Commissioning and Managing the Railway

West Midlands Rail Proposition and Business case October 2014

West Midlands Raiaill The WMR Proposition Contents Preface 1. Why Local? 7 2. Supporting Devolution 9 3. Our Strategies and Policies 10 4. Supporting Economic Growth 12 5. Re-mapping the 14 6. Accountable, Capable Governance 19 7. What We Want to Do 22 8. The Financial Structure 25 9. Renewal and enhancement 27 10. Working with Our Stakeholders 29 11. Procurement and Programme 31 12. Managing the Risks of Change 33 13. Five Stage Business Case Summary 35

The Business Case Contents Appendices 1. OVERVIEW Introduction 38 The West Midlands Devolution Proposition 38 The Strategic Case 39 The Economic Case 40 The Financial Case 40 The Commercial Case 41 The Management Case 41 2. THE STRATEGIC CASE Policy Context 42 Problems and Opportunities 48 Devolution Objectives 51 Measures for Success 51 Scope of Devolution 55 Alternative Strategic Options Considered 62 Conclusion 68 3. THE ECONOMIC CASE Introduction 69 Cost Impacts 69 Benefit Opportunities 70 Value for Money 72 Conclusion 79 4. THE FINANCIAL CASE Cost and Revenue Changes 80 Financial Scale of the Proposition 84 Funding Requirements 87 Financial Risk 88 Conclusion 91 5. THE COMMERCIAL CASE Introduction 92 Contractual Framework 92 Procurement 93 Approach to Developing an Output Specification 94 Conclusion 98 6. THE MANAGEMENT CASE Governance 99 Managing the Franchise 103 Conclusion 106 Appendices A Local Transport Plan Objectives 108 B Devolution Case Studies 115 C Services to be Operated by WMRC and WCC 124 D Proposed Stations to be Operated by WMRC 126 West Midlands Rail Proposition 2014

4 West Midlands Raiaill 4 Our Vision

“Championing the needs of passengers and business, West Midlands Rail will manage local rail services as part of an

integrated public transport network, directing future investment at“ increasing our economic performance

5 Preface

Commissioning and Managing the West Midlands Railway

The West Midlands local rail network is a key economic asset for the region and connects the 14 transport authorities that support this proposal.

Experience from across the country demonstrates that better outcomes for passengers and taxpayers can be achieved with local control of rail services. We believe the West Midlands has a strong case for a transfer of responsibility from central to local government with wide-ranging benefits for government, taxpayers and, most importantly, passengers.

Working together as ‘West Midlands Rail‘, Partner Authorities wish to take greater responsibility for specifying and managing local rail services in the region from 2017 in line with the ’s refranchising programme for .

Our proposition outlines how we wish to do this and describes the significant benefits we believe will flow from local control of local rail services and the associated re-mapping of services.

We are seeking Department for Transport’s (DfT) agreement to this proposal in order that WMR can commence joint working with DfT to develop the proposed franchises and the associated legal and funding frameworks over the coming months. We look forward to actively working with government over the coming months to develop our proposals further.

Councillor Roger Lawrence Councillor Mark Winnington Chair Vice Chair West Midlands Leaders Rail Group West Midlands Leaders Rail Group

5 6 1. Why Local?

1.1 The rail network matters most to local people and businesses, and should be commissioned to meet their changing needs, be affordable and easy to use, and attract people to the West Midlands.

1.2 As has been proven where responsibility for rail services has been devolved elsewhere, decision-making close to people and businesses who use West Midlands rail services would maximise the benefits from national and local investment in the existing network and HS2.

1.3 WMR reflects a substantial part of economic geography of the West Midlands Travel to Work area, enabling specification, management and investment in rail services to directly align with local economic, social, environmental and connectivity objectives.

1.4 WMR proposes therefore democratic local control of the West Midlands rail network, by taking direct responsibility for investment in its development and growth as a vital asset for the region’s economy, communities and environment. WMR would act as a focus to champion local passenger needs.

1.5 Devolving responsibility would offer many advantages over a centrally-led franchise:

• Local - a locally-directed organisation for delivering a locally-developed Rail Vision, with local democratic accountabillity

• Agile - swifter and more flexible in responding to changing local market conditions and investment priorities

• Connected - directly engaged in active partnerships with local people, passengers groups, businesses, local authorities and Local Enterprise Partnerships (LEPs)

• Informed - closely understanding the patterns of demand for local travel to meet and stimulate economic development and delivery of new housing and business capacity

• Integrated - direct local capability to integrate rail, metro, buses, bicycles, pedestrians and roads in partnerships with local authorities, LEPs and the private sector

• Balanced - understanding the local links between fares, service levels and passenger facilities with economic development

• Targeted - rail investment closely integrated with wider economic and infrastructure development led by LEPs through their Strategic Investment Plans (SEPs)

• Demanding - locally setting and scrutinising the highest commercial, operational, service quality and performance standards of the Contract Operator

• Focused - a Contract Operator focused on the success and performance of local services

7 1.6 WMR believes it can, over the longer term, add even greater value as the body best able to understand and influence the patterns of local economic change, movement between communities and passenger demand; this may be a key lever in the transformative power of devolution. WMR is therefore seeking a long-term commitment from Government for rail devolution covering not only the 2017 contracts, but also subsequent contracts.

7 8 2. Supporting Devolution

2.1 WMR supports the Government’s aspirations to decentralise decision making to local communities. Our proposition is our response to the Department for Transport’s invitation to devolve West Midlands rail services.

2.2 The Government’s approach to devolved responsibility has been set out in a number of reports and policies :

• The Coalition Agreement (2010) - “We will promote decentralisation and democratic engagement and we will end the era of top-down government by giving new powers to local councils (and) communities.”

• McNulty Report ‘Realising the Potential of GB Rail’ (2011) specifically noted:

“The advantages of greater local engagement in the regional railway are: better able to match demand and integrate with the local public transport network; more local market focus to target greater passenger numbers while reducing costs; stronger political and local enthusiasm for maintaining services that have been locally procured rather than the future being determined centrally and remotely; and greater encouragement of innovation in the type and nature of services to be provided.”

• The White Paper ‘Reforming our Railways’ (2012) -“The devolution of more decision-making powers from central to local government … would give local, democratically accountable bodies a greater say over local services, allowing a stronger input from local passengers than may occur with central and more remote decision-making …. Deployed in the right place, devolution could enable better planning of investment.”

• The Brown franchising review (2012)- “the specification and oversight of franchises should be managed by authorities that are closest to their communities and local economies” (with specific reference to re-mapping the LM franchise along the lines of our proposition).

