House of Commons Transport Committee Rail fares and franchises Eighth Report of Session 2008–09 Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 20 July 2009 HC 233 Published on 27 July 2009 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Transport Committee The Transport Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department for Transport and its associated public bodies. Current membership Mrs Louise Ellman MP (Labour/Co-operative, Liverpool Riverside) (Chairman) Mr David Clelland MP (Labour, Tyne Bridge) Mr Philip Hollobone MP (Conservative, Kettering) Mr John Leech MP (Liberal Democrat, Manchester, Withington) Mr Eric Martlew MP (Labour, Carlisle) Mark Pritchard MP (Conservative, The Wrekin) Ms Angela C Smith MP (Labour, Sheffield, Hillsborough) Sir Peter Soulsby MP (Labour, Leicester South) Graham Stringer MP (Labour, Manchester Blackley) Mr David Wilshire MP (Conservative, Spelthorne) Sammy Wilson MP (Democratic Unionist, East Antrim) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/transcom. Committee staff The current staff of the Committee are Annette Toft (Clerk), Jyoti Chandola (Second Clerk), David Davies (Committee Specialist), Marek Kubala (Inquiry Manager), Alison Mara (Senior Committee Assistant), Jacqueline Cooksey (Committee Assistant), Stewart McIlvenna (Committee Support Assistant) and Hannah Pearce (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Transport Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6263; the Committee’s email address is [email protected] 1 Contents Report Page 1 Introduction 3 Background to rail fares and franchising 3 Rail franchising—on track? 3 Rail franchises in the recession 5 Risks and renegotiations 5 Options for the East Coast Main Line 7 Length of franchises 8 Putting passengers first 9 2 Fares 10 Fare rises 10 Hidden fare rises and service cuts 11 The complexity of rail fares 12 The basket system 12 RPI+1 13 Conclusions and recommendations 14 Formal Minutes 16 Witnesses 17 List of written evidence 17 List of unprinted evidence 18 List of Reports from the Committee during the current Parliament 19 3 1 Introduction Background to rail fares and franchising 1. In 2006, we produced two major reports on rail passenger franchising and rail fares.1 We made a series of unambiguous recommendations to the Government about how best to improve services and increase the value for money of the railways. We were clear about the systemic problems, and argued that these were likely to cause problems in less benign economic climates. At the beginning of 2009, with the UK going into recession, large increases in rail fares were introduced across the country. These fare rises were accompanied by rumours of franchise holders defaulting on their contracts. We felt the two subjects merited another short inquiry to follow up our 2006 reports. Our inquiry has addressed two main areas: a) fares—in January 2009 regulated fares increased by an average of 6% and unregulated fares by an average of 7%, and b) franchising—the implications of the recession for train operating companies (TOCs) and their rail franchises. 2. We held two oral evidence sessions in February, one with train operating companies, trade unions and passenger representatives, and a further one with the then Minister of State for Transport, the Rt Hon Lord Adonis. In June, we had a follow-up oral evidence session with Lord Adonis to examine developments in the intervening months.2 Rail franchising—on track? 3. In our 2006 report on passenger rail franchising, we concluded that the franchising system had failed to fulfil its objectives, and that it was nothing short of a “policy muddle”.3 We were concerned that “the drive to extract premiums from some parts of the network will result in further above-inflation fare increases and a deterioration in customer service, investment and innovation”.4 We argued that the Government needed to “conduct a strategic review of the long term needs of rail passengers, and an honest appraisal of the structure best suited to fulfil these needs over the next several decades”.5 We urged the Government to ensure that this review be included in the 2007 Rail White Paper. The 1 Transport Committee, Sixth Report of Session 2005–06, How fair are the fares ? Train fares and ticketing, HC 700; and Fourteenth Report of Session 2005–06, Passenger Rail Franchising, HC 1354 2 Lord Adonis appeared before the Committee on 25 February 2009 as the then Minister of State for Transport, and on 17 June as Secretary of State for Transport to give evidence on rail fares and franchising. 