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Rail Franchising: Government Response to the Committee's House of Commons Transport Committee Rail franchising: Government Response to the Committee’s Ninth Report of Session 2016–17 Tenth Special Report of Session 2016–17 Ordered by the House of Commons to be printed 24 April 2017 HC 1145 Published on 26 April 2017 by authority of the House of Commons 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-op), Liverpool, Riverside) (Chair) Clive Efford MP (Labour, Eltham) Robert Flello MP (Labour, Stoke-on-Trent South) Karl McCartney MP (Conservative, Lincoln) Stewart Malcolm McDonald MP (Scottish National Party, Glasgow South) Mark Menzies MP (Conservative, Fylde) Huw Merriman MP (Conservative, Bexhill and Battle) Will Quince MP (Conservative, Colchester) Iain Stewart MP (Conservative, Milton Keynes South) Graham Stringer MP (Labour, Blackley and Broughton) Martin Vickers MP (Conservative, Cleethorpes) The following was also a member of the Committee during the inquiry: Mary Glindon MP (Labour, North Tyneside) 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. Publication Committee reports are published on the Committee’s website at www.parliament.uk/transcom and in print by Order of the House. Evidence relating to this report is published on the inquiry publications page of the Committee’s website. Committee staff The current staff of the Committee are Gordon Clarke (Committee Clerk), Nehal Bradley-Depani (Second Clerk), James Clarke (Committee Specialist), Andrew Haylen (Committee Specialist), Daniel Moeller (Senior Committee Assistant), Michelle Owens (Committee Assistant) and Estelle Currie (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Transport Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 3266; the Committee’s email address is [email protected]. Rail franchising: Government Response 1 Tenth Special Report The Transport Committee published its Ninth Report of Session 2016–17, Rail franchising (HC 66), on 5 February 2017. The Government’s response was received on 5 April 2017 and is appended to this report. In the Government response, the Committee’s recommendations appear in bold text and the Government’s responses are in plain text. The responses from the Office of Rail and Road and Network Rail are also appended to this report. Appendix 1: Government Response The Government welcomes this report from the Transport Select Committee, which sets out the findings of the latest in its series of five inter-related inquiries into the “future of rail”. This Government has made it very clear that our railways need to adapt and change in order to be able to cope with the growth that they have already experienced and that which lies ahead. This means continuing to deliver a steady programme of improvements, expanding the network to provide more trains, harnessing new digital technology to transform the way our railways work, and ensuring that the interests of passengers are kept firmly at the heart of industry decision making. The Committee’s series of inquiries into the future of franchising is a welcome contribution to that process. The process of rail franchising has evolved continuously since 1996 in order to keep pace with passenger expectations, market circumstances, technological advancements and, in particular, the challenge of serving the historic levels of passenger growth experienced under privatisation. The investment through franchising has contributed to the United Kingdom having one of the safest and fastest growing railways in Europe. Private sector rail companies have invested billions of their own money to give passengers more trains, more services and more seats, and in 2015 the NAO calculated that the three franchises competitively since the restart of the programme in 2013 had returned over £5bn to the Treasury – an 82% average increase in payments compared to forecasts of what the previous agreements would have delivered. Following a review of franchising by Richard Brown CBE in 2013, the Department for Transport implemented important and fundamental reforms that supported the successful award of 13 franchises in a little over three years. This achievement was recognised most recently by the Cabinet Office’s Infrastructure and Projects Authority (IPA) who, following a review of its own, recognised that the Department has a well-established cycle for letting new franchises, extending existing franchises and managing contracts in-life. The IPA also recognised that there were sound processes for setting up project teams and that templates existed for the all necessary management tools and contract frameworks. Therefore, while the Government rejects the Committee’s premise that franchising is no longer fit for purpose, we do welcome a number of the report’s recommendations, several of which reflect work streams already underway at the Department for Transport. This 2 Rail franchising: Government Response illustrates the Government’s ongoing commitment to continuous improvement in the franchising process, with particular focus on efficiency, accountability, innovation and driving value for money for passenger and taxpayer alike. Passenger Rail Competition We recommend that the Department take steps to streamline bidding costs where possible; even if the effect of this on market interest is likely to be marginal. The Parent Company Guarantee is crucial in protecting the public purse and should not be removed or amended significantly. Wider reform is required, possibly through open access operators in appropriate areas, or creating smaller franchises, to attract new entrants into the market and promote competition in rail. Without change it is difficult to see how the current model will be sustainable in the longer term. (Paragraph 26) The Government agrees with this recommendation, as it recognises that there is value in streamlining franchise bidding costs wherever practical. As noted by the Committee the Government has already taken steps to address this issue, including by introducing the pre-qualification questionnaire passport. Where appropriate, the Government will continue to investigate other ways to streamline bidding costs, including considering the impact on bidding costs when reviewing future franchise market reforms. The Government also recognises the need to ensure that franchising remains attractive to bidders while securing a good deal for taxpayers. This is why we are introducing a new risk transfer mechanism for use on selected franchises: the “Forecast Revenue mechanism” (or “FRM”). This mechanism offers protection against shortfalls in revenue relative to the winning bidder’s bid revenue line, and ensures operators share revenue with the Government when revenue outperforms this forecast outside of predetermined variances. By applying FRM on franchises where traditional risk transfer mechanisms would otherwise generate unsustainably large PCS requirements, the Government can ensure that healthy competition is maintained for its franchises. More broadly the Government is committed to ensuring that passenger services are delivered in a way that is commercially sustainable and meets the needs of passengers and taxpayers and will set out its longer-term strategic approach to franchising in the forthcoming Rail Strategy. Our response on open access is set out under Recommendation 2, whilst our response on smaller franchises is set out under Recommendation 4. We recommend that the Department and the ORR work together, as they develop the financial framework for the railways over Control Period 6 (2019–24), to present a comprehensive set of reforms to track access charges. These reforms need to manage the differing requirements of OAOs and franchisees and ensure that operators, taxpayers and passengers get a fair deal. A specific proposal for a PSO levy should be put out to consultation over the next 12 months, so that a new regime can be introduced from April 2019. We further recommend that timetabling spaces for open access services are determined upfront during franchise development prior to the publication of Rail franchising: Government Response 3 the Invitation to Tender. This will provide the certainty that industry needs to plan, particularly at the bidding stage of franchising but it will also help to encourage OAOs. (Paragraph 42) The Government agrees with this recommendation. We recognise that open access has a role to support franchising in the delivery of passenger services, particularly in serving new markets and driving innovation. We fully agree with the Committee, and the Competition and Markets Authority (CMA), that there need to be important reforms to create a fair, level playing field between open access and franchised operators. This will allow passengers to benefit from even greater competition, whilst protecting Government’s ability to support vital social services and to invest in the rail network on behalf of taxpayers and all rail users including freight. That is why we are working with the ORR as part of the Periodic Review 2018 process as they develop options for potentially reforming track access charges. We have been clear that we would like to see all operators
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