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BRIEFING PAPER

Number CBP 6521, 9 January 2018

Passenger rail services in England

By Louise Butcher

Inside: 1. How do passenger services

work? 2. Franchising policy since 2007 3. The future

Number CBP 6521, 9 January 2018 2

Contents Summary 3

1. How do passenger services work? 4 1.1 Franchising 4

What is it? 4 The early years 5 How does it work? 7 Direct awards 8 Scotland 9 Wales 10

1.2 Open access operators 10 1.3 Concession agreements 11 1.4 Track access contracts and charges 11

2. Franchising policy since 2007 13 2.1 Labour Government, 2007-10 13 2.2 Coalition and Conservative governments, 2010- 14

First reform paper & McNulty report, 2010-11 14 West Coast re-let failure, Laidlaw & Brown, 2012-13 15 Further reviews and reform, 2014- 17

2.3 Franchise length 19

3. The future 21 3.1 More competition? 21 3.2 More public ownership? 24 3.3 More partnership working? 27 3.4 More devolution? 29

London 29 Rest of England 31

Contributing Authors: Louise Butcher, Transport Policy

Cover page image copyright: Michael Day – flickr/CreativeCommons

3 Passenger rail services in England

Summary This paper explains how passenger rail services are provided in England and the policies of successive governments towards rail franchising. It also looks at those proposals which have been put forward for further reform – specifically more partnership working, competition, public ownership and devolution.

Since privatisation in the mid-1990s, there have been two types of passenger rail service on the GB rail network: open access operators (i.e. those that bid for ‘slots’ – specific parts of the overall National Rail timetable – to operate their own passenger services) and franchisees (i.e. those who operate a contracted service on a particular part of the rail network under licence from the Government and the regulator). By far the majority of services are run by franchises.

Franchising involves the Government setting out a specification for what it would like a franchise to do over a set period (level of service, upgrades, performance etc.). Companies then bid for the right to operate a franchise to that specification. The Government picks whichever company it thinks will deliver the best overall package for the franchise and give the best value for money. Franchise agreements include details of the performance standards that franchisees must meet and arrangements for the termination of a franchise in the case of failure to meet these standards.

There have been several reforms of the system since privatisation, most recently in 2012-14 following the failed West Coast let. There is much discussion at the moment about where the rail industry goes next and whether the current franchised system is fit for purpose.

Over the past couple of years there have been a number of reports looking into reform of the rail franchising system, advocating various changes, from more competition to more devolution, to more partnership working and moves towards reintegration of track and train. In November 2017 the Government published its strategic vision for rail, setting out plans for alliancing or partnerships, where the train operator works in tandem with the infrastructure manager, Network Rail.

Had Labour formed a government following the 2017 General Election it had pledged to bring the railways, in particular rail franchises, back under public control. There have been a number of reports looking into this idea over the past five years, suggesting how a future Labour Government could either nationalise the railways or create a publicly-run and partly devolved railway.

Finally, there is the question of what impact Brexit may have on how the railways are structured and operated. This remains uncertain for the moment.

Details of individual franchises can be found in the companion HC Library briefing paper CBP 1343 and information on other rail-related matters can be found on the Railways Briefings Page of the Parliament website.

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1. How do passenger services work?

There are essentially two1 sorts of services on the rail network:

• Franchises: train companies operating passenger rail franchises are awarded the right to run specific services within a specified area for a specific period of time, in return for the right to charge fares and, where appropriate, to receive financial support from the franchising authority.2 Franchised train operating companies (TOCs) generally lease stations from Network Rail (NR) and earn rental income by subletting parts of them, for example to retailers. There are currently 16 franchises operating in England and Wales and two in Scotland.3

• Open access operators (OAOs): OAOs operate on a commercial basis with no subsidy and are required to apply to the rail regulator (the Office of Rail and Road, or ORR) and NR for the necessary access rights to run their proposed service. Fares set by OAOs are not subject to fare regulation. Of a total of 19 proposals for open access services received by ORR between 2000 and 2014, only four were successful. There are currently just two OAOs: First Hull Trains and Grand Central Railway.4

1.1 Franchising What is it? A franchise is the right to run specified services within a specified area for a specified period of time, in return for the right to charge fares and, where appropriate, to receive financial support from the franchising authority.

Government subsidy is payable in respect of socially necessary services that might not otherwise be provided. Service standards are monitored throughout the duration of the franchise. Franchisees earn revenue primarily from fares and from subsidy. They generally lease stations from Network Rail (NR) and earn rental income by sub-letting parts of them, for example to retailers. Franchisees' main costs are the track access charges they pay to NR, the costs of leasing stations and rolling stock and of employing staff.

Franchisees may do light maintenance work on rolling stock themselves or contract it out to private companies. Heavy maintenance is normally procured for them by the rolling stock leasing companies according to the contracts between them.

1 concession agreements are very similar to franchises, but the legal framework is

different so they are dealt with separately in section 1.3, below 2 currently the Department for Transport in England and Wales, the Scottish

Government in Scotland; the Welsh Government in Wales becomes the relevant authority for the new Wales & Borders franchise, in the process of being let at time of writing

3 CMA, Competition in passenger rail services in Great Britain: A policy document, 8 March 2016, p38

4 ibid., pp41-2

5 Passenger rail services in England

The rights and obligations are specified in a Franchise Agreement between the franchising authority (in England the Department for Transport) and the TOC. Each franchise is negotiated individually and is a legal document that can only be terminated with the agreement of both parties.

The present system dates back to the Labour Government’s 2004 rail White Paper and the Railways Act 2005.5 In England the Department for Transport (DfT) is responsible for specifying and letting franchises and for managing franchisees’ performance against the Franchise Agreements. Franchisees (called train operating companies or TOCs) are responsible for providing passenger services; they sell tickets and retain fare revenue.6 Franchise contracts are awarded by the DfT. The number of franchises let at one time has reduced from the 25 at privatisation to 14 now.7 Franchises are broadly aligned with Network Rail’s regional structure, in order to make joint working easier – the Government plans to take this further in future (see sections 2.2 and 3.3, below, for more on this).

The early years The railways in Great Britain were privatised under the Railways Act 1993.8 The passenger railway was restructured so that domestic passenger train services could be offered to the private sector to run on a franchised basis. British Rail (BR) reorganised its passenger services into 25 different train operating units. These units were gradually incorporated as subsidiaries of BR and run as separate ‘shadow’ businesses. They paid access charges for the use of track and infrastructure, and rentals for stations and rolling stock, as do the franchisees that have followed them. Each operated under its own licence (granted by the Rail Regulator), its railway safety case (approved by the Health and Safety Executive) and a track access agreement with Railtrack (approved by the Regulator). A wide range of station and depot access agreements (also approved by the Regulator), property leases and other contracts were also required by each train operating business.

Each of the 25 train operating companies (TOCs) was then offered for sale as a separate franchise. Private sector companies, management-employee buy-outs and, if the Franchising Director agreed (in practice he never did), BR could bid for the franchises through a bidding process overseen by the Franchising Director. The successful bidder acquired the TOC outright for a fixed number of years. The first franchises, South West Trains and Great Western, were awarded on 19 and 20 December 1995 and the first privatised services started operating on 4 February

5 section 1 and paragraph 13 of Schedule 1 to the 2005 Act 6 this is usually the case, though on occasion a franchise will be financial structured in a

slightly different way – such as with the current Thameslink, Southern and Great Northern (TSGN) franchise which is essentially a ‘management contract’ whereby the operator receives a fixed payment for delivering services and all the fares revenue goes to the Government

7 not including Wales and Scotland or the potential new east-west franchise, see: DfT, Rail franchise schedule, 6 December 2016

8 not in Northern Ireland where NI Railways are still state-owned and operated

Individual Franchise Agreements can be found on the Gov.uk website.

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1996. The last franchise to be granted was ScotRail, which started operating in private hands on 1 April 1997. Most of these franchises were for seven years, expiring in 2003-04. Responsibility for the first round of franchise replacement was transferred to the Strategic Rail Authority (SRA) in 1999/2000.

For the first franchises the Franchising Director produced a Passenger Service Requirement (PSR) setting out the minimum service levels for train services, based on the timetable then being operated by BR. Each PSR was specific to the franchise. The Franchising Director had the responsibility for monitoring the TOCs’ performance. If TOCs did not deliver the proper timetable, the Franchising Director could impose penalties or, as a last resort, terminate the Franchise Agreement.

The Franchising Director's functions were laid down in section 5 of the 1993 Act – he was responsible for securing the provision of railway passenger services by entering into Franchise Agreements, with franchisees being selected through a competitive tendering process. Train companies bid for franchises on the basis of the amount of funding they would require – or the premium they would be prepared to pay – in order to run those services. The winner was the company seeking the lowest subsidy or offering the highest premium.

Under the Transport Act 2000 the SRA inherited all the functions, property, rights, and liabilities of the Franchising Director. Under the Railways Act 2005, the functions relating to Franchise Agreements for England transferred from the SRA to the Secretary of State for Transport, responsibility for the Scottish franchise transferred to the Scottish Government and the Welsh Government was granted a role in specifying local and regional passenger rail services in Wales (see below).

