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Embargoed until 00:01 20 January 2010 - Longer franchises, more scope for innovation and new measures to penalise operators who walk away

News Release issued by the COI News Distribution Service on 19 January 2010

Future rail franchises will be let for a minimum of ten years - with even longer contracts of up to 22 years possible in return for additional investment. Train operators are also to get more scope for innovation, stronger incentives for performance and maximising passenger growth, and will face higher penalties if they decide to walk away from their contracts, Transport Secretary Andrew Adonis announced today as he set out the Government's proposed changes to rail franchising.Longer franchises, more scope for innovation and new measures to penalise operators who walk away

Currently the majority of rail franchises are let for around eight years but, under the proposals, all future franchises will be offered on a ten year basis and bidders will be given the opportunity to present the case for a longer contract which includes additional investment. Future franchise specifications will also be designed to allow maximum scope for operators to offer innovative solutions and bidders will be free to offer their own additional plans and options in their bid.

To ensure that longer franchises continue to deliver for passengers, the Government is also proposing to introduce tougher performance measures to ensure that poor-performing operators can be stripped of their franchises. Franchisees will also be required to pay larger deposits - known as 'performance bonds' - to make it much harder for them to walk away from their franchises when revenues decline and parent companies will continue to be required to provide financial guarantees.

The proposals are set out in the Government's 'Future of Franchising' paper, which will inform the forthcoming consultations on new franchises for InterCity East Coast, Greater Anglia and Essex Thameside.

Andrew Adonis said:

"Franchise length is about striking a balance between securing investment from bidders - which comes from longer franchises - and testing the market regularly to ensure best value for taxpayers - which comes from shorter contracts.

"Ten year franchises, with the possibility of longer contracts should bidders make sensible and affordable proposals, will allow operators to invest and suggest new innovations. However, having longer franchises means that we will need to introduce tougher performance measures and more potential contract break points to ensure bad operators can be removed.

"Recent events have also shown how vital it is that we make it harder for operators to walk away from their franchises, so performance bonds will rise and we will expect much larger guarantees from parent companies."

Other proposed changes include:

Changes to the current financial risk-sharing provisions, known as 'cap and collar', which could include a link to GDP or employment levels.Making it easier for operators to invest their own money during the life of the franchise, and receiving part of the value of that investment once the franchise ends

Notes to Editors

1. The Department will now discuss the proposed changes with key members of the railway industry, including train operator owning groups. 2. The competition for future franchises will be decided on the basis of the ten year bids and the Government would then consider whether to opt for the winning bidder's longer option – if they bid one. This allows the market to choose whether they think a longer contract is worthwhile. 3. The Department considers that the extra incentives for investment provided by longer franchises are unlikely to be sufficient to deliver all the improvements which are needed by passengers and the wider economy. There will therefore continue to be a need for Government to specify, fund and monitor the delivery of key investments. 4. The Government will reserve the option to allow specify franchises where this is necessary. This will be necessary, for example, where major infrastructure changes could fundamentally change the scope of a franchise and would otherwise fall mid-way through a contract. 5. Bidders will be able to propose innovative solutions as part of the bids to Government and will gain extra credit for doing so. We are also investigating easier ways to allow bidders to invest in schemes with long paybacks during the life of the franchise – but gain some value for that asset if they do not retain the franchise

Contacts:

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