PAC seeks clarity from DfT over franchising concerns

EXPENSIVE and protracted legal action could ensue if settlements cannot be reached between owning groups and Government over the end of franchising, according to Public Accounts Committee Chairman Meg Hillier.

Writing to Department for Transport Permanent Secretary Bernadette Kelly on November 4, Hillier expressed concern that operators may also have been overpaid during the Emergency Measures Agreements (EMA) period from March-September.

Government paid approximately £4.3 billion to support the rail sector between March 23 and September 20, due to the decline in revenue caused by the lack of passengers as a result of the COVID-19 pandemic.

EMAs have since been replaced by Emergency Recovery Measures Agreements (ERMAs), with Government taking all revenue risk and covering all losses while passenger numbers remain low.

Nine operators signed the ERMAs (Avanti West Coast, c2c, Chiltern Railways, East Midlands Railway, Govia Thameslink Railway, Greater Anglia, TransPennine Express,

South Western Railway and West Midlands Railway), which expire between March 2021 and March 2022 ( RAIL 915).

Hillier has asked Kelly to write to her committee by the end of January, and thereafter every three months until all existing franchise agreements are fully dissolved/ wound up, to detail how DfT has ensured operators were not overpaid during the closedown of the EMAs and to provide progress on each franchise ending (detailing the final financial settlement for each operator).

This followed Kelly’s appearance before the PAC on October 15, when she provided updates on DfT activities including HS2, Crossrail, rail franchising, roads, support for local transport bodies, and how COVID-19 has affected transport.

Hillier wrote: “The train operating companies (TOCs) were paid a 2% management fee under the EMAs, reduced to 1.5% under the ERMAs, to deliver services. You told us that the operators will not be running at a loss, and the final EMA fee payment will not be made until the performance-related elements of the fee are agreed. We were concerned by the potential that operators may be overpaid during the EMA period.”

She added: “Once the subsequent ERMAs expire, dissolving the existing franchise agreements will require you to negotiate a final settlement with the TOCs. You explained that the aim for this negotiation was to ensure that neither the Department nor the operators profit from the end of the contracts.

“We are concerned that you appear to have a ‘take it or leave it’ approach to the negotiation, with TOCs left with an unpalatable option to return to the original contracts if they are not content with the severance deal offered, especially as there is no

independent arbitration process to settle any potential disputes.

“This creates a potential risk of expensive and protracted legal action if a settlement cannot be reached, or that TOCs returning to original contracts may deliver poorer passenger service levels to reduce their losses. Both these scenarios would be to the detriment of the taxpaying public.”

Hillier also raised concern over the ongoing delays to publication of the Williams Review. Initially due to be published in September 2019, it was delayed to this autumn, but has now been postponed until early 2021 to allow changes as a result of the effect of COVID-19 on rail.

Hillier wrote: “We understand the most recent slippage, but we are concerned by the continued delay and lack of clarity that this creates for the rail sector. You told us that the ERMAs have been designed to take forward some of the draft Williams reforms. However, you were not clear how the ERMAs and subsequent end of franchising will ensure that rail acts more in the interests of passengers.”

PAC wants Kelly to write to it within three months, outlining the work undertaken to understand post-COVID passenger demand and (at the earliest practicable point) to describe how the final findings of the Williams Review will be progressed.

Hiller also highlighted government funding provided to Transport for London, telling

Kelly that although the latest agreement on November 1 will address the expected shortfall in passenger revenue, this will only last until the end of March. Noting that this will have an impact on long-term planning, she said that further discussions will be needed to ensure TfL’s long-term sustainability.

Hillier also warned that other local transport bodies and operators will find it very difficult to plan with the short-term horizons given by DfT, when it provides support only until the end of 2020.

PAC recommends that DfT establishes a framework for the long-term support of local transport that includes analysis and assessment of the pandemic’s impact.