Franchise replacement initially focused on short term franchises (seven years or less) and was launched in a series of tranches. A new franchise map was published on 20 June 2000.9 The SRA was not convinced that the groups of services put together by BR back in the early 1990s – which formed the basis of the first franchises – were necessarily the right ones with which to go forward with the new replacement franchises. The re-franchising process came to a halt following problems with Railtrack and the safety issues that followed the Hatfield accident.

The whole process was in a state of flux in 2001/02 as Railtrack was nationalised and became Network Rail, and the Government and the SRA published a number of documents about how franchising would move forward, culminating in the publication of the policy statements from the Government in April 2002 and the SRA in November 2002.10 This second document set out a new form of partnership, with franchisees focused on delivering reliable performance, meeting passenger needs and containing short- and long-term costs. Generally, the SRA envisaged franchise lengths of between five and eight years,

9 sSRA press notice, “Sir Alastair Morton sets out Map for UK Rail”, 20 June 2000 10 SRA, Franchising policy statement, November 2002; also: HC Deb 6 November 2002,

cc319-320W

7 Passenger rail services in England

although their duration would be dependent on the characteristics of, and risks associated with, the individual franchises. If franchisees met key performance indicators (KPIs) and delivered on their plans, there was a provision for franchise extension.

How does it work? TOCs bid to operate a defined timetable, and their bids are judged not only on price, but also on relevant past performance, their commitments to improve train and crew reliability and their operational viability. Contracts include clearly defined penalties (including, as a last resort, termination) should they fail to deliver these commitments.

A guide to the railway franchise procurement process, published in May 2011, summarised the Department’s approach to letting a franchise.11 In 2013 the DfT published a further ‘competition guide’ to rail franchising setting out in more detail the process that the Department follows in procuring passenger rail franchises and showing how assurance and approval are built in to the system.12

The most recent version of Franchise Competition Guide dates from February 2016. It stated that the franchise competition process consists of “two distinct but interdependent work streams”, described as follows:

“Buying the Right Thing” means deciding what to buy and on what commercial terms to give the best outcome, and demonstrating that the Proposition for the procurement is fully sound.

“Buying in the Right Way” means running a procurement process that provides confidence to all parties. Such a process complies with applicable procurement law, is transparent and predictable to the market and the public and is operated with full integrity. It introduces the commercial tension required to obtain best price and quality responses from the market.13

It also stated that the Department had introduced a new ‘Passport system’ for potential operators looking to express an interest in rail franchise competitions. It said that this would ‘significantly reduce’ the cost and effort associated with Pre-Qualification: “passport holders are able to express an interest in any rail franchises during the lifetime of the Passport without having to repeatedly demonstrate their managerial competence”.14

In May 2016 the Government published a further, short document, setting out the aims of rail franchising and what it expects from ‘delivery partners’. It stated that as well as fulfilling their contractual and other legal responsibilities, it would look for delivery partners “to exemplify certain behaviours and values which we believe will contribute to the

11 DfT, A guide to the railway franchise procurement process, May 2011, paras 3-26 12 DfT, Rail Franchising Competition Guide, June 2013 13 DfT, Passenger Services: Franchise Competition Guide, 4 February 2016, p9 14 ibid., p5; see also: HC Deb 15 December 2015, cc76-77WS

Number CBP 6521, 9 January 2018 8

success of our rail franchising programme” such as “an inclusive, passenger-centric and market-led approach”.15

Section 30 of the Railways Act 1993, as amended, provides that if a franchise is terminated or there are no acceptable private bids, the Secretary of State for Transport16 can take over the franchise as an operator of last resort. This has happened a few times (e.g., Connex South Eastern, GNER, National Express East Coast).17

Direct awards Following the failed re-let of the West Coast franchise in 2012, the Government effectively suspended its refranchising programme and indicated its intention to make a number of ‘Direct Awards’ instead.18 The nature of these awards varies, but what they mean, in effect, is that the Government negotiates directly with the incumbent operator; there is no competition for the award. The former Rail Minister, Simon Burns, explained the process in a May 2013 letter to the then Chair of the Transport Select Committee:

In negotiating and approving each direct award, the Department uses a comparator to assess what is reasonable. For previous direct awards, where the contractual terms remained broadly the same as for the previous contract, the start point has been the preceding contract and the outturn for costs and revenues. The assessment of Value for Money in the Direct Awards that form part of the overall franchising programme is therefore done on an increment/decrement basis against the current provision from the existing operator.

We work with Technical Advisors to build a comparator model based on the current and projected performance of the franchise. The submissions from the incumbent for the Direct Award are then compared to this model and challenged where appropriate to bring them into an affordable and value for money position.19

The DfT’s guidance gives further information. On the general principles of making Direct Awards, it states:

The direct awards help to manage and sustain a realistic and properly resourced programme of Franchise Competitions and a healthy bidding market for those competitions. In entering into such direct awards, the Department is conscious that the commercial terms have not been tested through a procurement competition. Domestic and European law helps in this by setting out a specific legal framework for “public service contracts” (which encompass rail passenger services) which is intended to ensure that the terms are economically efficient so that the taxpayer (and fare-payer) is not over-paying for services. Should appropriate terms not be achievable, the Department will call upon contingency measures rather than enter into a Direct Award.20

15 DfT, Aims of rail franchising and what we expect from our delivery partners, 10 May

2016 16 or Scottish ministers where appropriate 17 for more information, see op cit., A guide to the railway franchise procurement

process, paras 29-31 18 see section 2.2., below and section 16 of HC Library briefing paper SN1343 19 Simon Burns letter to Louise Ellman, May 2013 20 DfT, Rail franchising direct awards process guide, 31 October 2014, p1

9 Passenger rail services in England

The October 2014 rail franchising schedule showed the proliferation of Direct Awards: of the 16 franchises managed and let by DfT, to October 2014 the Government had made seven Direct Awards and was anticipating making six more between 2014 and 2020. This means that 12 of the 16 franchises would be subject to re-let without open competition (Great Western counting twice).21

Scotland Under the 1993 Act responsibility for letting the ScotRail franchise is devolved, as is the power to make grants to railway services. Responsibility for tramways and guided transport systems is also devolved (e.g. the Edinburgh tram). Further powers were devolved by the Railways Act 2005. Specifically, Scottish Ministers were given powers to:

• prepare and publish a strategy for carrying out their functions in relation to railways in Scotland;

• provide financial assistance for freight services; • take increased responsibility for passenger services and

infrastructure relating to Scotland; • make penalty fare regulations for Scotland; • prepare (and from time to time revise) a code of practice for

protecting the interests of disabled rail users in Scotland; and • exercise the functions of the Secretary of State in relation to a

railway administration order involving a Scottish railway company.

The Scottish Government has responsibility for specifying and letting the ScotRail franchise and the new Caledonian Sleeper franchise (hived off from the ScotRail franchise in 2015).22

The Smith Commission proposed that the power to allow public sector operators to bid for rail franchises funded and specified by Scottish Ministers be devolved to the Scottish Government. This measure is now contained in section 57 of the Scotland Act 2016.

Across the second half of 2016 there were concerns about the performance of the franchise and indications that the Scottish Government would consider taking back the franchise from 2020 if performance does not improve.23 An improvement plan was agreed and published in November 2016.24 In July 2017 there were reports that Transport Scotland had begun the process of enabling a public sector bidder for the franchise when it expires in 2025.25 Any public sector bid(s) for the next franchise would be evaluated against private sector bid(s) in the same way as any other bidder.

21 DfT, Rail franchise schedule, October 2014 22 further information can be found on the Transport Scotland website 23 e.g. Scottish Government press notice, “Minister welcomes ScotRail Improvement

Plan”, 21 October 2016 and “Scottish Government calls summit on public sector railways bid”, Common Space, 23 November 2016

24 Transport Scotland, ScotRail Alliance Performance Improvement Plan, 29 November 2016

25 see, e.g. “End of the line for Scotrail? SNP plans radical shake-up of Scottish railways”, The Herald, 3 July 2017; under powers in section 57 of the Scotland Act 2016

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Wales Wales is waiting for its new system of devolution, set out in the Wales Act 2017. The Act introduces a ‘reserved powers’ model which specifies the matters reserved to the UK; everything else is devolved. This is the reverse of the current model. Government commencement orders are needed to introduce these changes. Until the 2017 Act comes into force the provisions of the Government of Wales Act 2006 apply.