• The Brown review also recommemded that the Dft should look at opportunities to create smaller franchises as WMR proposes, commenting that “more, smaller franchises will be more attractive to the market than fewer, larger fanchises. Smaller franchises in particular are likely to be more attractive to new entrants. And most of the current owning groups would prefer a small portfolio of franchises, since this reduces the impact of failing to win a particular competition and spreads their risk.”

9 3. Our Strategies and Policies

3.1 WMR wishes to take responsibility for specification of the key things that matter to passengers – the timetable, fares, stations and car parks, trains, service quality and reliability (which we have described at Section 7 of this Proposition)

3.2 In ‘A Rail Vision for the West Midlands’, published by the West Midlands Regional Rail Forum on behalf of all the local authorities in the West Midlands Travel to Work Area, an action plan is set out bringing together the strategies and policies that support our growing railway. The high level objectives outlined in the Rail Vision document are:

• Improving connectivity • Providing passenger and freight capacity • Effective local rail franchise governance, more closely aligned to regional priorities • Maximising regional benefits of HS2

3.3 Whilst devolution is only one element of a wider strategy for making the Rail Vision a reality, it is as an important mechanism that will help facilitate the delivery of these objectives.

3.4 The Rail Vision includes 12 key attributes for the local commissioning and delivery of rail services in the region:

• Passenger experience - offering West Midlands people and businesses a visible, recognisable, reliable, value for money rail service they will want to use again and again

• Clear objectives - using the rail network to actively support the regional economy and a sustainable environment

• Connectivity - ensuring rail services connect between the right places locally, to the most relevant developing economies across the UK, and take the opportunities created by HS2

• High Speed 2 - preparing to maximise accessibility for passengers between the local WMR network and the proposed Curzon Street and Interchange HS2 stations

• New Stations - improving access to rail services via regional Parkway stations serving the Travel to Work area, and new local stations within the region’s urban areas

• Better Interchanges – developing services and stations to maximise connectivity between rail and rail, and rail and bus, metro, cycles, cars and pedestrians

• Better Journey Times - developing opportunities with to reduce journey times beneficial to West Midlands local and regional connectivity

9 10 • Sunday and Earlier/Later Services – providing services enabling more people to work in the developing 7 day/24 hour economy and at facilities such as

• New Services - assessing the potential of services on existing or re-opened local routes as set out in the West Midlands Rail Vision

• London - seeking viable direct services for economic hubs such as Walsall, Telford and Shrewsbury, and faster, more frequent services for cities such as Worcester and

• Capacity - working with industry and investing partners and LEPs to enhance the value of DfT/NR commitments, provide new capacity and address significant constraints

• Accessibility - setting the right standards to make rail services and stations as easy as possible to access for all passengers, and to make sure all operators meet these standards

3.5 Local authorities from across the wider Midlands region have recently come together to advocate a new initiative known as Midlands Connect, which brings together a cross-LEP partnership to develop the strongest possible case for strategic investment across the Midlands. The WMR proposals for increasing local influence in rail complements the delivery of the Midlands Connect Vision.

1

Midlands Connect

A Rail Vision Autumn “driving sustainable economic growth & 2014 enhanced for the connecti vity, greater West Midlands rail networkimproved capacity Midlands social cohesion through & local accountability

Connect ”

How better connectivity will maximise growth for the Midlands and the nation

Spring 2014

A Rail Vision ( Version: Summer for the2014 West Midlands

)

11 4. Supporting Economic Growth

4.1 The link between transport provision and economic growth is well recognised. The aim of the WMR Proposition is to make the management of rail service provision in the West Midlands more accountable to local stakeholders and more responsive to the requirements of regional businesses in order to maximise those economic benefits, which a well-specified, high-quality rail service has the potential to deliver.

4.2 The Government and WMR have the shared objectives of:

• Supporting economic growth by delivering more capacity and better connectivity;

• Delivering a better service for passengers, encouraging modal shift and reducing carbon emissions;

• Delivering a more efficient railway which is better value for the tax payer;

• Unlocking the potential of HS2; and

• Making the West Midlands rail network more accountable to local people.

4.3 WMR’s case for devolution is premised on delivering rail service improvements which will generate improved economic outcomes. Strong local specification and management will ensure that high level policy objectives are delivered in the most efficient and effective way for the West Midlands so maximising the economic benefits for the region.

4.4 The Strategic Economic Plans (SEPs) developed by the seven Local Enterprise Partnerships (LEPs) that cover the region all recognise the important role that transport and connectivity play in generating economic growth for the West Midlands. This proposition places WMR in a centra role for ensuring that rail connectivity is optimised to support these economic growth plans. WMR will be able to ensure that LEP funding is efficiently and effectively targeted at the local schemes which will generate the maximum value for money.

4.5 It is difficult to quantify all of the economic benefits that will result from the devolution of rail services because the WMR proposition would lead to a change of management approach and ethos, rather than a physical enhancement to the rail network. However, WMR will have a clear remit to focus on the delivery of regional economic and social objectives, arguably absent from the current franchising structure. WMR will also have direct access to local rail performance and financial data which will enable the region to make more informed decisions in respect of both rail service delivery and future investment. Furthermore, being managed by people using the local rail network on a daily basis will bring a first hand passenger focus to the day-to-day decision-making process.

11 12 4.6 In the Economic Case we have provided examples and analysis to illustrate the scale and scope of the net positive economic impacts that local franchise management could deliver. Some of the ways in which improved economic outcomes can be achieved include:

• Meeting the specific local requirements of passengers, employees and businesses through, for example, revising train service specifications to meet the changing needs or major business districts, retail centres, tourist destinations and other centres of economic activity;

• More effective management of change: Local knowledge and experience would make changes to service easier and better value for money including, for example WMR’s understanding of industrial relations issues that could be a barrier to change;

• More effective integration of rail services with bus, metro and other transport modes, so making better use of the region’s wider transport network as a whole, encouraging multimodal journeys leading to a reduction in road congestion;

• A zonal fares structure covering the entire region, coupled with smart ticketing, making journeys easier and encouraging modal shift;

• Unlocking the wider regional potential of HS2 through improved access to the new West Midlands high speed station hubs and maximising the local value of released capacity on the existing network;

• Using WMR’s long-term interest to develop innovative commercial options for funding rolling stock, enhancements to stations and network capability to deliver improved service quality and capacity for growth in movement of employees and expansion of workforce catchments required to support growing business sectors;

• Maximising the benefits of LEP investment in both the transport network and other local infrastructure;

• Using local knowledge and working closely with the train operator to deliver more effective off-peak marketing of local rail services, driving modal shift, and increasing revenue.