3 Transport Committee, Fourteenth Report of Session 2005–06, Passenger Rail Franchising, HC 1354, paras 122–124 4 Transport Committee, Fourteenth Report of Session 2005–06, Passenger Rail Franchising, HC 1354, para 58 5 Transport Committee, Fourteenth Report of Session 2005–06, Passenger Rail Franchising, HC 1354, para 122 4 Government failed to do so, telling us that the system was “delivering” both good services and value for money.6 4. Just a few weeks after the publication of our report, in December 2006, GNER defaulted on its franchise commitments for the East Coast Main Line service,7 and the franchise was re-let to National Express in 2007. GNER had committed itself to paying the Government £1.3 billion in premiums for the seven year franchise. Despite GNER defaulting on this contract, National Express offered the Government even higher premiums for the line— £1.4 billion over the course of its seven and a half year franchise.8 During the first half of 2009, less than two years into the contract, the financial strain of the recession became apparent and National Express made significant cuts in staff and services on the East Coast Main Line.9 5. Since February 2009, the Rt Hon Lord Adonis, Minister, and subsequently Secretary of State, has given us repeated assurances that no train operating company was reporting financial difficulties or seeking to renegotiate their terms.10 Indeed, on 17 June, he told us that: We are now about a year through the recession and no train operating company has defaulted on its obligations even though, of course, their share prices have come under very considerable pressure in that time and the return they are able to make from operating rail services has diminished. The evidence so far is that the franchising system has continued to prove its worth.11 6. Precisely two weeks later, on 1 July 2009, National Express Group announced that it would not provide any further funding for its East Coast Main Line subsidiary. On the same day, the Secretary of State made a Statement in the House of Lords, announcing that National Express had sought a re-negotiation of their contract over several months, but the Government had refused to contemplate this option. Instead, a publicly-owned company would be established to take over the East Coast Main Line until the service could be re- franchised in 2010.12 7. As we said three years ago, the current system of rail franchising is a muddle. Within just three years, two franchise operators have had to abandon a major franchise—both of them on the East Coast Main Line. Whilst we fully support the Secretary of State in his decision to take back responsibility for the East Coast Main Line franchise, we remain convinced that these two high profile failures are indicative of the underlying problems in the current franchising model. 6 Transport Committee, First Special Report of Session 2006–07, Passenger Rail Franchising: Government Response to the Committee’s Fourteenth Report of Session 2005–06, HC 265, pp 1–2 7 BBC, GNER to surrender top train route, 15 December 2006, http://news.bbc.co.uk 8 National Express awarded contract for growth on InterCity East Coast, DfT Press Release, 14 August 2007 9 It has been reported that National Express’ revenue growth in the first quarter of 2009 was just 0.3%. The premium increased by just over £50 million this year, and will do so again in each of the next two financial years. The ‘cap and collar’ risk-sharing arrangements for Government support do not apply until the end of 2011. See: Modern Railways, Hard times are getting harder, June 2009 10 Qq 233 and 243 11 Q 319 12 HL Deb, 1 July 2009, col 225, Statement by Rt Hon Lord Adonis 5 Rail franchises in the recession 8. The National Express East Coast franchise is reportedly not alone in facing financial distress. South West Trains, owned by Stagecoach, is involved in a dispute over its £1.2 billion contract with the Government about when it becomes eligible for revenue support.13 Stagecoach has warned that its rail division would face a “significant” loss if it were to fail to resolve the dispute. Virgin West Coast’s revenue growth for the 48 weeks to 29 March 2009 was only 0.5%, although it is expected to remain profitable in the current financial year.14 Arriva is facing heavy losses on CrossCountry.15 In recent months, there have been a reported 7,000 job cuts in the rail sector, including 750 jobs at National Express Group, 480 at South West Trains, and 300 jobs at Southeastern.16 It is unclear what the cost to the tax payer of the default on the East Coast main Line is likely to be, because much of the information is confidential.17 It is clear, however, that if more franchises were to default, the financial implications could be very serious indeed, perhaps jeopardising funding for other transport projects.