The Welsh Government is a co-signatory to the current Wales & Borders franchise. It is also responsible for determining the priorities for local and regional services and setting fares for them; and has a role in developing facilities such as stations and local lines and funding rail improvements. In the February 2015 St David’s Day Agreement the Coalition Government confirmed that the Welsh Government would take over procurement for the Wales & Border franchise in 2018. 26

The mechanism by which the Welsh Government will obtain the powers to let the franchise will be via a so-called ‘section 109 Order’ under the 2006 Act.27

1.2 Open access operators As set out briefly above, open access operators (OAOs) operate on a commercial basis with no subsidy and are required to apply to the ORR and NR for the necessary access rights to run their proposed service. Fares set by OAOs are not subject to fare regulation. Of a total of 19 proposals for open access services received by ORR between 2000 and 2014, only four were successful. There are currently four OAOs – First Hull Trains; Grand Central Railway; Heathrow Express and Eurostar – though the focus tends to be on the impact of the former two, which compete directly with long-distance franchises.

In its March 2016 report on competition in rail passenger services the Competition and Markets Authority (CMA), gave more information as follows:

Together [First Hull and Grand Central] represent less than 1% of passenger miles. In the past, there had been other OAOs, and applications have recently been made to ORR for more substantial passenger services on intercity routes. [In August 2015, Alliance Rail was granted access rights to operate six daily return services between London and Blackpool from 2018]

The scale of ‘open access’ operations is currently limited by ORR’s assessment criteria. There is concern that competition from OAOs might pose a risk to the revenue streams of franchisees, which could deter potential franchisees from bidding for franchises or could induce them to submit ‘lower’ bids, reducing the revenues

26 having initially announced that the franchise would be devolved in November 2014,

see: HMG press notice, “PM announces rail package to electrify Valley Lines and boost Welsh economy”, 21 November 2014; and HMG, Powers for a Purpose: Towards a Lasting Devolution Settlement for Wales, Cm 9020, February 2015, p31

27 for more information on the devolution and letting of the new franchise see: Welsh Assembly Economy, Infrastructure and Skills Committee, On the right track? The Rail Franchise and South Wales Metro, June 2017

11 Passenger rail services in England

available to the government for funding the network and for subsidising public service operations.28

1.3 Concession agreements There are a few rail services which are exempt from the franchising provisions of the 1993 Act and are operated by the private sector on behalf of a public sector body. Most (though not all) of these services are in London and are let as concession agreements by Transport for London (TfL). The other notable concession agreement is Merseyrail. 29

Each service is exempted from the 1993 Act by a specific exemption order.30 A terms of transfer agreement is made between the DfT and the devolved body taking over responsibility for the let of the rail services on those lines.

1.4 Track access contracts and charges Network Rail (NR) owns and manages most of the rail network in Great Britain. Anyone who wishes to operate trains on NR’s network must have a track access contract with NR, for which a charge is made. Access to track is regulated under the Railways Act 1993, as amended, and track access contracts have to be approved by the Office of Rail and Road (ORR). The ORR’s role in overseeing access contracts provides both protection against unfair contract terms being forced on TOCs and provides protection to third parties who might be affected by the terms of a contract between a TOC and NR.

The ORR has developed model contracts that contain standard provisions and give those entering into the contract a clear understanding of how their relationship is governed. Each model contract sets out aspects of train operation such as each party’s rights and obligations relating to charging and the rights to run services. There are two model track access contracts – one for scheduled, franchised passenger services and one for freight services. The ORR’s policy on the duration of access contracts is regulated by the Railways Infrastructure (Access and Management) Regulations 2005 (SI 2005/3049), as amended.31

An important aspect of the ORR’s role in track access is to protect train operators from being charged unduly high prices by the infrastructure manager (NR), whilst ensuring that the access charges paid by operators are sufficient to enable NR to recover the costs of operating, maintaining and renewing its network. Variable charges are intended to provide incentives for train operators (and their funders and suppliers) to

28 op cit., Competition in passenger rail services in Great Britain: A policy document, p10 29 the current London Overground concessionaire is Hong Kong’s MTR Corporation and

Laing Rail; MTR is also the concessionaire for Crossrail; MerseyRail services in Merseyside, let as a concession by MerseyTravel, are run by Serco and Abellio

30 see, e.g. most recently Railways (North and East London Lines) Exemption Order 2015 (SI 2015/237); and Railways (Crossrail Services) Exemption Order 2015 (SI 2015/239) [section 25 of the Crossrail Act 2008 also disapplied the provisions of the 1993 Act with regards to public service operators]

31 these regulations implemented the relevant parts of the First European Railway Package

Number CBP 6521, 9 January 2018 12

make efficient use of the network and to consider costs implied to NR when appraising choices and design of rolling stock.

On an annual basis, charges for franchised passenger train operators comprise the following elements:

• a fixed track charge; • a variable track usage charge; • a traction electricity charge (incorporating the electrification asset

usage charge); • a capacity charge; and • a change of law charge

In addition, there are provisions for a possible rebate to be paid by NR under certain circumstances approved by ORR. There are also additional permitted charges covering payments for enhancement charges paid through the track access contract.32

The Periodic Review process for Control Period 5 (2014-19) was concluded in early 2014. The ORR published its final determination in October 2013, confirming an average increase of 36 per cent of total franchised passenger variable charges in real terms.33 However, many franchised operators were largely protected from this increase under the terms of their franchise agreements (which bound them to CP4 charge levels).34

In November 2015 the Rail Delivery Group (RDG) completed a review of access charges and set out how it thought the regime should change for the following control period.35

The ORR has been looking at changes to charges and contractual incentives as part of Periodic Review 2018. It published conclusions in June 2017. It stated that it had decided to make a number of ‘targeted reforms’ to “simplify the charges and incentives regime, improve fixed cost transparency and continue work towards an improved cost allocation to support competition on the network”. In particular, its key decisions were that:

• the capacity charge will no longer apply, with the income from this charge to be collected through other charges;

• we will continue to work to extend fixed cost recovery to all operators, subject to a market-can-bear test; and

• as previously announced, the overall approach to variable charges will remain as it is now. However, following further analysis, we now consider that these charges can be set below the level of costs directly incurred, in certain circumstances and for a time-limited period – i.e. the capping of variable charges is possible.36

32 full details can be found in: ORR, Criteria and procedures for the approval of track

access contracts, December 2011 33 ORR, Periodic Review 2013: final determinations, 31 October 2013, chapter 16 34 ORR/NR, CP5 price lists and related documentation, December 2013 35 RDG, Review of Charges: Summary Report, 26 November 2015 36 ORR, Conclusions on consultation on charges and contractual incentives, 29 June

2017, p1

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2. Franchising policy since 2007

2.1 Labour Government, 2007-10 In July 2007 the Labour Government published its final rail White Paper. It generally praised the performance of the TOCs and gave an overview of their achievements. These were, broadly, that they had successfully used the commercial freedom available to them to pursue a more customer-focused approach to services and a more market-based approach to pricing. This had contributed to the growth in passenger demand and produced a generally positive trend in customer satisfaction. Trains were newer and more comfortable and new technology had further enhanced the passenger experience.37

Both the Transport Select Committee and the Public Accounts Committee published reports on rail franchising in 2009. The Transport Committee concluded that franchising was “a muddle” and called for greater flexibility within the system,38 The Public Accounts Committee concluded that the Department for Transport had generally “shown itself capable of letting rail franchises to the planned timescales and protecting the taxpayers’ interests”.39

The 2008-09 recession caused concerns for both the Government and the TOCs and questions were raised about the viability of several franchises. The then Secretary of State for Transport, Lord Adonis, reassured the Transport Committee in June 2009 that there had been no sign of defaults and that “The evidence so far is that the franchising system has continued to prove its worth”.40

In January 2010 the Labour Government published a guide to franchise procurement.41 It stated that franchise monitoring would concentrate on essentials and that the number of key performance indicators would be cut in order to reduce the burden on franchisees. The last franchises awarded by the Labour Government built in graduated penalties, culminating in termination, for failure to deliver an improvement in reliability to which a franchisee had contractually committed. The Government also indicated that financial failure would be regarded as equally serious.

Also in January 2010, Labour published a document setting out its future franchising policy. The paper focused on five areas: franchise length; specification and delivery; encouraging innovation and investment; changes required during the life of a franchise; and better management of risk and incentivising operators. Its key proposals were as follows:

37 DfT, Delivering a Sustainable Railway, Cm 7176, 24 July 2007, paras 10-1-10.6 38 Transport Committee, Rail fares and franchises (sixth report of session 2008-09), HC

103, 27 July 2009, p14 39 PAC, The Department for Transport: Letting Rail Franchises 2005–2007 (twenty-eighth

report of session 2008-09), HC 191, 19 May 2009, p5 40 op cit., Rail fares and franchises, Q319 41 DfT, A guide to the railway franchise procurement process, January 2010

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• Specification and delivery: TOCs to be contractually required to deliver services and other outputs that are important to the public; specifications designed to allow maximum scope for innovative solutions; operators held to account for promises upon which bids were won; and TOCs need to demonstrate that any changes to timetables would not increase journeys times for passengers without justification.

• Encouraging innovation and investment: bidding process to be altered to place greater emphasis on innovation and alternative proposals; and consider improvements to the investment mechanisms to encourage operators to develop and fund investments, especially toward the end of a franchise.