13 5. Re-mapping the Network

5.1 Our proposition proposes the re-mapping of the London Midland franchise to create two new franchises focused on different markets which we have termed:

• West Midlands Rail Contract (WMRC) - local services in the West Midlands

• West Coast Connect (WCC) - London commuter and regional services, including those operating within the West Midlands

5.2 This market focus will enable each to be exploited to it’s full potential, bringing down costs to the taxpayer. Market testing of this proposal suggests that rail operators would welcome such an initiative.

5.3 The existing London Midland services and routes are shown in Figure 5.1 and the proposed WMRC and WCC services are shown in Figure 5.2.

5.4 WMRC would include passenger services on the following routes:

• Shrewsbury - Telford - Birmingham New Street • - Birmingham New Street - Walsall - Rugeley Trent Valley • Birmingham New Street - Birmingham International • Nuneaton - (plus Coventry - Kenilworth - Leamington Spa from December 2016) • Redditch - Bromsgrove - Birmingham New Street - Lichfield Trent Valley • Hereford - Worcester - Birmingham New Street • - Worcester - Birmingham Snow Hill - Leamington Spa- Stratford-u-Avon • Stourbridge Junction - Stourbridge Town

5.5 WCC would include services on the following routes within the West Midlands:

• Birmingham New Street - Coventry - Rugby - Northampton - London Euston • Birmingham New Street - - Liverpool • Stafford - Nuneaton – Rugby

13 14 West Midlands Rail Contract West Coast Connect Franchise

Would: Would: • Provide services to 13 out of 14 WMR • Provide services to 9 out of 14 WMR authorities authorities • Operate 112 stations, serving a further 15 • Operate 37 stations, serving a further 34 • Run over 650 trains per day (excl. Stour • Provide approx. 13% of all services into bridge Town branch) Birmingham • Provide approx. 50% of all services into • Operate a fleet of approximately 300 Birmingham carriages • Operate a fleet of approximately 250 • Circa 28 Million Passenger Journeys carriages • £190M operations cost • Circa 30 Million Passenger Journeys • £170M passenger revenue • £160M operations cost • £30M other revenue • £56M passenger revenue • Run from 2017 to 2024 (ready for HS2) • £37M other revenue • Run from 2017 to 2024 (ready for HS2)

5.6 WMR’s proposed role is different in each:

• WMRC – joint WMR-DfT specification and management of the 2017-24 contract with incremental progress to full WMR devolved responsibility. The December 2017 timetable would form the WMR-DfT base WMRC specification.

• WCC - direct agreement with DfT on specification of Birmingham-Northampton and Birmingham-Stafford portions of WCC services.

5.7 WMR’s proposition seeks to promote WMR rail stations as a community hub, providing interchange and integration between modes and a new customer centred environment. WMR therefore wishes to examine alternative delivery models which use its long-term interest to take a greater future role in WMRC and other operators’ West Midlands stations to enhance service quality, consistency and multi-modal integration.

5.8 Located at the heart of the UK, WMR would not be a network in isolation. Devolved responsibility would facilitate better integration of operations, investment and marketing of a cohesive local railway forming an active part of the Network and HS2. To this end WMR commit to continued partnership working with DfT Rail Executive.

15 Franchise Length

The assumed timescales for WMR’s proposal are for a seven year franchise as recommended in the Brown review (with suitable extension options). This would allow for a subsequent contract to become operational in advance of the significant passenger service enhancements related to the HS2 Connectivity Package and freed up capacity on the existing network from 2026.

The 2024 date is therefore subject to review and change but referenced as a notional date throughout this document.

15 16 Ledbury Hereford Worcester Worcester Colwall Shrewsbury Malvern Link Malvern Foregate Droitwich Kidderminster Town Stourbridge Wellington Hartlebury Blakedown Malvern Great Oakengates St Hagley Cradley

Spa Telford Central Lime St Lime Liverpool

Wolverhampton Shifnal Heath Shrub Hill Shrub Worcester Stourbridge Stourbridge Cosford Old Hill Old Bridge Galton Smethwick Rowley Regis Albrighton Lye Langley Green & & Sandwell

Coseley Codsall Dudley Port Bromsgrove Bilbrook Liverpool South Pky Jn Runcorn Penkridge Acton Bridge Rolfe St Smethwick Barnt Longbridge Norton Kings Oak Selly Bournville Northfield Alvechurch

Tame Bridge Bridge Tame Hartford University Bescot Green Bloxwich Redditch The Winsford Crewe Five Ways Five Hawthorns Bloxwich Landywood Walsall Stadium New St New North Stafford

Birmingham Birmingham Jewellery Pky Wootton Henley Quarter Cannock Yardley Wood Yardley Hednesford Alsager Whitlocks Moor St Moor Rugeley Spring Road Spring Hall Green Hall Wood End Wood Earlswood Kidsgrove The LakesThe - Snow Hill Snow Birmingham Wilmcote in Stratford Stoke on Trent Stoke on Blake Street Stone Wythall Wawen Danzey - Hamstead Shirley Arden Town End Shenstone Witton Bordesley Lichfield City Lichfield - Small Heath Small upon Tyseley Valley Ru Stratford Acocks g - Avon eley Wylde Sutton Coldfield Bearley Butlers Lane Duddeston Gravelly Hill Gravelly Erdington OaksFour Adderley Chester Road Aston Olton Solihull Widney Trent Trent Green - Claverdon upon Valley Trent Lichfield Green Dorridge Lapworth Water Orton Water Park Stechford - Avon ParkwayAvon Manor Lea Hall Lea Hatton Wilnecote Marston Green Birmingham International Birmingham Coleshill Hampton Tamworth Parkway Warwick Berkswell Pky Polesworth - i -

Tile Hill A Atherstone Warwick Bedworth Coventry Arena Bermuda Bermuda

Canley Nuneaton Coventry London Midland Service London Midland London Midland Station Station London Midland 2016) Kenilworth Park (opens 16) 2015/ Leamington Spa Leamington Harrow and Wealdstone and Harrow itnKye Central Keynes Milton (opens 16) 2015/ ( opens opens ( Hemel Hempstead Wembley Central Watford Junction Watford Leighton Buzzard Rugby London Euston Kings Langley Kings Berkhamsted Cheddington Wolverton Apsley Long Long Tring Northampton Buckby

Watford North Fenny Stratford Garston Bow Brickhill Bricket Wood Woburn Sands How Wood Apsley Guise Park Street Lidlington Abbey Albans St Millbrook Stewartby Kempston Hardwick St Johns Bedford

