Rail Franchising

Written evidence from First/Keolis TransPennine Limited (RF 11)

1. Introduction

1.1 First Keolis TransPennine Ltd (F KTPE) is pleased to submit this response to the Transport Select Committee call for evidence on the Brown R eview of the R ail F ranchising Programme . F K TPE run s inter-city train services connecting major towns and cities across the North of England and into Scotland. It is a joint venture partnership between FirstGroup (the UK’s biggest public transport provider) and Keolis (the largest French private sector transport group).

The F ranchise provide s 294 daily weekday services , directly employ ing around 1,0 5 0 staff , with responsibility for the manage ment of 30 stations .

Over the next few years the Nor thern and TransPennine Express f ranchises fall due for replacement . T here are currently discussions around the future franchising model for the North , including the potential devolution of certain rail decision- making to PTE’s and Local Authorities and the possibility of remapping or merger of the se Franchises.

We remain committed to working with our local and national stakeholders to help deliver the best long term outcomes for customers and taxpayers irrespective of the outcomes of the s e debate s . This submission is intended to provide a perspective from one of the curren t f ranchisees on some of the important issues currently under review .

2. Decentralisation

2.1 The government has recently consulted on options for devolving more accountability and decision-making related to local rail services to sub-national bodies, such as local authorities and PTEs. F K TPE broadly agrees with this approach , providing appropriate governance arrangements can be put in place and the necessary resources /capability are built into a new devolved letting and management authority . Decentralised decision-making on certain franchises to sub-national authorities has potential merit and could allow better understanding and greater alignment between local priorities and resource allocation.

2.2 We note that the Department for Transport’s (DfT) [1] consultation on decentralisation showed support for some form of further devolution, but highlighted a broad agreement across consultees for different treatment of inter-regional services (that we interpret to include the services currently provided by FKTPE) to local services and agree with the implicit principle that they should be let on a different basis to each other.

2.3 If further decentralisation of rail decision-making does take place w e would support the Transport Select Committee ’s position that inter-regional and long distance services which serve areas beyond controlling local authority boundaries would require some appropriate safeguards. [2] In this context, 85% of the current FKTPE revenue from passenger journeys arises from journeys that are wholly outside of or cross one or more PTE boundaries.

3. Background to two franchises

3.1 F K TPE has been ru nning the TransPennine Express F ranchise since 2004, taking over the inter-regional and long distance routes from First North Western and Arriva Trains Northern , both of which previously served a mixture of short distance, inter-regional and long distance routes . The lo cal routes of these two former F ranchises were taken over by Northern Rail in December 2004. This change was instigated to address a number of issues in the perf ormance of the previous combined market franchise proposition including an inconsistent customer proposition, low passenger satisfaction, low passenger growth and poor train service performance. The subsequent performance of both F ranchise s demonstrates that this split from geographic to market led scoping of franchise content in the North has been highly successful . The table below helps to show from our own perspective some of the key outcomes that the current f ranchise proposition has been able to deliver . We submit that the underlying drivers for a continuation of a market led approach to deliver such outcomes remain valid.

% Change in measure 2013 v 2004

200 3- 4

20 12- 13

% Improvement F K TPE

% Improvement UK Rail

Passenger Journeys

13.5m

25.2m

87%

40%

Nat ional Passenger Survey Overall S atisfaction Measure

74%

88%

14%

8%

Direct franchise subsidy per passenger kilometre

10.1 pence

3.3 pence

67%

Comparison not available

4. The case for two franchises

4.1 There are number of reasons that have been put forward both in support of and against a merger of the No r thern and TransPennine Express f ranchises. The principle reas ons cited against merger are as follows:

- The optimal commercial framework for each franchise differs ;

- Separation allows strong focus and priorities to be addressed within both local and the inter-regional / long distance markets ;

- Two franchises increases competition and drives better outcomes for passengers ; and

- Maintaining two franchises is consistent with the Brown R eview recommendation no t to reduce the number of rail franchises to avoid market and government risk and increasing barriers to market entry .

The main reasons cited in favour of merging the F ranchises are as follows:

- To allow the optimisation of outputs from the Northern Hub and electrification projects; and

- To deliver economies of scale.

Each of these points is discussed further in the following paragraphs.

4.2 The split in 2004 into the TransPennine Express and Northern f ranchises was intended to address the differing commercial drivers between local and inter-regional / long distance services and it has been very successful in this aim . B y allocating revenue risk to the franchisee together with a profit sharing mechanism with the DfT , FKTPE has been provided with a strong continued incentive to invest in improving the customer offer.

In addition to working in a continued partnership with DfT and local stakeholders over the franchise term to develop and deliver a series of contracted specification changes , around 15% of current services (measured in vehicle miles) operated by FKTPE have been incrementally added during the franchise term by the franchisee taking full commercial risk. This has been done without a ny specification requirement or other contractual commitment to do so . It has directly benefitted customers without making any further call on the taxpayer and has retur ned more revenue to the treasury than initially anticipated .

Furthermore , the current high passenger perception scores are being delivered without the franchise agreement requiring a contracted service quali ty regime, but by an inherent commercial incentive through the fare - box. This position contrasts with m any of the shorter distance local services in the North which are much more heavily depe ndent on taxpayer support with many outputs need ing to be underpinned through specification or other contractual mechanism s . Tighter specification helps to guarantee minimum outputs , but can add inefficiency by inhibit ing innovation and the flexibility to respond to emerging market needs. It is important than any future franchise model and specification acknowledges these differences in the incentives required between service type so that future o perators can work efficiently with the relevant letting authority to drive the best outcome for customers and the taxpayer.