• Changes required during the life of a franchise: change mechanisms employed in franchise contracts to be made more robust and easier to use; and development of mechanisms to encourage operators to identify sensible cost savings from service changes.

• Better management of risk and incentivising operators: strengthening provisions to discourage operators from walking away when times are tough; franchise agreements to give train operators revenue incentives to attract passengers and develop the business; and alternative risk-sharing mechanisms to be considered, including linking franchise payments to external economic factors, such as GDP.42

2.2 Coalition and Conservative governments, 2010-

First reform paper & McNulty report, 2010-11 The Conservative-Liberal Democrat Coalition Government that took power in May 2010 stated in the Coalition Agreement that it would “grant longer rail franchises in order to give operators the incentive to invest in the improvements passengers want – like better services, better stations, longer trains and better rolling stock”.43 Before the election, the Conservatives in particular had promised to reform rail franchising.44

In July 2010 the Government published a consultation on the Coalition’s proposals to reform franchising, within the context of the anticipated spending cut to come later in the year.45 The Government’s view was that the existing system of rail franchising had become too prescriptive at the point of bidding, and lacked flexibility once operational. In response, the Government intended to release private investment by granting longer franchises and to base awards on “the quality of the overall package of proposals they contain to invest in the railways, improve services and grow passenger numbers, rather than focusing

42 DfT, The Future of Rail Franchising, January 2010 43 HMG, The Coalition: Our Programme for Government, May 2010, p31 44 Conservative Party, Conservative rail review: getting the best for passengers, February

2009, section 5.4; and Conservative Party, Invitation to join the Government of Britain: the Conservative manifesto 2010, April 2010, p23

45 HC Deb 14 June 2010, c44WS

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solely on the binary question around the level of subsidy or premia to be paid”.46

The Government published its response to the consultation in January 2011, setting out its initial views on how it intended to proceed with future franchising.47 Specifically, that the specifics of each franchise would be decided on a case by case basis; Government would set demanding outcomes for operators to deliver but give them more flexibility to decide how best to achieve those outcomes; it would award longer franchises with the attendant benefits they would provide; and bring down the overall cost of running the railways.48

In May 2011 the Government published Sir Roy McNulty’s final report on rail value for money. On franchising, he agreed with the Government’s assessment in its 2010-11 review of franchising policy of those elements that were inhibiting efficiency and value for money. He recommended that the Government consider a number of additional measures which would incentivise TOCs to reduce unit costs, including:

• closer alignment and partnering with infrastructure providers; • possible use of price-based specifications – inviting bidders to

propose levels of service within a defined level of subsidy; • stronger incentives for unit-cost reduction, for example through

contractualised unit-cost reduction profiles; • up-front payments, instead of performance bonds; • periodic reviews by the ORR of some franchise parameters and

commitments, and benchmarking of TOC and Rolling Stock Company (ROSCO) costs by the ORR;

• greater opportunity and incentive for Passenger Transport Executives (PTEs) and/or local authorities to influence outputs; and

• consideration of a “Northern region” as part of the refranchising process, in conjunction with a wider review of the franchise map.49

The Government published its response to McNulty in March 2012. It largely said it would proceed on the basis it had previously announced on longer franchises and flexibility and would also look at the alignment of incentives with Network Rail.50

West Coast re-let failure, Laidlaw & Brown, 2012-13 In October 2012, following the problems with the re-let of the West Coast franchise,51 the then Secretary of State for Transport, Sir Patrick McLoughlin, announced two independent reviews:

• Sam Laidlaw, Chief Executive of Centrica, would examine what happened during the West Coast procurement and why, with the

46 DfT, Reforming Rail Franchising, July 2010, p4 47 DfT, Reforming Rail Franchising: Government response to consultation and policy

statement, January 2011 48 HC Deb 19 January 2011, cc42-44 49 DfT, Realising the Potential of GB Rail Report of the Rail Value for Money Study:

Summary Report, May 2011, para 6.1.4; full report available on the archived Gov.uk website

50 DfT, Reforming our railways: Putting the customer first, Cm 8313, 8 March 2012, p48 51 for full details, see section 16 of HC Library briefing paper SN1343

Number CBP 6521, 9 January 2018 16

aim of establishing the lessons to be learned. He would report by the end of November.52

• Eurostar chairman Richard Brown CBE, would examine the wider rail franchising programme, looking in detail at whether changes were needed to the way risk was assessed and to the bidding and evaluation processes. He would report back by the end of December. 53

In the meantime, the outstanding franchise competitions (Great Western, Essex Thameside and Thameslink) were paused pending the outcome of the Brown Review, in order to ensure future competitions would be robust and deliver best value for passengers and tax payers.54

Laidlaw’s final report55 was published on 6 December 2012 alongside the DfT’s formal response. The work of the inquiry was focused on the calculation of the Subordinated Loan Facility (SLF) for the West Coast franchise and the application of the relevant guidance to that calculation. The SLF is the amount of money the DfT requires the parent companies of bidders to put up to mitigate the risk of insolvency during the course of the franchise. Laidlaw’s main conclusion was that: “in seeking to run the complex and, in some respects, novel ICWC franchise process, an accumulation of significant errors ... resulted in a flawed SLF sizing process. The responsibility for this flawed process rests with the DfT, rather than with any of its external advisers”.56 Laidlaw recommended a number of measures to help to restore confidence in the DfT’s conduct in rail franchising and procurement.57

The Department’s response to the report was published on the same day.58 Sir Patrick said that Laidlaw’s recommendations would improve how the DfT managed the franchising process and awarded franchises and that the DfT would be reconfigured to achieve these ends.59

The Brown Report was published on 10 January 2013 alongside a statement from the Secretary of State giving his initial response. Brown’s main conclusion was that “the rail industry works, and that there is no credible case for major structural change” but that at the same time “to continue to make real progress, concerted effort is required on a significant, though manageable, number of key areas, from which lasting and tangible improvements will flow”.60 Looking

52 DfT press notice, “West Coast Main Line franchise competition cancelled”, 3 October 2012 53 ibid. 54 ibid. 55 an interim report was published on 29 October, see DfT, The Laidlaw Inquiry: Initial

Findings Report, 29 October 2012; and the Transport Committee took evidence on it from the Secretary of State two days later, see: Transport Committee, Uncorrected Oral Evidence, HC 537-ii, 31 October 2012

56 DfT, Report of the Laidlaw Inquiry: Inquiry into the lessons learned for the Department for Transport from the InterCity West Coast Competition, HC 809, 6 December 2012, para 3.1

57 ibid., para 3.13-3.14 58 DfT, Response to the Report of the Laidlaw Inquiry, 6 December 2012, para 2 59 HC Deb 6 December 2012, cc1018-19; the Opposition said that ministers were to

blame, see Maria Eagle cc1019-20 60 DfT, The Brown Review of the Rail Franchising Programme, Cm 8526, January 2013,

para 1.4, listed in paras 1.11-1.20; the Transport Committee took evidence from

17 Passenger rail services in England

forward, Brown urged that the franchising programme be restarted, but that the Department should be mindful of what it and the market can resource, and seek to avoid ‘bunching’ franchises, “which increases the vulnerability of the programme to peaks and troughs in the economic cycle”.61

The paused franchise competitions were restarted at the end of January62 and in March 2013 Mr McLoughlin set out how the Government intended to proceed with the franchising schedule over the medium term.63 On the same day the Government published a revised statement on franchising policy, under section 26 of the Railways Act 1993, as amended, setting out how the Secretary of State proposed to exercise his franchising power in future. This was designed to follow the principles of the Brown review.64 The Government also announced the formation of a Rail Franchise Advisory Panel, headed by Richard Brown, to provide advice, support and commercial expertise to the DfT.65

Further reviews and reform, 2014- Subsequently, the DfT undertook to review Government rail functions in order to identify what actions were required to deliver those functions in the most effective and efficient way. This was published in February 2014.66 Sir Patrick announced that as a consequence of the review a new Rail Executive would be created within DfT, including a new Office of Rail Passenger Services with responsibilities including delivery of the franchise programme and the management of existing franchises. It also recommended that the Government consider a longer-term option of a new, more arm’s -length body with responsibility for rail delivery functions. Sir Patrick stated that the Government would consider moving to a more arm’s-length body in 2016.67

The Passenger Services Directorate within DfT was formed in November 2014 to bring together the all the passenger facing activities of the Department’s rail function, including the letting and management of franchise contracts, into one team, and to renew its focus on “placing passengers at the heart of everything we do”.68

In February 2016 the Public Accounts Committee published a report on reform of the rail franchising programme since 2012. It concluded that the DfT had “strengthened its capability to let franchises, but there are still gaps in its ability to then manage the contracts effectively”. It also warned against “barriers to entry to the UK market and the possibility that current participants in the market may drop out. Any reduction to

Richard Brown on his report a few days later, see: Transport Committee, Oral Evidence from Richard Brown CBE, HC 874-I, 15 January 2013