Figure 5.1 – Existing London Midland franchise

17 Ledbury Hereford Worcester Worcester Colwall Shrewsbury Malvern Link Malvern Foregate Droitwich Kidderminster Town Stourbridge Wellington Hartlebury Blakedown Malvern Great Oakengates St Hagley Cradley

Spa Telford Central Lime St Lime Liverpool

Wolverhampton Shifnal Heath Shrub Hill Shrub Worcester Stourbridge Stourbridge Cosford Old Hill Old Bridge Galton Smethwick Rowley Regis Albrighton Lye Langley Green Sandwell & Dudley & Sandwell

Coseley Codsall Dudley Port Bromsgrove Tipton Bilbrook Liverpool South Pky Jn Runcorn Penkridge Acton Bridge Rolfe St Smethwick Barnt Longbridge Norton Kings Oak Selly Bournville Northfield Alvechurch

Tame Bridge Bridge Tame Hartford University Bescot Green Bloxwich Redditch The Winsford Crewe Five Ways Five Hawthorns Bloxwich Landywood Walsall Stadium New St New North Stafford

Birmingham Birmingham Jewellery Pky Wootton Henley Quarter Cannock Yardley Wood Yardley Hednesford Alsager Whitlocks Moor St Moor Rugeley Spring Road Spring Hall Green Hall Wood End Wood Perry Barr Earlswood Kidsgrove The LakesThe - Wilmcote in Snow Hill Snow Birmingham Stratford Stoke on Trent Stoke on Blake Street Stone Wythall Wawen Danzey - Hamstead Shirley Arden Town End Shenstone Witton Bordesley Lichfield City Lichfield - Small Heath Small upon Tyseley Valley Ru Stratford Acocks g - Avon eley Wylde Sutton Coldfield Bearley Butlers Lane Duddeston Gravelly Hill Gravelly Erdington OaksFour Adderley Chester Road Aston Olton Solihull Widney Trent Trent Green - Claverdon upon Valley Trent Lichfield Green Dorridge Lapworth Water Orton Water Park Stechford - Avon ParkwayAvon Manor Lea Hall Lea Hatton Wilnecote Marston Green Birmingham International Birmingham Coleshill Hampton Tamworth Parkway Warwick Berkswell Pky Polesworth - i -

Tile Hill A Atherstone Warwick Bedworth Coventry Arena 05 16) 2015/ Bermuda

Canley Nuneaton Coventry WCC Station Station WMRC Specified by Jointlyby specified andDfT WMR WestCoast Connect (WCC)Service: West Midlands Rail Contract (WMRC) Service 2016) Kenilworth Pa rk ( opens opens ( rk Pa Leamington Spa Leamington Harrow and Wealdstone and Harrow itnKye Central Keynes Milton (opens 16) 2015/ ( opens opens ( Hemel Hempstead Wembley Central Watford Junction Watford Leighton Buzzard Rugby London Euston Kings Langley Kings Berkhamsted Cheddington Wolverton Bletchley Apsley Long Long Tring DfT Northampton Buckby

Watford North Fenny Stratford Garston Bow Brickhill Bricket Wood Woburn Sands How Wood Apsley Guise Park Street Ridgmont Lidlington Abbey Albans St Millbrook Stewartby Kempston Hardwick Bedford St Johns Bedford

Figure 5.2 – Proposed West Midlands Rail Contract and West Coast Connect franchises

17 18 6. Accountable, Capable Governance

6.1 WMR’s governance structure, bringing together partner authorities in the Rail Contract area, is inclusive, democratic and flexible, enabling phased evolution from a joint DfT-WMR specification of the first 2017 WMRC contract to a fully devolved arrangement for subsequent contracts.

Metropolitan Authorities Shire and Unitary Authorities Birmingham City Council Herefordshire Council Coventry City Council County Council Dudley Metropolitan Borough Council Shropshire Council Sandwell Metropolitan Borough Council County Council Solihull Metropolitan Borough Council Telford and Wrekin Council Walsall Metropolitan Borough Council Warwickshire County Council Wolverhampton City Council County Council Table 4.6 - West Midlands Rail: Constituent Local Authorities

6.2 WMR’s governance structure comprises of two groups to ensure that decisions can be made effectively with democratic accountability:

• Leaders’ Rail Group – setting strategic policy and providing democratic accountability

• West Midland Rail Limited (WMR Ltd) – specifying and managing the rail contract through a small, focussed delivery team

Furthermore, this governance structure will ensure there is the right capacity within WMR to manage financial responsibilities and manage risk.

6.3 There are seven principles underpinning WMR’s governance, giving flexibility over how each authority wishes to be exposed to the risks/rewards of franchise management:

• Effective, transparent, democratically accountable decision making

• Robust financial management

• Agility to deliver early benefits and respond to changing circumstances

• A minimum service baseline agreed between all WMR local authorities

• Flexibility for WMR authorities to develop and fund enhancements above the baseline

• Active co-ordination with other transport modes, franchises and innovations

• Active integrated investment with Local Enterprise Partnerships and the private sector

19 6.4 During 2015, partner authorities will formally establish West Midlands Rail Limited and the Leaders Rail Group. This will enable WMR to fully engage with the DfT franchise programme for WMRC, including consultation, specification and bid evaluation

6.5 In addition, WMR’s governance structure is structured to facilitate phased, incremental devolution of responsibility between 2017 and 2024. WMR would oversee:

• Joint specification of the WMRC

• Terms of the Management Agreement between DfT and WMR

• A formal early review between WMR and the DfT which will determine the approach to further devolution during and beyond the first franchise term

• Joint DfT-WMR specification of West Coast Connect local services in the West Midlands and ongoing influence through a side agreement

6.6 WMR would also seek comfort from the DfT over the provision of subsidy for subsequent contracts and also confirmation that investment in WMR services would continue in national funding programmes (HLOS, etc)

6.7 Should the principle of this proposition be accepted by the Secretary of State, WMR will establish the formal Governance Structure, focussing local democratic input to the specification programmes for WMRC and WCC. The Leaders Rail Group has already met in shadow form to formally endorse this Proposition for submission to Government in autumn 2014.

