Memorandum by The Department for Transport,
Local Government and the Regions (PRF 35)
PASSENGER RAIL FRANCHISING
1. On 29 June the Secretary of State published
for consultation draft Directions and Guidance for the Strategic
Rail Authority (SRA). The Government plans to set the SRA 12 new
objectives which cover the need to concentrate on delivering the
Government's 10-Year Plan for Transport, driving up standards
of punctuality, safety and comfort across all franchised services
and a much clearer and more focussed approach to franchising.
The draft Directions and Guidance make it clear that the top priority
is delivering the key targets set out in the 10-Year Plan: an
increase in passenger rail use of 50 per cent by 2010, a reduction
in overcrowding to meet SRA standards by 2010, and a significant
increase in rail freight's share of the freight market by 2010.
2. On 16 July the Secretary of State issued
for consultation a draft policy statement, "Passenger Rail
Franchising." The franchising policy statement has two purposes:
to provide more detail of the revised approach to franchising
which is outlined in the draft Directions and Guidance, and to
satisfy a statutory requirement. The first part of the draft outlines
the Government's priorities for the passenger railway, and builds
on the objectives and processes proposed in the draft Directions
and Guidance. The statement makes clear that the SRA should do
whatever is most appropriate to obtain benefits for passengers,
in the short as well as the longer termwhether that is
through agreed enhancements or extensions of existing franchises,
or by replacing them early or in the normal course of events.
3. The Government regrets that the draft
statement has been misunderstood or misrepresented as narrowly
focused on franchise extension, or as an abandonment of the long
term. It is neither of these things: it specifically allows for
a range of approaches, whatever is most appropriate in the particular
case. No doubt different approaches will be appropriate in different
cases. Where franchises are replaced it will be for consideration
what the duration of the new franchise should be.
4. For some franchises (eg South Central,
Chiltern, South West Trains), heads of terms have already been
agreed for early replacement franchises. For Midland Mainline
an extension has already been signed, and for GNER negotiations
are currently under way. Passenger benefits can be obtained in
these or other ways, such as by agreement under current franchise
deals or through replacement of a franchise either early or on
expiry in the normal way.
5. The aim is to see early improvements
in safety, punctuality and comfort across all franchised services,
with new passenger performance targets, investment in additional
services, improvements to rolling stock and improved passenger
facilities. This is additional to, not instead of, long-term investment.
6. The second part of the draft franchising
statement sets out the Secretary of State's proposed policy towards
the use of the power in section 26 of the Railways Act to set
aside the precise tendering process which otherwise precedes the
award of a franchise. Where the SRA seeks to replace an existing
franchise early, the Secretary of State expects it to do so through
an exercise which is very close in substance to the tendering
process laid down in the Act. However, where there are several
years to run on an existing franchise, the SRA may not formally
be able to seek invitations to tender and the process, although
fully competitive, may not comply with the requirements of section
26. The Secretary of State has a duty to undertake appropriate
consultation when preparing a statement relating to section 26.
7. The consultation period for both documents
ends on 21 September, which makes it difficult to respond to the
Committee in detail. The Government will consider the responses
received before publishing the final franchising statement, and
Directions and Guidance to the SRA.
8. The Hatfield accident demonstrated that
the backlog of investment on the railways is more pervasive and
deeper than anyone had realised. Among the consequences has been
that Railtrack needs for the time being to concentrate on its
"day job" of operating and maintaining the railway.
New major infrastructure projects, to add to the massive West
Coast project already under way, are not top of its agendain
the Government's view, rightly so. Long term investment to improve
the railway remains the Government's objective, but a different
approach will be needed to the major infrastructure projects which
must be a part of that objective. Against that background there
has to be some decoupling of the franchise programme and major
9. Nevertheless, several long-term multi-billion
pound enhancement schemes are already happening on the railwaythe
West Coast upgrade, the Channel Tunnel rail link and implementation
of the Train Protection and Warning System (TPWS). The Government
is ready through its 10 Year Plan to fund further major schemes
just as soon as the Strategic Rail Authority can finalise the
10. The first phase of the East Coast upgrade
is also under way. But by common consent there are two more years
of detailed preparatory work to be done before decisions can be
taken on the next phase. Other significant infrastructure enhancements
may face similar delay, which will unavoidably have an impact
on when the capacity and performance benefits from infrastructure
11. The Government is looking to attract
new sources of finance from third parties to take forward additional
major enhancement projects. The Department, SRA, Treasury and
Railtrack are currently developing proposals for Special Purpose
Vehicles (SPVs), new investment vehicles designed to attract private
sector finance and to deliver the completed enhancements. Details
of potential structures will be outlined in the SRA's Strategic
12. Investment in new rolling stock can
and will continue to be led by the rolling stock leasing companies
(the ROSCOs). That requires a long-term commitment to the railway,
but it does not in itself require new long-term operating franchises.
