BRIEFING PAPER Number CBP 6521, 9 January 2018 Passenger rail services in By Louise Butcher England Inside: 1. How do passenger services work? 2. Franchising policy since 2007 3. The future www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary 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. Number CBP 6521, 9 January 2018 4 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 Individual Franchise between the franchising authority (in England the Department for Agreements can be Transport) and the TOC. Each franchise is negotiated individually and is found on the a legal document that can only be terminated with the agreement of Gov.uk website. 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 Number CBP 6521, 9 January 2018 6 1996.