19 20 Experienced Transport Authorities

6.8 West Midlands’ authorities have extensive experience of contract management, consortium procurement, innovative rail and metro enhancement schemes, prioritisation and making sometimes difficult choices, examples including: • Midland Metro Centro – Phase 1 development; Contract management; Phase 2 development • Car Parks Centro - operation and enhancement of 38 rail station Park and Ride car parks • Route upgrades Centro - Jewellery Line development – Birmingham-Smethwick Jnc. Centro/Coventry CC/Warwickshire CC - Nuneaton-Coventry upgrade (NUCKLE 1) Centro/Staffordshire CC/Cannock Chase DC/Network Rail – upgrade • New Street Station Gateway Centro with Birmingham City Council, Network Rail, DfT and Department for Business, Innovation & Skills (BIS) • New stations Centro/Worcestershire CC - Bromsgrove Warwickshire CC - Warwick Parkway, Coleshill Parkway, Stratford Parkway, Kenilworth Centro/Coventry CC/Warwickshire CC - Arena, Bermuda Park (NUCKLE 1) • Station enhancements Centro - ticket offices, Customer Information Systems, Access for All Telford & Wrekin – Telford Station upgrade Worcestershire CC - Worcester Foregate St, Malvern Link upgrades Herefordshire Council - Hereford and Leominster Access for All Northamptonshire CC – Northampton Station upgrade Coventry CC – Coventry Station upgrade Staffordshire CC - Access for All, Lichfield Trent Valley • Partnerships Warwickshire Quality Rail Partnership - County Council, Network Rail and TOCs Centro - ‘Transforming Rail Travel’ partnerships with TOCs Chase Line service enhancements - Centro, Staffordshire CC • Franchise (1997-2007) Centro - Franchise co-signatory bearing some revenue risk with responsibility for fare setting, marketing, monitoring performance, operating incentive regimes, implementing new services, etc. 6.9 WMR would provide the key opportunity and structure for such enterprise, innovation and investment to be combined in an integrated manner in partnership with LEPs and other third parties across the West Midlands Travel to Work Area, an opportunity WMR’s constituent authorities are determined to take.

21 7. What We Want to Do

7.1 Within the phased process from shared DfT/WMR franchise procurement and management between 2017 – 2024, to full devolution, WMR seeks to progressively:

• Take responsibility for operation and planning of the West Midlands Rail Contract • Become a key partner with DfT in delivery of the West Coast Connect franchise • Take control of the levers driving rail’s input to the region’s economy and environment

7.2 Through devolution of the local rail network, in partnership with the DfT, WMR will seek to bring improvements in the following areas:

• Passenger Rail Services - specify service levels and enhancements linked to passenger growth and increased economic performance

• Fares, Ticketing and Marketing - specify fares; drive innovation in multi-modal ticketing technology; pro-actively market rail as part of integrated high quality public transport net work; extend ‘Network West Midlands’ Zonal system across the WMR region.

• Stations and Car Parks – take advantage of WMR’s long term interest in stations to consider innovative business models to drive up standards, deliver enhancements, car park capacity, commercial value, third party investment, and widen the role of stations as prime community assets.

• Provision, Maintenance and Procurement of Rolling Stock - ensure that the Contract Operator delivers a strategy for rolling stock provision that meets timetabling and capacity requirements and delivers good value for money. Investigate new approaches to procure rolling stock, taking advantage of WMR’s long-term interest.

• Safety - continue to deliver a safe railway in partnership between WMR, Network Rail, the Contract Operator, other TOCs, ORR, Rail Safety Standards Board and passenger groups; safety is and must be a basic assumption of all who use the rail network.

• Performance - provide direct local oversight and scrutiny of WMRC and WCC performance, supported by Service Quality and Revenue Protection regimes incentivising the highest standards for passengers every day.

• Infrastructure Maintenance and Management - act as a principal regional customer for Network Rail, providing local visibility, focus on performance and value for money

• Network Enhancements – sponsor network enhancement and investment in partnership with the region’s 7 LEPs, including potential new routes and services (e.g. Walsall – Wolverhampton), route regeneration, new stations and local capacity schemes, but as more particularly outlined in the Rail Vision.

21 22 • Other Future Franchises - work with DfT and Welsh Government on specification of other franchises serving the West Midlands including: West Coast (2017); Wales & Borders (2018); Cross Country (2019); Chiltern (2021).

• High Speed 2 – be a key regional client for HS2, and an active partner with DfT, HS2, Network Rail and the LEPs in determining how to unlock the full potential of HS2 and the released national, regional and local capacity in the West Midlands.

7.3 In partnership with the DfT, WMR would seek to be both leader and coordinator of the inputs and outputs of the region’s local rail network, seeking to engender a strongly collaborative approach with Network Rail and other TOCs as well as its constituent authorities, LEPs and third parties.

Market Interest

7.4 Financial consultants Grant Thornton have undertaken a Market-Testing exercise on behalf of WMR in order to understand how bidders might react to the creation of the WMRC and WCC franchises and devolved local control. Grant Thornton concluded that:

7.5 The market testing was undertaken with nine organisations representing potential bidders, including a potential new entrant to the market. Respondents were asked questions relating to both the remapping and devolution. Key findings were:

• The market can see benefits from re-mapping the current London Midland franchise with a closer market focus, and these are likely to outweigh the costs

• There will be market interest in both the WMRC and WCC franchises

• Bidders will be willing to look at future alternative commercial models

• Bidders would be comfortable contracting with WMR Ltd as long as it had appropriate financial backing and appropriate competence and expertise

• Bidders could see opportunities for WMR authorities to integrate transport more effectively under a devolved contract.

23 “The market concurred with WMR’s belief that a smaller West Midlands focus would generate benefits from the increased focus and clearer market when compared to the current London Midland franchise. Although costs were noted... the market still thought that efficiencies could be generated, and moreover, by splitting into two franchises it was likely that the revenue forecasts proposed by bidders would be higher for the two franchises than for the re-letting of another equivalent to London Midland. ”

23 24 8. The Financial Structure

Revenue, Cost and Subsidy Overview

8.1 Using available data WMR has estimated the split of costs, revenues and subsidy between the West Midlands Rail and West Coast Connect contracts, shown in Table 8.1.

Current Franchise £m pa West Coast Connect £m pa

Passenger Revenue 231 175 Other revenue 67 30 Total Revenue 298 205 Costs -348 -189 Subsidy/Premium -50 16

Table 8.1 Franchise Costs, Revenue and Subsidy Split 8.2 The indicative figures for WMRC subsidy and WCC premium illustrate the different market characteristics of each franchise and shows the potential advantages of franchise remapping which would enable each contract to focus on its own market with better customer and taxpayer outcomes.

• WMRC - focused attention to the subsidy-dependent part of the current LM franchise

• WCC - greater incentives and attention to innovation and passenger volume growth while managing the impacts of the HS2 project.

WMR Franchise Financial Management

8.3 WMR has assessed the principal franchise model in which operators hold revenue risk, risk sharing models such as and ScotRail, and successful commissioner-risk bearing models such as LOROL, and Tyne and Wear Metro.