13. Meanwhile passengers deserve more than
promises. The Secretary of State's draft guidance to the SRA,
his new franchising policy and his decision on the East Coast
franchise are all aimed at achieving early improvements in the
quality of services. That is additional to, not instead of, long-term
14. The Secretary of State has asked the
SRA to take a fresh look at what can be achieved within existing
franchises to drive up safety, punctuality and comfort across
all franchised services.
15. The Government wants to see improvements
in existing franchises which include:
New passenger performance targets.
Investment in additional services.
Improvements to rolling stock.
Improved passenger facilities.
16. The Government's aim is to deliver the
following benefits. Not all of these will necessarily arise on
any given franchise. Some of these benefits may be deliverable
through existing franchises or extensions of them but others may
require selective early replacement of a franchise.
Better punctuality and reliability
eg tougher performance targets, extra drivers, spare trains for
emergency use, enhanced maintenance cover, better arrangements
for dealing with disrupted services.
Reductions in overcrowding eg extra
rolling stock, additional services and longer trains.
Improved personal security eg more
CCTV at stations and on trains, secure parking, more accreditation
under the Secure Stations initiative and extended staffing hours.
Integrated transport measures eg
integrated public transport information systems; better and safer
interchange at and access to stations by local public transport,
by car, cycle and on foot; and new park and ride stations.
Improved accessibility for disabled
people eg at stations and on trains.
Putting passengers first eg better
compensation when things go wrong, no quibble refunds, and a greater
voice for passengers in the level and standard of services.
Improved station facilities eg signage,
information, waiting rooms, and ticket offices.
Improved passenger information and
retailing eg real time travel information and Internet ticket
17. The need for the safe operation of the
railway is a given. The Government has never suggested that performance
be at the expense of safety, and believes that the two go hand
in hand. On safety, the SRA has a duty to take into account the
need to protect all persons from dangers arising from the operation
of the railways, taking into account, in particular any advice
given to the SRA by the HSE. The draft Directions and Guidance
say that the SRA should ensure that HSE is fully consulted whenever
railway safety may be at issue, and that it should be guided by
the advice of HSC/HSE on all health and safety issues.
18. Franchising is not the only tool available
to the SRA. The Rail Passenger Partnership scheme provides funding
to assist the provision of new or enhanced local and regional
services that cannot be justified on financial grounds but which
contribute to the Government's wider objectives for rail. The
SRA has streamlined the assessment process for smaller schemes.
This will ensure that successful projects are appraised more quickly
and the benefits felt by passengers sooner.
19. The Government is not abandoning the
long term. But it does not want to be so focused on the long term
that it neglects the need to make improvements now. The daily
reality also needs attention.
20. The problems which Railtrack has itself
acknowledged have affected the picture on infrastructure investment.
Since Hatfield, Railtrack has rightly said it needs to concentrate
for now on maintaining and operating the existing network. That
will change; but meanwhile, improvements depending on major investment
in infrastructure are going to take longer to deliver. So the
SRA needs to concentrate on other types of improvements.
21. Investors in enhancement projects need
clearly developed and fully costed projects before they are willing
to put up capital. The Government has no reason to believe that
private capital will not be available for sound well-costed projects.
In some cases the investment might come from train operators,
and might form part of the overall business case which would justify
a long (up to 20 years) franchise.
22. Investment in rolling stock is now mainly
undertaken by the rolling stock leasing companies. So long as
the railways have a healthy futureand the number of passengers
is continuing to risethe rolling stock companies will continue
to invest. The SRA can require new trains to be used by the replacement
franchise, thus producing a longer guaranteed lease income period.
But in principle it should not need to do so. If the trains are
satisfactory in service, a business risk which the leasing companies
should be prepared to undertake, there should be a ready market
for them, whoever the franchisee.
23. So there may still be cases where the
award of 15 to 20 year franchises may be justified in order to
allow a reasonable opportunity to the train operator to make a
return. But this will not be so in every case.