61 ibid., para 1.21 62 HC Deb 10 January 2013, cc23-24WS and DfT press notice, “Rail franchising future

programme”, 31 January 2013 63 DfT press notice, “Fresh start for franchising”, 26 March 2013 and HC Deb 26 March

2013, cc95-8WS 64 DfT, Consultation Response Document: Railways Act Section 26, 26 March 2013 65 DfT, Terms of Reference - Rail Franchise Advisory Panel, 26 March 2013 66 DfT, Organisational review of Department for Transport rail functions: final report, 26

February 2014 67 HC Deb 26 February 2014, cc23-24WS 68 op cit., Passenger Services: Franchise Competition Guide, p5

Number CBP 6521, 9 January 2018 18

the current level of competition is a major risk to securing value for money for the taxpayer”.69

In December 2016 the Secretary of State for Transport, Chris Grayling, made a speech setting out the Government’s thinking on the future of rail franchising. Generally, he said that there needed to be “a change to the way the industry works in order to make sure it can meet the needs of passengers” and that one of the key ways to achieve this would be bringing track and train back together:

I intend to press ahead with a recommendation put to the department 5 years ago by Sir Roy McNulty, when he reported to Philip Hammond how to make the railways run better and more cost-effectively. I will do this initially at an operational level. In order for all those involved to be incentivised to deliver the best possible service for the passenger. I expect the new franchises on South Eastern and East Midlands, the next ones in the franchise pipeline, to have integrated operating teams between train services and infrastructure.

We will continue to develop this model as further franchises are renewed – including the option of developing joint ventures as proposed by Sir Roy. Going forward, this new approach will also need to take into account the needs of open access and freight operators, both essential to our railway. The solutions in various areas may differ from each other in their models but the outcome will be the same – a railway that is predominantly run by an integrated local team of people with an absolute commitment to the smooth operation of their route.70

Mr Grayling also stated that train quality and train performance and the passenger experience must be “set at the heart of the franchise objectives and incentives that we set to a much greater degree than they are at the moment”.71 These ambitions were reflected in the DfT’s consultations on the new South Eastern and East Midlands franchises, published in March and July 2017.72

In November 2017 the Government published its strategic vision for rail, which contained proposals for ‘joining up track and train’ in future franchises:

Reforms will build on the best of the public and private sectors, with private sector involvement bringing innovation, investment and competition. Our reforms will ensure that the railway is run by an integrated local team of people with an absolute commitment to meeting the needs of their passengers, while securing the best value for farepayers and taxpayers. Future contracts will:

• Create one-team working locally, with the right incentives for train operators and Network Rail to co-operate on reliability and high performance.

69 PAC, Reform of the rail franchising programme (twenty-first report of session 2015–

16), HC 600, 12 February 2016 70 Speech by Chris Grayling, An innovative, modern, passenger focused railway network,

6 December 2016 71 ibid. 72 DfT, Future of South Eastern rail services, 14 March 2017; and DfT, Future of East

Midlands rail franchise, 20 July 2017

19 Passenger rail services in England

• Present a single accountable face of the railway for passengers.

• Adopt joint branding and identity where appropriate, giving joint teams a shared culture and giving passengers a better sense of who to hold to account.

Joint working between track and train companies will take different forms tailored to each area, including new joint operational teams, short-term task forces to manage improvement, or longer-term contracts and agreements.73

These issues are explored in more detail in section 3, below.

2.3 Franchise length The maximum length of rail franchises is mandated by EU law. Articles 4.3 and 4.4 of Regulation 1370/2007/EC state:

3. The duration of public service contracts shall be limited and shall not exceed 10 years for coach and bus services and 15 years for passenger transport services by rail or other track-based modes. The duration of public service contracts relating to several modes of transport shall be limited to 15 years if transport by rail or other track-based modes represents more than 50 % of the value of the services in question.

4. If necessary, having regard to the conditions of asset depreciation, the duration of the public service contract may be extended by a maximum of 50 % if the public service operator provides assets which are both significant in relation to the overall assets needed to carry out the passenger transport services covered by the public service contract and linked predominantly to the passenger transport services covered by the contract.

If justified by costs deriving from the particular geographical situation, the duration of public service contracts specified in paragraph 3 in the outermost regions may be extended by a maximum of 50%.

This means that initially a franchise may be awarded for 15 years, but may be extended for a further 7.5 years in certain circumstances: a total of 22.5 years.74

The Conservatives were supportive of longer franchises before the Labour Government took up the idea in early 2010. Labour’s proposal was that future franchises would be let for a minimum of ten years, with bidders allowed to bid for a period above that, within European law.75 The Conservatives were calling for franchises of between 15 and 22 years in early 2009 and in government envisioned ‘standard’ contracts of between 15 and 22.5 years.76 However, the Brown Report,

73 DfT, Connecting people: a strategic vision for rail, Cm 9519, 29 November 2017,

paras 1.28-9 74 for background, see: COM (2000) 7 final, 26 July 2000; COM (2002) 107 final, 21

February 2002; and DfT, Proposal on public passenger transport services by rail and by road, October 2005

75 DfT press notice, “Longer franchises, more scope for innovation and new measures to penalise operators who walk away”, 20 January 2010; and: op cit., The Future of Rail Franchising, paras 2.2-2.5; see also the accompanying report by KPMG

76 op cit., Conservative rail review: getting the best for passengers, section 5.4 and op cit., Reforming Rail Franchising: Government response to consultation and policy statement, paras 2.12-2.13

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published in January 2013, recommended a more cautious approach to letting longer franchises, involving shorter initial franchises with the potential for extensions and intermediate break points.77 This is broadly the approach that has been pursued since.

77 op cit., The Brown Review of the Rail Franchising Programme, para 4.7

21 Passenger rail services in England

3. The future

Information on the various ways railways can be structured, owned and managed, can be found in HC Library briefing paper Rail structures, ownership and reform, CBP 7992, July 2017

Over the past couple of years there have been a number of reports looking into reform of the rail franchising system, advocating various changes, from more competition to more devolution, to more partnership working and moves towards reintegration of track and train. As stated above, in November 2017 the Government published its strategic vision for rail, setting out plans for alliancing or partnerships, where the train operator works in tandem with the infrastructure manager, Network Rail.

Had Labour formed a government following the 2017 General Election it had pledged to bring the railways, in particular rail franchises, back under public control. There have been a number of reports looking into this idea over the past five years, suggesting how a future Labour Government could either nationalise the railways or create a publicly-run and partly devolved railway.

Finally, there is the question of what impact Brexit may have on how the railways are structured and operated. This remains uncertain for the moment.

3.1 More competition? Some have argued that the failures of the current system to deliver cheaper fares and better services are a result of a compromised, ‘imperfect’ privatisation and that proper ‘on the track’ competition could rectify these problems.78

Most recently, in March 2016 the Competition and Markets Authority (CMA) published a report on competition in rail passenger services.79 As explained in section 1 above, at the moment almost all competition is on a ‘for the market’ basis (i.e. in the form of competitive franchise bids) rather than ‘on-rail’ (i.e. by running competing services on the same lines). The CMA’s main conclusion was that on-rail competition might deliver more benefits than the current system: “a range of benefits … could arise from allowing other operators to run competing services against the existing franchise operators”.80

78 see, e.g. Stephen Glaister for the CRI, British Rail Privatisation: Competition destroyed

by politics, Occasional Paper 23, 2004 and Tony Lodge for the CPS, Rail’s second chance: Putting competition back on track, 25 March 2014

79 all relevant documents available on the archived CMA website; the report met with a mixed response, see, e.g. for the pro: “At last, a watchdog that believes in real markets”, Daily Telegraph, 10 March 2016 and for the con: RMT press notice, “RMT slams ludicrous Competition and Markets Authority report”, 8 March 2016

80 CMA press notice, “CMA signals route for greater rail competition”, 8 March 2016; for full report see op cit., Competition in passenger rail services in Great Britain: A policy document

For more information on Brexit and the railways, see HC Library briefing paper CBP 7633.

Number CBP 6521, 9 January 2018 22

Its main recommendation was that to increase competition and benefits for passengers in the short term, there should be an increase in the number of open access services and a splitting of franchises offers, and in the longer term a possible move towards a system of multiple licensed operators replacing franchises. The CMA suggested that there was evidence from here and abroad that OAOs could deliver cost savings and efficiency benefits.