8.4 We recognise that to support development of WMR’s governance and capability and limit initial risk to partner authorities and the DfT, the award of the 2017-24 Rail Contract will be on a ‘Net Cost’ basis with revenue risk held by the operator.

8.5 Consistent with this approach, WMR would expect to share in some revenue or profit upside potential, which would be directly reinvested to enhance passenger service provision.

8.6 WMR is seeking day-to-day responsibility for the management of the WMRC from Day 1. Financial responsibilities could include payment to the operator, and approval of operator Customer and Communities Improvement Fund and Innovation Fund applications where WMR’s local knowledge would be particularly beneficial.

8.7 WMR is keen to ensure that it provides a strong regional leadership and will be a focal point for investment in the local network. As such, WMR would expect to be fully involved in discussions relating to Network Rail Control Period 6 (2019-2024) investment in the region and beyond.

25 8.8 A mid-franchise review between WMR and the DfT will determine what additional financial responsibilities will be devolved to local control for the remainder of the franchise term

8.9 Any funding agreement between WMR and DfT would need to:

• Cover the operator subsidy for an agreed defined minimum level of service, including the impact of committed investment schemes (e.g. electrification)

• Support WMR’s appropriate management costs

• Maintain DfT’s Rail Investment Strategy, growth funding and project specific funding (e.g. National Stations Improvement Project, Access for All)

• Share risks appropriately between DfT and WMR (e.g. national policy, regulation and charges risks remain with DfT)

8.10 Once WMR has further experience and strengthened its capacity relating to franchising and risk, WMR would review the commercial model for subsequent contracts, including different approaches to holding revenue risk. Potential benefits of adopting a different model could include:

• Full local control of passenger service specification • Full local control of fares, ticketing and technology • Full local flexibility to change services and fares swiftly to match developing markets • Full local specification of facilities, operating hours and staffing levels • Close, direct attention to revenue protection and ticketless travel • Rail Contract Operator incentivised and focused upon effective cost management • Simplified contract bidding, avoiding complex premiums for operator risk-bearing

8.11 WMR would seek comfort from DfT over the long-term availability of funding to support the base level of local rail services irrespective of the commercial framework adopted in subsequent contracts.

25 26 9. Renewal and enhancement

Maintenance and Renewals

9.1 Network Rail will welcome WMR as a regional focal point, and will be a key partnership to develop. WMR will take a long term view of the regional rail network so will be keen to fully participate in the Long Term Planning process. This partnership will also seek to build on the experience of Network Rail-TOC ‘Local Delivery Groups’ to use all parties’ maintenance and renewal resources in a jointly-planned, integrated manner, maximising value for money and avoiding duplication and poor programming.

Enhancements

9.2 Through its relationship with Network Rail and the Contract Operator, WMR would be an informed bidder for DfT’s CP5 investment funds (and future CP6/7 funds) defined and prioritised via evolution of the regional rail vision ‘A Rail Vision for the West Midlands’ (Summer 2014) and through Network Rail’s imminent route study process.

9.3 WMR will bring together its enhancement aspirations set out in the Rail Vision with those of the Local Enterprise Partnerships to maximise the benefit of joint planning and investment across the whole West Midlands Travel to Work Area, for example developing a joint strategic plan for new and enhanced Parkway/Park and Ride stations.

Current Train Fleet

9.4 High quality trains will continue to be required for the West Midlands to meet passenger expectations of quality and accessibility, and to attract and stimulate patronage growth.

9.5 WMR will seek to work closely with DfT and the operator to support the development of a rolling stock strategy to meet the capacity and quality requirements of the West Midlands that delivers improving value for money.

9.6 Working with the DfT and the operator, WMR would seek to support the development of a Rolling Stock Strategy, which would be owned by the operator, which would determine :

• A defined fleet of WMR trains • A depot, stabling and maintenance plan • A cascade plan for rolling stock released by regional or national electrification schemes • A plan for catering for growth • A plan for resourcing service development proposals

27 27 28 10. Working with Our Stakeholders

10.1 WMR would fit within a wide set of relationships with national, regional and local bodies in the public and private sectors, as well as across the rail and public transport industry.

10.2 As a principal driver of the development of the West Midlands Rail Network, WMR would seek to develop active, innovative industry relationships and partnerships with:

• DfT - in respect of services in the West Midlands provided by : - The West Midlands Rail Contract and West Coast Connect - The West Coast, Cross Country, East Midland and contracts

• Network Rail - to support the success of WMR and focus on reducing the operational cost of the West Midland local rail network

• Office of Rail Regulation - to maximise the value for money and outputs of Network Rail and the Contract Operator’s activities

• Rail Safety Standards Board and other rail industry stakeholders - Working together to continue to deliver a safe railway network

• Rail Delivery Group – ensuring integration of local and national opportunities to support and drive the RDG’s rail efficiency agenda

• High Speed 2 – early, continued WMR-HS2 engagement to maximise value of both parties’ investments, and deliver integration between HS2 and the local rail network

• West Midlands Rail Contract Operator – via WMR/DfT specification, tendering and Contract award and subsequent shared commitment to cost-effective delivery

• Train Operating Companies - via a ’West Midlands Routes Partnership‘ with all TOCs serving the West Midlands

• Welsh Government and other neighbouring regional bodies - To ensure seamless linkages between regions

• Birmingham Airport – ensuring coordination of WMR’s objectives and investments with those of the Airport, Network Rail, HS2 and Solihull Metropolitan Borough Council

• Bus and Coach Operators – working with the bus industry to best integrate subsidised and commercial services with rail, and deliver high quality bus-rail interchanges

• Midland Metro – to fully integrate marketing and ticketing of Midland Metro phases 1 and 2 with the West Midlands Rail Network

• WMR Constituent Local Authorities – to build relationships with other authority functions such as planning and highways in addition to each authority’s formal WMR role

29 • Local Enterprise Partnerships – as major partners for economic investment, local, regular and routine engagement with the LEPs would be a vital devolution benefit

• Business, Commerce and Tourism Bodies – WMR sees the rail network being a key contributor to the health of business, commerce and tourism

• Passenger bodies – statutory and voluntary bodies will be key partners in determining what the West Midlands Rail Network should deliver and its success in doing so

29 30 11. Procurement and Programme

Procurement

11.1 The DfT Rail Franchise Schedule proposes a new London Midland franchise from June 2017, preceded by a 15 month Direct Award Interim contract running from April 2016.