24. The 10 Year Plan provided for an aggregate
£63 billion of public expenditure and private investment
for railways33 per cent of total Plan funding. This was
made up of just over £34 billion of investment funded by
the private sector, and £29 billion of public support. (The
latter includes £3 billion of revenue support for privately
funded infrastructure enhancements other than the CTRL, which
is usually omitted from the total to avoid double countinghence
the widely quoted total of £60 billion.). The majority of
the £34 billion of private investment is not affected by
Railtrack's financing problems, and comprises spending on the
CTRL, passenger and freight rolling stock, and infrastructure
25. The Government is fully committed to
delivering the key growth targets for the railway in the 10 Year
Plan (50 per cent passenger growth, reduced overcrowding and up
to 80 per cent freight growth provided the rail freight companies
can deliver improvements in performance and efficiency). But not
everything can be done at once. The SRA's strategic plan will
show how priorities can be addressed, and will map out how passenger
benefits and future growth are to be achieved. New pressures have
of course arisen since the 10 Year Plan was published. But the
Plan will be reviewed in conjunction with next year's review of
26. In April 2001, Railtrack agreed in a
Statement of Principles with Government to focus its activities
on maintenance and renewal of the core network, working with joint
venture third parties to take forward future major enhancements.
It also agreed to appoint, following consultation with Government,
a public interest non-executive director to its main board.
27. The new approach to providing enhancement
projects will involve establishing joint ventures involving third-party
providers of project finance and project management/delivery skills.
This will enable Railtrack to give more attention to management
of the core network. Railtrack's participation in the development
projects will be crucial, along with train operating companies,
construction consortia and financial institutions.
28. Translating the April agreement in principle
into workable structures is a major and crucial task. The aim
is to determine what forms of special corporate financing structures
will be best suited to the major rail projects coming up. The
SRA are developing a structure for how this third party financing
will work, to be outlined in the Strategic Plan.
29. In order to maintain the advantages
of a unified network, it is anticipated that the enhanced asset
will transfer to Railtrack on completioneither through
full ownership or, at least, through responsibility for operating
and maintaining the asset. Public funds provided by the SRA will
play a vital role in making the new structures happen. These funds
will not only be able to provide risk-bearing equity through direct
participation in joint ventures or SPVs, but could also be used
for post-completion refinancing.
30. The draft Directions and Guidance make
it clear that the SRA is the strategic, planning and co-ordinating
body for the rail industry and the guardian of the interests of
rail users. It acts as the purchaser of train services and railway
infrastructure on behalf of the Secretary of State. The Government
looks to the SRA to provide leadership and a clear strategic direction
for rail transport in Great Britain, through partnership with
key organisations. Prioritising programmes is a key element of
the SRA's leadership role. But the role goes much wider. For example,
it includes promoting an understanding and mitigation of long-term
supply constraints on the capacity of the industry.
31. The draft Directions and Guidance also
emphasise the importance of day to day franchise management by
the SRA, to protect the interests of rail users and public finances.
The SRA will require robust commitments to continuous improvement
in performance in replacement franchise agreements. A revised
performance regime will be put in place which will progressively
reflect the benefits resulting from increased investment. The
SRA will expect train operators to build in sufficient operational
resilience to their plans to deal with problems that are reasonably
foreseeable such as staff shortages, and the vulnerability that
stems from regular, prolonged overtime working. New franchise
agreements will provide for closer scrutiny by the SRA, particularly
on performance and the delivery of other franchise obligations.
The more timely and effective enforcement provisions under the
Transport Act 2000 will enable the SRA to take a robust and proportionate
approach to breaches, or likely breaches, of franchise agreements.
32. In 1999, the SRA started to replace
the shorter franchises, although not due to expire until 2003
and 2004, to secure additional investment and passenger benefits;
in some areas the franchise map is being redrawn to create fewer,
stronger franchises. This was judged by the SRA to be the best
way to secure additional investment and passenger benefits.
33. However the franchise replacement programme
now needs realigning. There is concern about the slow pace of
the programme, the length and complexity of bidding rounds and
the absence of clear guidance about the nature of the bids. The
"bottom-up" approach adopted by the SRA until now has
largely left it to bidders to make proposals on issues such as
customer service, infrastructure and rolling stock. Train operators
are indeed best placed to identify innovative solutions and to
take the commercial decisions involved, but this approach has
generated contrasting bids which are difficult to evaluate and
involve a wide range of potential costs. The process has left
the SRA unable to combine elements to form the best overall value
for money or operational solution; it can only accept or reject
the offers made.
34. The SRA is therefore now looking at
a more structured approach that focuses on clearly defined output
specifications. There would be a core proposal that the SRA would
definitely purchase, and a menu of "optional extra"
enhancementsincluding suggestions by biddersthat
the SRA has an option to take up during the franchise, according
to circumstances then prevailing.
35. This should speed up the process, and
should also help to ensure that the franchise replacement programme
delivers the best overall value for money, taking into account
a range of factors including safety, regional development, social
inclusion and other objectives.