court. Late in the day, the Government recognised that a problem existed in the process followed and put its hands up. In itself, this places the Government at more danger of legal challenges going forward - because, quite simply, a challenge to the process has been seen to work. However, the problem appears to have come to light only as a result of external examination by PwC. There are clear legal and political implications from the situation that the DfT now finds itself in.

Legally, rail franchises are Part B services contracts under the Public Contract Regulations 2006. Their procurement is undertaken under the franchising provisions of the Railways Act 1993. An array of European and UK procurement and competition rules applies, which set out a number of procedural steps which must be followed. With any procurement exercise it is not uncommon for complaints and claims to be brought on procedural grounds.

However, it appears that the Government's concession in this case is due to insufficient or incorrect data having been used in the franchising process for passenger growth or inflation. The first of two inquiries launched to look into the matter, which will be conducted by Sam Laidlaw (DfT non-executive director), will consider whether this is the case and also whether the issues applied to all or just some of the bids.

The second inquiry, by Eurostar chairman Richard Brown, will look in more detail at the implications for the rail franchising programme. Terms of reference for the inquiry appear to envisage changes to the bidding and evaluation processes for franchises but not a deeper examination of what franchising is for and what it should achieve. There are also few details about what resources will be available to either inquiry. The current situation offers the chance to consider what franchising is for. There is also a question over how each inquiry relates to the other. If the first suggests "human error" or a slight tweak to the model, then surely the second cannot be too radical in its recommendations?

The "do minimum" option, the one with least political impact, is to say that the system works well and that it was merely a problem with data input. This is the line that the Government is currently using. This could lead to some tweaks to the system but no major overhaul.

However, the problem has already been used as a basis to argue for reform by unions and rail campaigners, most notably for the railways to be brought back totally under the control of the public sector by renationalising. Nevertheless, there is nothing intrinsically wrong with the franchising system and nothing wrong with long franchises being offered. Just look at Merseyrail and Chiltern - two well-performing railways, reflecting local needs, which both run on long-term franchises and from which lessons could be learned. Although these are largely self-contained, the original South West Trains franchise was also offered for 20 years.

If the first inquiry concludes that there was a data-input error then it will be more difficult for the second to start considering major changes to the franchising system, or indeed a move away from franchising altogether. If the Government can place the blame firmly at the door of officials then it saves the franchising system and allows ministers to move forward with suggested reforms of the civil service.

At the beginning of the summer, Cabinet Office minister Francis Maude launched the Civil Service Reform Plan. Though criticised by some as the first step towards the politicisation of the civil service it went largely unnoticed. Even the Labour Party did not seem to mind the suggestions too much. The West Coast problem has, it could be said, provided ministers with a clear justification for moving ahead with reform.

If, however, we look at the fightback from one of the officials suspended and consider the way in which the decision was made, then it starts to look as if the problem is that a more effective system of checks and balances is required, with clear lines of responsibility and, most importantly, civil servants equipped with the expertise necessary or technical matters outsourced. Additionally, there remains some confusion about the Government's priorities regarding franchise bids. The procurement documents themselves indicated that the franchise was to be awarded to the bidder who offered the "best, robust proposition, in terms of price and reliability, for operating the base service specification... this proposition will need to be affordable, and represent an acceptable level of value for money".

The guidance states that ministers need to be satisfied that the processes are fit for purpose and produce the right outcomes but that they are not involved in prequalification of bidders or the award of contracts. The West Coast franchise gave a weighting of up to 15% for bids that set out improvements to profit-sharing. The suspicion remains that the Treasury's view is that sizeable repayments are required while the DfT is looking at services, punctuality, and the like. If you then add in a sizeable dose of localism and stake- holder engagement, you have a lack of clarity about what the franchises are meant to deliver and issues of comparability. This lack of clarity comes from politicians and shows that there can be tension between the politics and the legal process.

The role of the Treasury and its expectation of an income stream also needs to be looked at. If the emphasis is seen to remain on payments to the Government then the potential number of bidders could decline, especially if the franchise periods have to shorten and the guarantees required in case of default increase. In the worst case scenario, a franchise system that works economically may not work commercially.

What this episode puts into focus is the need for a full appraisal of national transport requirements. It remains the case that, currently, each part of transport stands alone. Bidders for rail franchises have to estimate (over a 15-year period) economic growth to inform their passenger numbers, but without an indication from the Government as to how road, airports, ports and urban transit systems will develop. That adds to the risk and uncertainty in an already complex process.

There are choices on offer to the Government. Is the model to be railways operated directly, a fully-specified franchise or one that allows operators to demonstrate innovation and share any proceeds with the Government? Questions have also been raised about the future of the DfT itself. It undoubtedly requires additional expertise to deal with franchises but this could be moved to a more specialised body (akin to the former Strategic Rail Authority). Neither is its recent policy- making record impressive. A decision regarding aviation has been outsourced to an independent review and we still await a National Networks National Policy Statement (originally due in Autumn 2009).

The question is: what is the DfT now for?

Tackling the present problem quickly cannot wait for the creation of new bodies or deeper soul-searching. If a solution is not found soon then market, and passenger, confidence in rail will be lost.

This article originally appeared in October 2012's edition of the Transport Times.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Stuart Thomson
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