Nigel Harris says contracting is a sound approach - but not this way!

Contracting is a sound approach - but not this way

“DfT’s existing franchising approach is dead in the water. A new approach is needed - urgently”

It’s been my firm opinion for quite some time that passenger franchising requires an urgent rethink - and the chaos of the Govia Thameslink Railway/Northern timetable meltdown really proves this.

When Government decreed amid the timetable chaos that eight operators would not implement December timetable changes, it pulled the rug on South Western Railway.

The DfT triggered an immediate need for SWR to renegotiate its one-year-old franchise. Extra SWR trains due in December are a contractual requirement on which the financial plan is dependent: this is a big deal. The DfT’s decision to defer the December changes has made its own franchise plan undeliverable.

In The Times on July 23, Industrial Editor Robert Lea succinctly put into sharp focus how it isn’t franchising itself that is at fault - it is the deals actually struck that are the problem. Lea pointed out that Network Rail had warned ORR/DfT that the infrastructure was incapable of handling the SWR services specified by DfT and signed up to by First/MTR. He paints a picture of SWR insisting that its proposals were agreed by DfT, with NR responding that franchisees are required to operate only services which can be accommodated by the infrastructure. ORR, which arbitrates access disputes, was unable to square this impossible circle and told NR and SWR to keep talking. And if you’re thinking SWR is a familiar story, you’re right. This is another DfT franchise demanding more traffic from an infrastructure incapable of delivering extra capacity - about which it was warned by NR. The key questions as I see them are: When SWR bid its ambitious enhanced timetable, and when DfT officials were specifying franchise improvements, what assessment did either make of what the infrastructure could actually cope with?

What did bidders actually know - and when? My understanding is that NR made clear that the proposed timetable “wouldn’t work.” So, did bidders press ahead regardless on the assumption that in the light of DfT requirements, money would be found for the infrastructure capacity upgrades implied?

When bids are being evaluated, DfT passes all operational components to NR for comment. These comments are then passed back to the DfT bid evaluation team - but note NR was not required to ‘sign off’ these timetables.

It beggars belief that I should say this - but it is surely incumbent on DfT to have a high degree of certainty about the maximum capacity the infrastructure can deliver, when it is pushing bidders to improve their bids?

A reasonable question is: why would the DfT knowingly push for undeliverable franchises? Let’s look at the numbers.

In 2016, DfT accounts reveal that ‘income received from TOCs’ (franchise premia payments) was just shy of £1.9 billion. Those same accounts also report that ‘support for passenger rail services’ (subsidy) was just £ 374 million.

In other words, DfT makes a surplus of £1.6bn on passenger train franchising. This represents about half of the DfT’s income. Bluntly, the more DfT can squeeze from the railway, the less it has to ask the Treasury for. This gives extra context to that barmy 10% compound passenger growth requirement that wrecked the East Coast franchise.

In the fallout from East Coast, NR warnings about infrastructure capacity were a factor. NR also correctly warned DfT that the GTR franchise timetable was unworkable - and it did indeed have to be rewritten. Now a third franchise is having the same problem.

The picture that emerges is of the DfT having a clear financial incentive to routinely squeeze more from the infrastructure, with too little heed to capacity. Bidders keen to stay in rail were compelled to ‘play the game’ - and then added to the problem through their own misjudgements.

What’s to be done? Only agreeing deliverable franchises would be a good start! The DfT has responded to some of the recent problems. It is working, I am told, on ‘Statements of Capacity’ (remember the old Route Utilisation Strategies?) to create boundaries to contain over ambitious aspirations by either DfT or bidder. In the South Eastern ITT, more rigorous financial robustness and risk assessments were included. NR’s views on timetable robustness are now given greater weight. But each of those is a solution to a problem of DfT’s own making, so these are not shouted about. As a consequence, they largely go unnoticed.

Is a reinvented Strategic Rail Authority Mk 2 the answer? Well, if it was configured like the SRA abolished in 2004, it could afford to recruit a higher level of expertise - but given that DfT envy of SRA pay was a key reason for its abolition then this is unlikely. Also, SRA2 could only work within powers delegated by DfT - but again, civil servants were bitter at SRA1 discharging responsibilities they saw as rightly theirs. This was another reason it was killed off, so it seems unlikely that SRA2 would be given the powers needed to succeed.

But strategy is crucial. If you seek to create best value sustainably then you reduce risk, which has a cost. If all you wish to do is maximise cash income for DfT then you take a different approach. Who decides? And let’s be very clear - a nationalised railway would face exactly the same problems, so how would officials deal with them then?

We saw in the summer 2018 timetable meltdown that slow DfT decision making was a root cause - it would not make decisions until full outcome studies were done. In franchising, a similar slowness has meant that no action is taken until crisis is upon us, even when there has been long-standing awareness of problems. The Virgin Trains East Coast franchise was in trouble from Day One, because changes in the economy between bid submission and franchise launch meant that finances were hobbled from its first train. No one did anything about it. And now SWR.

Both DfT and industry have failed over several years in how railways are managed in real life. A lousy job has been made of looking forward to both anticipate risk and take effective decisions about how to manage it. We have, through fault and misjudgment on all sides, contrived franchises that don’t work and staff at all levels are exhausted and disillusioned. They perform endless graft trying to make it all work and then suffer relentless criticism when this proves impossible.

So please, no more undeliverable franchises. Franchising itself is a sound approach, but the way we’ve done it has failed. Where would East Coast be now if it had had a 5% compound growth target rather than 10%? Where would GTR be if enough time had been given to timetablers? Where would SWR be if the DfT had listened to NR’s capacity warnings? DfT’s existing franchising approach is now dead in the water.

A new approach is needed - urgently.

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