These recommendations predominantly affect the intercity rail routes (i.e. East Coast, West Coast and Great Western main lines), where the CMA considered that the potential for this sort of competition is highest. It proposed that competing open access operators:

… should be able to make more of a contribution than at present in terms of track access charges and through a Public Service Obligation (PSO) levy to contribute to the funding of important but unprofitable services, such as those in rural areas. This would help cover any fall in the premiums paid to government that might result from increased competition.81

In terms of the practicalities, the CMA stated that there were three obstacles to this sort of on-rail competition, none of which it considered to be insurmountable:

• access to infrastructure, network capacity and rolling stock: it did not see these as serious obstacles, arguing that there was already an obligation to treat all track access obligations equally and that access to rolling stock at a reasonable price, where long-term service provision is assured, had not been a problem. It did however issue a word of caution on the issue of network capacity and how a lack of spare capacity can constrain new entrants into the rail market (i.e. finding scarce timetable space for new services);

• funding the network and loss-making services, and the financial sustainability of operators: this was slightly more complex. The CMA argued that any success on the part of OAOs could have a financial detriment on franchisees and possibly undermine their business model – this in turn could lead to a reduction in any income the Government received from a franchise. More optimistically, it also argued that on-track competition could help drive the business cases for investment; and

• operational issues and greater complexity arising from an increase in the number of operators: this goes back to how to manage a railway operating at close to maximum capacity, with full timetables. It would have implications for the resilience of the rail network – a West Coast Main Line operating at effective capacity at peak hours would mean that one small delay or defect would have significant knock-on effects for other services.

The CMA’s report was followed swiftly by the Shaw Report into the future of Network Rail (NR), published alongside Budget 2016.82 It made seven key recommendations, based in three areas: customers,

81 op cit., “CMA signals route for greater rail competition” 82 DfT, The future shape and financing of Network Rail: The recommendations, 16

March 2016

23 Passenger rail services in England

devolution and growth. None of these touched directly on on-rail competition issues. As indicated in section 2.2, above, in December 2016 the Secretary of State for Transport set out the Government’s view of the future of rail franchising, it made no specific mention of competition.83

The Transport Select Committee looked at the question of competition in its February 2017 report on rail franchising. It concluded that open access had “been a success, albeit on a limited scale to date” and that the “balance of evidence points to potential benefits in open access having an expanded role on long distance routes, beyond just filling marginal capacity or connecting unserved markets”. The Committee recommended that DfT and the ORR work together for a comprehensive reform to track access charges for 2019-24, which should:

… manage the differing requirements of OAOs and franchisees and ensure that operators, taxpayers and passengers get a fair deal. A specific proposal for a PSO levy should be put out to consultation over the next 12 months, so that a new regime can be introduced from April 2019. We further recommend that timetabling spaces for open access services are determined upfront during franchise development prior to the publication of the Invitation to Tender. This will provide the certainty that industry needs to plan, particularly at the bidding stage of franchising but it will also help to encourage OAOs.84

As stated above, one of the CMA's recommendations (supported by the Transport Committee) was that OAOs could make more of a contribution than at present in terms of track access charges and through a Public Service Obligation (PSO) levy to cross-subsidise unprofitable services, such as those in rural areas.85 This would help cover any fall in the premiums paid to Government that might result from increased competition. The DfT issued a consultation on this in February 2017. It stated that ‘levelling the playing field’ between franchisees and OAOs was critical to maintaining “the stability of the franchise market so that it can continue to deliver for passengers and provide value for money to taxpayers”, in the event of more open access services.86 The DfT’s proposed objectives and principles for the levy are:

Our objective for introducing the levy is to ensure that, where they are able to, open access passenger operators make a contribution towards socially and economically important, but ultimately unprofitable, services.

To underpin our objective we have developed a number of principles for the levy:

83 op cit., An innovative, modern, passenger focused railway network 84 Transport Committee, Rail franchising (Ninth Report of Session 2016–17), HC 66, 5

February 2017, paras 34 & 42 85 a PSO levy on railway undertakings operating passenger services to recover the costs

of running public service obligations is permitted under Article 12 of the Recast First Railway Package, Directive 2012/34/EU

86 DfT, Putting passengers at the heart of the Railway: supporting sustainable Competition - The passenger rail public service obligation levy, 21 February 2017, para 1.4

Number CBP 6521, 9 January 2018 24

a) it should enable better outcomes for passengers through innovation and improved services,

b) it must sufficiently protect taxpayers;

c) it must not significantly distort behaviour or create perverse incentives;

d) it must not act as an unjustifiable barrier to entry where passengers interests are advanced;

e) it must be transparent, predictable and able to be effectively administered;

f) it must be sufficiently flexible to different business models; and

g) it must be resilient to future changes in the market and capacity.87

The consultation closed in April 2017. The Government has yet to announce the outcome.

The rail regulator has continued to approve a small number of new OAO services on cross-country routes. Most recently, it decided in May 2016 to allow First Group to operate new services on the East Coast Main Line between London and Edinburgh, in direct competition with the incumbent franchisee Virgin East Coast.88 As one press report explained, the current system “puts franchised and open access operators on a collision course” as “the Government tries to extract as much premium payment as it can from Virgin, the scales between profitability and loss are finely balanced”.89 Tony Lodge, a supporter of further liberalisation and competition, argued that this competition on the ECML has promoted higher customer satisfaction and better value for money for passengers.90

3.2 More public ownership? In contrast to the CMA, others, particularly the rail unions and the Labour Party, believe that they key to improving passenger services is not by ‘more privatisation’ in the form of competition, but by bringing rail services back under public control. They argue that the ‘fragmented privatised railway’ has been an expensive, inefficient failure.

Some sort of ‘renationalisation’ or move to a more devolved form of public ownership is usually perceived as a gradual process which would take a number of years – train services would not be renationalised in a ‘big bang’ but taken back in-house as they came up for renewal.

The Labour Party went into the 2017 General Election on a platform to:

Bring […] our railways back into public ownership, as franchises expire or, in other cases, with franchise reviews or break clauses. We will introduce a Public Ownership of the Railways Bill to repeal the Railways Act 1993 under which the Conservatives privatised our railways […] A publicly owned railway system can be the

87 ibid., para 1.20-1.21 88 ORR press notice, “Rail regulator approves future new passenger services on the East

Coast Main Line”, 12 May 2016 89 “Rail competition could put in train problems galore”, Daily Telegraph, 17 May 2016 90 “Choice puts railways on right track”, The Times, 13 February 2017

25 Passenger rail services in England

backbone of our plans for integrated transport. It will be built on the platform of Network Rail, which we will retain whole, working with the devolved administrations. We will ensure new rolling stock is publicly owned and will encourage expansion of public freight services in a publicly owned railway…91

This on the face of it is a proposal to reform the rail system by making it as a fully integrated, publicly owned monopoly.

In an article for the New Statesman, published on 11 May 2017 the Shadow Secretary of State for Transport, Andy McDonald, put the policy in context. He said that: “public transport has increasingly become detached from the concept of public service. Too often it is seen as a series of opportunities to profit from an essential service that no government can let fail”.92 He went on:

The network of companies who operate passenger services on Britain’s railways – 75 per cent of which are foreign companies or foreign-owned state companies that extract profits from British taxpayers and commuters in order to reduce fares back home – come together in a jumbled network that drives up the cost of improvement works, complicates ticketing structures, slows ticketing reform and extracts eye-watering profits that could instead go on improvements or keeping fares down from the system. The hit to the pockets of commuters stands in stark contrast to the hundreds of millions of pounds in dividends paid to shareholders of private train companies each year.

The case for nationalisation is good economics, too. Last year, TUC research showed that the costs saved from bringing franchises which expire from 2016 to 2020 back in house could save up to £604 million a year by 2020, enough to lower regulated fares by up to 10 per cent.93

Labour’s policy builds on the work of a number of groups, notably the trade unions and their Action for Rail campaign. One of the most cogent cases for bringing the railways back into public ownership is set out in the June 2012 report, Rebuilding Rail, commissioned by Aslef, the RMT, TSSA and Unite. It argued that the privatised railway is too expensive and too complex, leading to high ticket prices, inefficiencies and a service run for the benefit of shareholders rather than passengers.94 The report set out a possible governance structure for a future nationalised and integrated ‘GB Rail’, derived from the Deutsche Bahn governance structure in Germany but modified to give broader accountability.95

In effect, the system they proposed was one where the existing infrastructure manager, Network Rail (NR), would become GB Rail Network & Operations, with its ‘essential functions’ of allocating and charging for network capacity hived off to GB Rail Access, but otherwise its current network operations could continue largely intact. Thereafter,

91 Labour Party Manifesto 2017, pp90-91 92 “Passengers not profit: the case for public ownership”, New Statesman, 11 May 2017 93 ibid. 94 Transport for Quality of Life, Rebuilding Rail, June 2012, pp7-8; the TUC also put the

case for public ownership more recently, see: “The rail franchise needs more than just a reboot”, TUC Touchstone blog, 3 May 2017

95 ibid., p72

Number CBP 6521, 9 January 2018 26

the organisational changes to NR would centre around building its capacity to run train operations. It would also involve changes to rolling stock (train) procurement, whereby GB Rail would be able to procure new trains directly, using either government grant or government-backed debt. The report argued that procurement of rolling stock by GB Rail could be carried out in such a way as to support UK train manufacturing industry.96

A slightly different model was proposed by the Centre for Research on Socio-Cultural Change (CRESC) in 2013. They envisaged a more defuse, regional model of rail provision to “provide a framework for political accountability and financial cross-subsidy as long as the railway system has to provide both an integrated national network and intra-regional services”. 97 Some sort of regionally or locally owned and run public railway has received support from other sources.98 The Co-operative Party and Co-operatives UK have championed a different sort of mutually-owned and run railway.99

