Reform of the rail franchising programme

26 Nov 2015 12:40 PM

The management of rail franchising has improved since 2012 however significant risks remain to achieving value for money as the programme develops.

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“Since the collapse of the West Coast Main Line franchise competition, the Department has improved its management of rail franchising. Results of early franchise competitions indicate that returns to taxpayers could be higher than in the past. However, important risks remain. There is considerable uncertainty and volatility around the rail infrastructure improvement programme. And there are risks to effective competition should market interest decline. The Department recognises these challenges and is taking steps to address them.”

Amyas Morse, head of The National Audit Office, 24 November 2015

The Department for Transport has improved management of its rail franchising programme, and is better placed to deliver value for money than it was in 2012, following the collapse of the InterCity West Coast Competition, according to a report by the National Audit Office. However there are emerging risks to achieving value for money as the rail franchising programme develops, with uncertainty, delays and cost increases on major infrastructure works; the risk of reduced competition; and potentially stretched bidder and departmental resources.

The NAO found that the Department, following the cancellation of the competition, has now largely addressed the recommendations in reports by the NAO, the Committee of Public Accounts, and Sam Laidlaw (a then Departmental Non-Executive Director). Those reports highlighted significant weaknesses in the Department’s management and oversight of the franchise competition. The Department has taken steps to improve its capability and has strengthened its leadership. It is also taking steps to strengthen its franchise management capacity and capability.

Since the restart of the franchising programme in 2013 the Department has awarded three franchises through competition and made 10 ‘direct awards’ (single tender actions to help produce a staggered schedule of competitions while maintaining the provision of train services). Overall, for the three completed franchise competitions, operators are contracted to pay the Department higher returns than the Department’s estimate of what would have been paid under the terms of the previous franchises.

The Department’s decision to let ‘direct awards’ to incumbent operators was a sensible temporary measure but it may have missed opportunities to maximise value for money in the early direct awards because the benchmark used was too low and not designed for the purpose. The Department has contained risks to value for money from these non-competed contracts by limiting the number and duration of direct awards, with most lasting between two and three years. On the Great Western franchise, however, it will not benefit from the potential higher returns resulting from competition for up to six and a half years longer than originally planned. The Department awarded two direct awards for Great Western. The second of these will last between three and a half and four and a half years, because it judged that the work to electrify the route, and the introduction of new trains would create too much uncertainty to carry out an effective competition.

The scale and complexity of planned infrastructure work and the major decisions pending about the construction schedule for High Speed 2 presents challenges for franchising:

• The Department must decide between a range of responses and judge how best to protect value for money while keeping train services running. Its options include: delaying competitions until there is greater certainty about infrastructure plans (for example, the Trans Pennine Express and Great Western franchise competitions); issuing a management contract which protects the operator from the risks to revenue (as, for example, with the Thameslink, Southern and Great Northern franchise) or managing change during the life of the contract (for example the direct award for the Great Western franchise);
• The resources of the Department and potential bidders could be stretched by the high levels of activity planned to take place during 2016 and 2017. The Department is now planning to start competitions for the South Western, InterCity West Coast, West Midlands and East Midlands franchises over a period of eight months and award all four franchises between February and November 2017. The Department had intended to avoid overburdening the market and encourage competition by producing a phased competition schedule; and
• The Department may find it harder to get value for money in future competitions if market interest drops below the current level. The three competitions started since the relaunch of the programme each received three bids. By the Department’s own measure, if it receives fewer than three bids it may reduce value for money. The Department is trying to encourage new entrants to the market, and maintain interest from existing operating companies. It has not yet decided how it might adjust its procurement approach to drive a better deal in the event that market interest falls, for example, by introducing more competitive negotiation and dialogue with bidders.