11.2 Our proposition seeks the agreement of the DfT for the re-mapping of the London Midland franchise when re-tendered in 2017 to create two new franchises West Midlands Rail (WMRC) and West Coast Connect (WCC) (Section 3 above)

11.3 Subject to such agreement, WMR proposes engagement as follows:

• London Midland Direct Award Interim Contract - WMR to inform specification in relation to creation of the West Midlands devolved network

• Management Agreement – for WMR to oversee the management of WMRC and WCC delivery

• WMR Contract – OJEU/ITT notices specify a standard Franchise Agreement, and will set out how the franchise will subsequently be managed by WMR

• Consultation – DfT/WMR joint public consultation on the West Midlands and West Coast Connect contracts

• WMRC Contract Specification and Award - Joint DfT/WMR programme and specification

• WCC Contract Specification - Joint DfT/WMR for WCC services in the West Midlands

31 Programme

11.4 Our programme begins with this proposition, is consistent with the DfT Rail Franchise Schedule, and is in three principal stages, with the following key milestones:

Milestone 1: WMR’s Proposition for WMRC and WCC

• October 2014 - Submission of WMR Proposition to DfT • Winter 2014 – Secretary of State’s decision to proceed with franchise remapping and devolution • Develop and agree the Heads of Terms for the franchise Management Agreement

Milestone 2: WMR engagement with DfT on Direct Award

• Autumn 2014 - agree scope, objectives and passenger benefits with DfT • End 2015 - DfT complete negotiation with London Midland • April 2016-June 2017 – 15 month Direct Award Interim Contract

Milestone 3: West Midlands Rail Contract and West Coast Connect Franchise Procurement

• December 2015 - consultation; agree strategy, specification and Draft ITT with DfT • December 2015 - Pre-qualified bidders selected • May 2016 - Invitations to tender, Franchise Agreement • November 2016 - Contract Bid deadline • January 2017 - Contract Award and commencement of mobilisation • June 2017 – WMRC and WCC commence

31 32 12. Managing the Risks of Change

12.1 The gradual transfer of roles and responsibilities from the DfT to WMR will be accompanied by the transfer of risks. Indeed, one of the benefits of devolving responsibility is that being closer to the risk will allow local and more effective management of that risk. Implicit in this phased approach is the need for a clear strategy for identification, transfer and management of risks both between DfT and WMR and amongst WMR’s constituent authorities.

12.2 WMR is thus developing a Risk Management Strategy, within which principal risk categories and their mitigation are being assessed. The exact balance between the risks and potential rewards will be subject to detailed discussions. Initially, we would propose to work with the DfT to define the principles behind the amount of risk that would be transferred to the train operator. Once these key principles have been agreed we will then discuss with the DfT how the public sector risks can be best shared between WMR and DfT. The management of this risk sharing and a risk register will form part of the agreement between DfT and WMR. During the franchise WMR will work with Network Rail and the train operator to help them manage their risks.

12.3 Even with full devolution WMR recognises that some risks will be retained by the Secretary of State and in seeking an incremental, phased transfer of responsibilities from DfT to WMR post contract award in 2017, WMR recognises the need to strengthen its capacity further.

33 12.4 The principal risk categories and their mitigation being assessed include:

• Financial Risk - WMR has prepared a high-level Financial Risk Register (5 Stage Business Case - Table 4.4) forming the base for a subsequent full and detailed quantified risk register

• WMR Capability - to extend its capability WMR intends to put in place an experienced team to work with the DfT to specify the LM Direct Award, specify and procure the next West Midlands franchise, and to work with the DfT in specifying the WCC services in the West Midlands.

• Risk Allocation amongst WMR Constituent Authorities - this would be managed through the Leaders Group under WMR’s governance structure, with models currently being considered by WMR constituent authorities for risk-bearing and decision making

• Network Rail Relationship – WMR will need to participate in industry forums and agree a structured working relationship with Network Rail to manage performance and ensure that WMR can effectively input into the Control Period planning processes and agree in frastructure enhancements.

• Service Specification – WMR will work closely with DfT to ensure that an appropriate performance management regime is clearly defined and WMR will then put in place a local team to manage the contract. The agreement between DfT and WMR will need to have clear rules agreed on scope of authority for changes to the specification.

• West Coast Connect – Birmingham to Northampton and Birmingham to Stafford Services are vital to the West Midlands economy and the local rail network; joint engagement in their specification is a key risk mitigation for WMR

• Safety - Continuing delivery of operational safety of the prospective Contract network, its passengers and staff, meeting all statutory and industry standards, is and will be a core feature of all relevant components of the proposition development, implementation and operation.

33 34 13. Five Stage Business Case Summary

13.1 WMR has developed the Proposition in the ‘Five Stage Business Case’ format required by the DfT. The key components and benefits set out in the Business Case are summarised below.

13.2 Stage 1 - Strategic Case

• Economic growth via greater rail capacity and better connectivity and integration • Better services and stations attracting more passengers and reducing carbon emissions • A more efficient, affordable, effective railway which is better value for the taxpayer • A rail service which is more accountable and responsive to local people and businesses • A local rail network ready to unlock the full potential of HS2

13.3 Stage 2 - Economic Case

• Better value for money and lower costs via local partnership with the Operator • Earlier, larger Contract outputs and revenue available for local re-investment • Over £50m (NPV) of direct economic benefits (2010 prices) between 2017 and 2024 • Closer alignment of rail investment and services with the West Midlands economy • Greater incentives for WMR constituent authorities to invest in rail services and facilities

13.4 Stage 3 - Financial case

• Premised on existing service and subsidy levels, providing certainty to DfT and WMR • Affordable, with subsidy no greater than within a retained single franchise • Subsidy c. £66m p.a., based on £93m revenues and £159m costs p.a. • Proposition and franchising costs covered by savings and revenue growth • Closer, local management of the subsidy-dependent portion of the LM franchise

35

13.5 Stage 4 – Commercial Case and Procurement Strategy

• DfT procure LM 2015 Direct Award and 2017-24 Contract in partnership with WMR • Early establishment in 2014 of an experienced WMR Executive Management Team • Early WMR/DfT agreement on geography, service and financial base, term and risk • Initial Net Cost Contract reviewed in subsequent contracts. • Four agreements: Devolved Funding Agreement (DfT/WMR); West Midlands Rail Contract (DfT/ WMR/TOC); West Coast Connect (Local Services) Side Agreement -WCC Northampton/Stafford services (DfT/WMR); Operator of Last Resort (DfT/WMR)

13.6 Stage 5 - Management Case

• Clear, inclusive and democratic WMR governance structure with early ‘shadow’ set-up • Robust financial management, developing longer-term risk bearing capability • Swift, flexible, directly engaged with local people, businesses and LEP investment • Processes to include project planning, risk management, assurance and communications • Phased programme supporting DfT with LM Direct Award and 2017-24 Contract

35 36 Five Stage Business Case Five Stage Business Case

West Midlands Raiaill Introduction

1.1 This five stage business case presents the case for devolution of local rail services in the West Midlands. It has been prepared in response to the DfT’s invitation for Local Transport Authorities to put forward a proposal to take greater responsibility for the specification, management and funding of rail services.