Most recently, there has been renewed concern about whether the franchising system as it stands is ‘fit for purpose’. These concerns, voiced with increasing frequency during the ongoing service failures and industrial disputes affecting Southern Rail, were given new impetuous by the Government’s announcement in November 2017 that it intends to terminate the current East Coast franchise three years early, in 2020, and to contract a new public-private ‘partnership’ to take over the running of the route.100 Further to this announcement there was a flurry of criticism from the Labour Party, the former Labour Secretary of State for Transport Lords Adonis (who subsequently resigned his post as Chair of the National Infrastructure Commission) and rail unions about what they deemed a ‘£2 billion bailout’ of Stagecoach and Virgin.101

The FT reported the views of industry figures that “the problems on the East Coast line could be precursor to other train operators seeking to exit their contracts early”. Critics have also claimed that the DfT has encouraged “aggressive bids” from train operators, which can cause financial woes down the line.102 The Guardian reported the views of the former Labour leader, Ed Miliband, that:

Experience clearly shows that the franchise system is broken – it ends up being a system that privatises the gains and nationalises the losses … Companies have an incentive to say up front: ‘We’ll give you all this money,’ and then pull out. The supposed gains of

96 ibid., pp73-4 97 CRESC, The Great Train Robbery: privatisation and after, June 2013, p162 98 e.g. Compass, see All on Board: A publicly owned railway for an interconnected

world, July 2014 and Progress, see “Make rail regional”, Progress Online, 9 July 2014

99 Co-operatives UK, Co-operative rail: a radical solution, New Insight 6, 2011, p21 [written by Christian Wolmar, the noted transport commentator who stood to be the Labour candidate for Mayor of London in 2016]

100 For further information see section 4 of HC Library briefing paper CBP 1343 101 See, e.g. “Stagecoach’s ‘bailout’ will cause a crisis, says Lord Adonis”, London

Evening Standards, 6 December 2017 and “Tom Watson calls on Chris Grayling to quit over 'grubby' East Coast rail deal”, The Guardian, 31 December 2017

102 “Is Britain’s rail franchising system fit for purpose?”, Financial Times, 5 January 2018

27 Passenger rail services in England

competition are massively outweighed by the costs, problems and inefficiencies.103

3.3 More partnership working? As set out in section 2.2, above, increasing partnership working, possibly leading to vertical integration at some point in the future, where track and trains are operated together, is a key part of the Government’s future plans for franchising.

The industry has been moving slowly in this direction for some time, with varying degrees of success. The Rail Delivery Group (RDG) was established in May 2011 on the back of the McNulty report (see section 2.2, above) to bring together rail passenger operators and Network Rail (NR) with the clear aim of improving joint working.104 The Government has since sought to encourage better joint working by better aligning Network Rail’s enhancement programme with operator needs and introducing long-term performance plans and annual joint performance improvement plans for operators and NR.105

NR has also entered into working alliances with train operators in recent years. These vary from coordination at a day-to-day management level to deeper commercial arrangements in which the disruption costs and benefits of renewal work come from the same budget. For example, in April 2012, NR entered into a “deep alliance” with South West Trains, putting in place a single joint management team responsible for infrastructure and train operations on NR’s Wessex Route. This ended in June 2015. The Transport Committee commented that the arrangement “was always likely to be limited as the alliance did not supersede the contracts already in place between Government, Stagecoach (the owner group for South West) and NR”.106 The only current substantive alliance is that on the NR Scotland Route, which begun in May 2015.

The Transport Committee concluded that NR’s alliancing programme “has not achieved the desired benefits that were initially envisaged for this programme” and that it was “ultimately limited by the misalignment between franchises and Network Rail routes that prevents the establishment of deeper commercial arrangements”.107

In December 2016 the Secretary of State for Transport, Chris Grayling, said that there needed to be “a change to the way the industry works in order to make sure it can meet the needs of passengers” and that one of the key ways to achieve this would be bringing track and train back together. This will be initially at an operational level starting with the new franchises on South Eastern and East Midlands, which will have integrated operating teams between train services and infrastructure.108 Mr Grayling stated that the Government would continue to develop the model further, including the option of developing joint ventures. He

103 “Is this the best we can do with Britain’s railways?”, The Observer, 7 January 2018 104 RDG press notice, “Realising the potential of GB rail”, 11 May 2011 105 op cit., Rail franchising, para 85 106 ibid., para 87 107 ibid., para 90 108 op cit., Future of South Eastern rail services; and Future of East Midlands rail franchise

Information on SWT, ScotRail and NR’s alliancing policy in general can be found at: NR, Alliances [accessed 18 August 2017]

Number CBP 6521, 9 January 2018 28

stated that the ultimate goal is a railway “that is predominantly run by an integrated local team of people with an absolute commitment to the smooth operation of their route”.109

Mr Grayling also announced a new East West Rail (EWR) company with a view to designing, constructing and operating the new route between Oxford and Cambridge. This would be “the first new integrated rail operation in decades that is separate to Network Rail”.110

One of the main franchise operators, Stagecoach, was reported to be cautious about the plan. Martin Griffiths, the company’s chief executive, said that while joined-up working was “absolutely the right thing to do”, that “exposing Stagecoach shareholders’ capital to infrastructure risk … would be a fundamentally different proposition which right now would be difficult”.111

In November 2017 Mr Grayling published the Government’s strategic vision for rail, which contained proposals for ‘joining up track and train’ in future franchises. Between 2019 and 2024 the strategy envisions “A new generation of long-term integrated regional rail partnerships, working to aligned objectives, focussed on passenger needs”, followed by “‘One team’ models delivering results across the network, with passenger operations and infrastructure management working seamlessly together” by 2029 and culminating in “Advanced commercial, contractual and delivery models refined for individual markets and circumstances, with integrated ways of working” from 2030.112

The paper argues the benefits of this approach as follows:

We … need to ensure local teams have the power to take decisions and fix problems when they arise, while speaking with a single voice to passengers. We are changing the way the industry works by making two significant reforms: supporting an increase in the power of local teams at Network Rail, and by making reforms to franchises through the competitions we run and contracts we let. This two-pronged programme will bring both sides of the industry – track and train – much closer together, to work more effectively for rail users.113

In order to achieve this the Government intends to “develop a commercial model that best supports longer term and more integrated partnerships between track and train”:

The train operator will actively collaborate with Network Rail to bring a clear operator and passenger view to planning infrastructure management and developing plans for future route infrastructure. Bidders will need to develop credible plans and this will form part of a revised bid assessment process. To fully realise this relationship a longer term contract (up to 15 years) will be used … It remains the Government’s view that the vast majority

109 op cit., An innovative, modern, passenger focused railway network 110 DfT press notice, “Transport Secretary puts passengers at the heart of the railway”, 6

December 2016 111 “Stagecoach chief warns Grayling on rail shake-up plans”, Financial Times, 8

December 2016 112 Op cit., Connecting people: a strategic vision for rail, p10 113 Ibid., para 1.15

29 Passenger rail services in England

of infrastructure risk should lie with Network Rail. There may be small scale opportunities to share risk to improve the efficient delivery of infrastructure but these will need to be designed on a case by case basis.114

It envisions that future franchises will:

• Create one-team working locally, with the right incentives for train operators and Network Rail to co-operate on reliability and high performance.

• Present a single accountable face of the railway for passengers.

• Adopt joint branding and identity where appropriate, giving joint teams a shared culture and giving passengers a better sense of who to hold to account.115

And that most future contracts “will be shaped around the creation of an alliance structure, with alliance boards overseeing implementation. An overall route perspective will be provided by a route supervisory board including operators, passenger representatives and the Network Rail route”.116 Joint working would be reinforced by the creation of “shared metrics for the whole operation of a particular part of the network”.117

3.4 More devolution? Over the past decade there has been some momentum behind the devolving of responsibility for letting franchises to a more local level within England. However, that has recently stalled, certainly as regards to London. While bodies like Rail North and West Midlands Rail now have an increasing say in franchise design and management, the DfT still retains ultimate responsibility as the franchising authority. Some of the reason behind the limited devolution to date is financial – some routes currently receive a significant cross-subsidy from premium payments made by other operators, though this has been declining over a number of years.118

The view of the DfT now seems to be ‘no devolution for devolution’s sake’. RAIL Magazine quoted the Rail Minister, Paul Maynard, at a Parliamentary reception in September 2016 saying something to this effect: “Devolution should not be done just for devolution’s sake. I want councillors to have more powers because it will be local decisions being made. That way people can, for example, look at HS2 and ask how we can make benefits from it. You need a clear focus”.119

London In London, Transport for London (TfL) and the Secretary of State are required to co-operate on rail matters, including a requirement that the Secretary of State must consult TfL before issuing a rail franchise 114 Ibid., para 3.41 115 Ibid., para 1.28 116 Ibid., para 1.34 117 Ibid., para 1.36 118 ORR data portal, Government support to the rail industry by TOC - Table 1.7