4.3 The separation by market type has also allowed additional operator management focus and investment to be applied on developing markets for rail travel in the North outside of the traditional commuter peak periods , improving the efficiency of the operation as a whole . As a result the leisure customer growth rate has outstripped commuter and business customer growth rate (which in any case have shown good growth) on average over the past 8 years by more than 20% per annum . L eisure customers now account for 73% of FKTPE passenger revenues. The development and growth in these markets has been a key factor in driving down direct f ranchise subsidy per passenger km by 67% over the past 8 years. A franchise merger could risk a dilution of this focus .

4. 4 The conclusions of the Brown Review noted that whilst there may be a case for some franchises to be reconfigured in the context of devolution, it highlights any further move s towards larger franchises should cease as this s ubstantially increase s the level of market risk both to the bidders and to the Department. [3] In addition the Brown Review highlights that t here is clearly a strong case for maintaining a good number and range of franchises with varying sizes and geographical types and market sector focus .

4.5 Recent research by Passenger Focus showed that passengers value the mix of local and longer distance services provided by FKTPE and Northern. The same research also recorded some concern about change for change’s sake and the potential costs of reorganisation or, in a merged franchise, from any loss of competition. Passengers felt that the lack of competition could lead to increased prices and a poorer standard of service. [4]

4. 6 One of the main reasons cited for a potential merger of services currently provided by Northern and F K TPE is to realise economies of scale. According to statistics recently published by the ORR [5] , despite being one of the smallest UK rail franchises , FKTPE’ s operating costs per passenger kilometre are amongst the lowest in the UK rail industry and around a third lower than the average amongst the regional sector as a whole. It is worth noting that the current F ranchise already successfully shares Driver, Conductor and Station Staff resources and costs variously with eight TOC’s (including Northern Rail ), Network Rail and Freight o perators to avoid un-necessary cost duplication . F ramework Alliance agreements are al so in place to explore opportunities for further joint working includi ng improving industry efficiency.

4.7 The other main reason put forward in support of merger is to support the deliver y an d optimisation of outputs from forthcoming investment in the Northern Hub including simplifying the letting of the successor franchises prior to the future service structure and resource plan having being fully established . Whils t we fully understand this important objective, i t is worth noting that effective structures within the industry already exist to a chieve this without requir ing franchise merger s .

Two major changes to rail services in the North have been successfully delivered in partnership with stakeholders and operators using these mechanisms in 2004 and 2008 . In addition FKTPE is currently working to deliver a 35% increase in capacity across its network over the next 18 months in support of the Nort hern Hub investment . T his is being successfully co-ordinated with the co-operation of other passenger and freight operators inc luding Northern Rail using the existing industry structures. T he potential merger of the two F ranchises would not remove the need for this type of interface and co-ordination as the rail network in the North is currently served by seven rail franchises , as well as several freight operators , operating over three devolved Network Rail routes. T he allocation of access rights to the network will continue to be regulated by the ORR .

S ervice re-mapping between operators has also been successfully achieved outside of full re-letting with the transfer to FKTPE of Blackpool – Manchester Airport services in 2006 and Edinburgh / Glasgow – Manchester Airport services in 2007. Rolling stock cascades between operators have also taken place successfully with both the Northern and TransPennine Express franchise s cascading several fleets in and out of their franchise operations.

Both incumbent operators have already been working in strong partnership with Network Rail for over a year to plan for and optimise the delivery programme for the Northe rn Hub representing the longer term interests of their customers.

Many of the changes in timetables, rolling stock and service group re-mapping set out above were not foreseen or finalised at the time of letting the current Tra nsPennine Express and Northern f ranchises in 2003/4. The fact these very significant changes have been delivered by the industry and continue to be delivered shows that similar variations or uncertainty in final outputs could be managed by the letting authority and two separate successor franchisees in the future.

A major restructuring of the franchise proposition at the same time as an intense period of very significant project delivery in the North could introduce new risks to the timely delivery of important service improvements for customers.

4.8 In summary whilst there are good arguments for devolving further control of rai l decision-making to PTE’s and local a uthorities in the North, the merger of services currently operated by the TransPennine Express and Northern franchises is not a pre-requisite for this to occur. Over the past nine years t he separation of services by market type has allow ed many significant benefits to be reali sed for customers and taxpayers. It is important that any future franchising model for the North of England is ca pable of retaining and building upon these improvements.

25 January 2013

REFERENCES


[1] Rail decentralisation: devolving decision-making on passenger rail services in England p.12; Department for Transport

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/15328/consultation-responses.pdfInter-regional

[1]

[2] Seventh Report of Session 2012-13: Rail 2020, p.22 Transport Select Committee

[2] http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtran/329/329.pdf

[2]

[3] The Brown Review of the Rail Franchising Programme

[3] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/49453/cm-8526.pdf

[3]

[4] Passenger views of Northern and TransPennine rail franchises; p.37 - Passenger Focus http://www.passengerfocus.org.uk/research/publications/passenger-views-of-northern-and-transpennine-rail-franchises

[4]

[5] "Costs and revenues of franchised passenger train operators in the UK" www.rail-reg.gov.uk/server/show/ConWebDoc.11053

Prepared 5th February 2013