Franchising reforms?
THE passenger franchising process faces significant challenges and may need fundamental changes in the future, according to Tracks, a new transport think tank established by the Campaign for Better Transport.
It commissioned independent consultant Credo to produce a report called Ensuring a Sustainable Rail Industry, which concludes that the Government “must clarify the economic and financial role of the railway and the appropriate balance between taxpayer and fare payer to fund the railway”, and that the Department for Transport must lead a “fundamental and bold review of fares”.
This is because, although franchising has delivered, circumstances have changed radically in the 20 years since privatisation. Its core focus on generating financial returns for the Treasury has led to problems, as franchisees are driven more by their contractual responsibilities to Government and paying premium payments than serving customers.
Another significant factor has been that devolution was not an issue when the franchising system was drawn up in the early 1990s, but is now a strong influence on railway operations.
The report points out that some recent franchise bids have been based on strong revenue growth, and that these targets may prove “challenging” for operators. It states: “If that does turn out to be the case, the economics of the franchises means that the financial implications could be significant.”
The concentration of the rail industry into a small number of large franchises creates risks for the supply chain, the report concludes, highlighting the impact on businesses that winning or losing franchise competitions can have.
It also says that it is “not clear” whether the current franchising system is the best solution to support the wider development of the rail industry, arguing that franchising has “struggled to create the right mechanism to support investment or encourage decisions which are made on the bases of whole life costs”. Another weakness is said to be that the franchise model has struggled to deliver ‘optimal solutions’ for the development of assets such as stations, or supporting a panindustry strategy for rolling stock.
A lack of integration with Network Rail in terms of incentives and planning horizons has also created problems, the report concludes. It adds that there also appears to be no clear link between the franchise model and the Government’s forthcoming industrial strategy, which the railway must reflect, especially post-Brexit.
Reforms suggested by Credo include changing the way franchises are let from a financial basis to a quality basis, with bidders offering a proposed level of service
within an “affordability envelope” rather than the DfT specifying requirements and asking bidders for financial quotes.
The evaluation process should be changed to give quality greater priority, and the financial structure of the rail industry changed to provide what the study calls “acceptable certainty” on future franchise payments, with windfalls from ambitious bids retained within the industry and ensuring that no franchise is allowed to be too big to fail.
In the longer term, Credo suggests the current single standardised franchising model could be changed to provide a range of options, offering greater flexibility on franchising (it identifies six outline models).
Other issues include a “disconnect” between incentives for train operators and Network Rail, and the wider supply chain. Credo highlights that the cycle of franchise bids “makes it difficult [for suppliers] to act in the best interest of the industry and the passenger”.