[accessed 18 August 2017] 119 “No devolution unless necessary - Rail Minister”, RAIL Magazine, 21 September 2016

Number CBP 6521, 9 January 2018 30

Invitation To Tender (or when entering a franchise agreement for which an ITT has not been issued) for railway passenger services to, from or within London.120

In July 2007 the DfT announced that TfL, as part of the franchise specification process, would be able to propose and pay for extra train services or improvements to stations on a number of ‘inner suburban’ routes within the Greater London boundary.121 In 2012 the then Mayor of London, Boris Johnson, stated that he would like to see TfL assume responsibility for more inner suburban services in London.122 In February 2015 the then Chancellor, George Osborne, and Mayor Johnson announced that TfL would take over rail services between Liverpool Street, Enfield Town, Cheshunt (via Seven Sisters) and Chingford and gain control of most of the stations servicing those routes.123

In January 2016 Mr Osborne and Mayor Johnson announced that they would consult on transferring London’s suburban rail services (“rail services that operate mostly or wholly within the Greater London boundary”) from the various rail franchises to TfL, to be run as part of TfL Rail as a ‘London Suburban Metro’ service.124 This would be achieved sometime in 2021.125 The Evening Standard reported that this could lead to TfL’s rail services stretching as far as Sevenoaks and Dartford in the south-east, Epsom and Croydon in the south, Hampton and Chessington in the west and Hertford and Welwyn Garden City in the north.126

No official response to the consultation has been published. However the Secretary of State, Chris Grayling, has made it relatively clear that he sees little merit in further rail devolution to London. In December 2016 Mr Grayling announced that he expected new rail franchises to have integrated operating teams between train services and infrastructure, starting with the new South Eastern franchise. He said that he would invite TfL “to be more closely involved in developing the next South Eastern franchise, through seconding a TfL representative to the franchise specification team”.127 The Mayor of London, Sadiq Khan, expressed his disappointment, as this in effect meant that those South Eastern services specified in the January 2016 prospectus would not be devolved to TfL.128

120 TfL’s rail powers are set out in section 175 of the Greater London Authority Act

1999, as amended and sections 15-17 of the Railways Act 2005 121 HC Deb 18 July 2007, cc23-25WS; and DfT, Guidance on the role of Transport for

London in the Department for Transport's rail franchising process, July 2007 122 DfT, Rail Decentralisation - Devolving decision-making on passenger rail services in

England: Consultation Responses, November 2012, para 3.20 123 HMT press notice, “Long term economic plan for London announced by Chancellor

and Mayor of London”, 20 February 2015 124 Mayor of London press notice, “Transport Secretary and Mayor set out vision for rail

travel”, 21 January 2016 125 DfT/TfL, Rail passenger services in London and the south east: a new approach, 21

January 2016 126 “TfL's London Overground to take control of capital's entire suburban rail network”,

Evening Standard, 21 January 2016 127 HCWS322, 6 December 2016 128 Statement from the Mayor of London, 6 December 2016

31 Passenger rail services in England

Responding to a PQ in January 2017 the then Transport Minister, Lord Ahmad of Wimbledon, said that the Mayor of London had presented a business case for the devolution of suburban London services on the South Eastern franchise. This was scrutinised by Departmental officials, “analysing the costs and benefits of the proposal including the impact on the South Eastern franchise and the forthcoming competition”. The departmental analysis “highlighted a number of uncertainties in the business case particularly around the operational risks associated with splitting the franchise, and around the benefits that were being claimed”.129

Rest of England As to England more generally, there have been proposals for regional devolution of franchises for many years. Under the Railways Act 1993 the Passenger Transport Executives (PTEs) in the major metropolitan areas outside London were co-signatories to the franchises which covered their areas. Labour made some changes in this area in 2005, following concerns that PTEs were not directly exposed to the consequences of their decisions on fares and service levels. Sections 13 and 14 of the Railways Act 2005 gave PTEs greater flexibility to make a choice between rail and other modes of transport in their areas if rail services offered poor value for money; and removed the PTEs from being direct parties to franchise agreements.130

The 2011 McNulty Report (see section 2.2, above) stated that there was still too high a degree of central government involvement in rail franchising and recommended that there be greater localism, with more involvement in England of local authorities and/or PTEs, with “local decision-making brought more closely together with budget responsibility and accountability”.131 In his 2013 report Richard Brown also recommended further devolution of English franchises to the relevant authorities.132

However, progress has been sluggish. In its March 2012 command paper, the Coalition Government stated that it would look at devolving more responsibility for English rail franchises to local areas and published a consultation document to that end. It was limited in scope, arguing that DfT should retain responsibility for safety and security, accessibility, performance on the strategic rail network; national ticketing policy/strategy; and “connectivity enhancements benefiting primarily strategic rail services”.133 It also argued that only category E services (i.e. services linking smaller towns and rural areas with larger towns, cities and the inter-city rail network) were suited to decentralisation, possibly with a limited number of category D services

129 Railways: Greater London: Written question - HL4450, 16 January 2017 130 for more information on the role of PTEs, see: DfT, The new system for the role of

English PTEs in the rail franchising process, July 2006 131 op cit., Realising the Potential of GB Rail: Final Independent Report of the Rail Value

for Money Study – summary report, p47 132 op cit., The Brown Review of the Rail Franchising Programme, paras 5.5-5.6 133 DfT, Rail Decentralisation: Devolving decision-making on passenger rail services in

England, March 2012, para 4.4

Number CBP 6521, 9 January 2018 32

(i.e. local services conveying people into the major cities and conurbations across the country).134

The paper envisioned this sort of decentralisation being delivered by what it called ‘local transport consortia’, comprised of Local Enterprise Partnerships (LEPs), local authorities and/or PTEs. These bodies might end up being cosignatories to a franchise or they could buy local enhancements to the base specification of the franchise. This power currently exists but has been little used – probably because these enhancements have to be locally funded in perpetuity.135

Responses to the consultation were published in November 2012. They were broadly in favour of more local control of rail franchising. The Department concluded that it remained “committed to seeking to implement an appropriate form of decentralisation in those parts of England where it is sensible to do so” and that it would therefore “continue informal discussions with those bodies who have submitted proposals or firm expressions of interest”.136

After the 2015 General Election 2015 plans for Combined Authorities and elected mayors across the country moved on apace with the first CA Mayors being elected in May 2017. In the north of England Rail North worked with DfT to specify the Northern and TransPennine Express rail franchises, which began in April 2016, and West Midlands Rail will jointly manage the West Midlands only services in the new franchise which begins in December 2017.137

As stated above, the Shaw Report into the future of Network Rail (NR) was published alongside Budget 2016.138 Shaw’s saw progress in this area in two ways: by ‘deeper’ route devolution and a reconfiguration of the current routes so as to better align then with the evolving devolved arrangements across England.

Firstly, on deeper route devolution, she proposed a new model of operation for NR, clearly showing the routes closer to their customers and more autonomous from the direct input of the centre.139 The second part of Shaw’s recommendation in this area was to redraw the geographical scope of these routes to better map them onto devolved areas. She acknowledged that an ‘ideal’ geography was unlikely but argued that a new structure could and should

• enable political accountability and support economic growth by directly aligning with one body or a small number of bodies that are responsible for transport and/or wider economic planning in the region;

134 ibid., paras 4.22-3 135 ibid., paras 4.36-4.47 136 DfT, Rail Decentralisation - Devolving decision-making on passenger rail services in

England: Consultation Responses, November 2012, section 4 137 DfT press notice, “More seats for rail passengers as nearly £1 billion is invested in

Midlands services”, 10 August 2017 138 op cit., The future shape and financing of Network Rail: The recommendations 139 op cit., The future shape and financing of Network Rail: The recommendations, p50

33 Passenger rail services in England

• enable effective coordination between the route and train operators by aligning with a small number of train operators; and

• remain of a manageable size and scale for the Route CEO and top team to effectively and efficiently operate the network.140

On this basis, Shaw concluded that there is a strong case for creating a dedicated route for the North with the residual London North East and London North West routes more closely aligned to the East and West Midlands.141 However, as many of the benefits from the creation of a route for the North are likely to accrue to Transport for the North (TfN) and other stakeholders in the region, Shaw concluded that it is “reasonable that these bodies should provide a contribution to these transition costs” and that TfN had expressed a willingness to work together with Network with NR on this issue.142

She also said that better-aligned local routes could leverage more sources of local funding for enhancements (e.g. developer contributions, local government borrowing, Business Rate Supplement, and Business Rate retention).143

In July 2017 the Urban Transport Group published a report arguing that devolution could drive significant improvements in performance and customer satisfaction as was evidenced by devolved networks in London, Scotland, Merseyside and Tyne & Wear.144

140 ibid., p72 141 ibid., p77 142 ibid., p77 143 ibid., p117 144 UTG press notice, “New report proves devolved rail networks work for passengers

and the areas they serve”, 20 July 2017

BRIEFING PAPER Number CBP 6521, 9 January 2018

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