1.2 This document follows the best practice five case model approach set out by the DfT for the development of transport business cases and takes into account the DfT’s supplementary guidance for devolution propositions. This business case is at the strategic outline stage in the project planning life cycle and as such it will be updated as the devolution proposition is developed during the evidence based decision making process.

1.3 This document sets out the evidence that supports that proposition in the required five case format:

• Strategic Case – Sets out the case for change and how the rail devolution proposition can support the delivery of both central and local government transport policy objectives;

• Economic Case – Demonstrates the value for money of the devolution proposition and provides evidence for the benefits being realised;

• Financial Case – Demonstrates the financial impact of the proposition and how the devolution proposition will be funded;

• Commercial Case – Sets out the commercial basis of how the devolved rail services will be procured; and

• Management Case – Sets out the principles behind the governance structure and protocols that will be adopted to manage the devolution of local rail services.

The West Midlands Devolution Proposition

1.4 This devolution proposition has been prepared jointly by the Local Transport Authorities (LTAs) that make up the West Midlands. These are the West Midlands Integrated Transport Authority (acting as the local transport authority for Birmingham, Coventry, Dudley, Sandwell, Solihull, Walsall and Wolverhampton), Warwickshire, Herefordshire, Worcestershire, Telford and Wrekin, Shropshire, Northamptonshire and Staffordshire.

38 1.5 These Local Transport Authorities have chosen to create a new identity, West Midlands Rail (WMR), to encompass the services proposed for devolution and the collective approach of the authorities across the region in developing the proposal. It is expected that WMR will take increasing responsibility for managing, specifying and funding local rail services, ultimately moving towards becoming the franchising authority and franchise manager for the devolved services. Rather than refer to the individual Authorities this case refers to WMR as the body that represents the interests of local authorities within the Metropolitan area and the surrounding counties and unitary authorities that make up the West Midlands region.

1.6 This business case considers greater local control over how rail services are managed. WMR’s preferred option is that a new West Midlands Rail Contract (WMRC) is created as a result of re-mapping the existing franchise services. Solely for the purposes of this proposition, the current London Midland services which are not included in this new West Midlands Rail Contract will be referred to as the West Coast Connect (WCC) franchise.

The Strategic Case

1.7 The Government and WMR have shared objectives to:

• Support economic growth by delivering more capacity and connectivity; • Deliver a better service for passengers, encouraging use and reducing carbon emissions; • Deliver a more efficient railway which is better value for the tax payer; • Develop a local network ready to unlock the full potential of HS2; and • Make the West Midlands rail network more accountable to local people.

1.8 These objectives can be best achieved through the devolution of local rail services. Devolution provides the framework for greater political and management incentive to manage the franchise on a day-to-day basis and to define and implement change. Strong local specification, management and funding will ensure that high level policy objectives are delivered in the most efficient and effective way for the West Midlands. Underpinning the case for change, this devolution proposition seeks to address the following problems:

• the lack of responsiveness to locally defined needs for rail services; • the distortion of incentives to the franchisee; and • the cost and complexity of delivering change.

1.9 Through its discussions with the DfT, WMR recognises that it is appropriate to move towards the strategic objective of fully devolved rail services in a progressive approach to minimise risk for all parties, generate early benefits and secure best value for money. WMR and DfT will jointly specify the new franchise, with DfT leading procurement. Initially, WMR would take responsibility for day-to-day management of the franchise with DfT retaining overall financial control. WMR and DfT would undertake a joint mid franchise review to determine the approach to further devolution of responsibility for the remainder of the franchise term. This would set the foundations for the following franchise when WMR would have fully devolved responsibility for specifying, procuring and managing the contract.

38 39 1.10 Devolved rail services in the West Midlands would better support the local economy than a continuation of the present arrangements, through:

• Greater local focus on the specification of rail services resulting from WMR understanding and responding to changes in local market conditions in a timely manner;

• Improved accessibility for services as a result of WMR having the ability to provide multi-modal integrated transport services for passengers;

• Improved service quality as a result of the operator being focussed on locally defined targets;

• Faster resolution of performance issues as a result of local contract management engaging closely with the operator;

• Greater economic return on investment as a result of local transport investment decisions being considered as part of an integrated transport system and in the context of national rail policy; and

• Increased and more effectively targeted investment as a result of local engagement with LEPs and alignment with their Strategic Economic Plans. The Economic Case

1.11 The economic benefits underpinning the proposed devolution of rail services result from local contract management generating earlier and larger outputs from the franchise. This transfer of roles and responsibilities to WMR will offer value for money with costs associated with the re-mapping being recovered in the longer term through passenger benefits and efficiencies. This is supported by evidence from rail services that are currently devolved to local authorities in the UK, namely Merseyrail, , ScotRail and Wales & Borders.

1.12 Estimates for the potential economic benefits have been identified. These initial findings will be refined as development of the devolution proposition progresses. The Financial Case

1.13 The Financial Case has identified the incremental revenue and management costs associated with the proposal. The new West Midlands Rail Contract element is likely to continue to require a subsidy whilst the WCC franchise has the potential to become a premium paying franchise for the DfT. By creating a West Midlands Rail Contract that is more attractive to the market, WMR believes that the reduced risk premium that train operators will factor into their bids will offset the increase in management costs associated with the proposed new arrangements. The financial impact of devolution is no worse than a ‘do nothing’ scenario.

1.14 The Financial Case demonstrates that West Midland Rail has developed an understanding of the scale of the financial proposition and has considered (and developed mitigation for) the financial risks associated with it.

40 The Commercial Case

1.15 The Commercial Case has set out a procurement strategy designed to get the best long term value for a devolved West Midlands Rail Contract. A phased approach to the devolution of rail services with a net cost approach from 2017 minimises the risks to the DfT’s overall rail franchising schedule and mitigates risks to WMR’s members. WMR believes that the size and risk profile of the proposed specification will make it more attractive to bidders, especially new entrants to the UK rail market.

1.16 WMR and the DfT are continuing to discuss the details of the necessary contractual agreements. It is proposed that WMR and DfT would enter into a separate Management Agreement to sit alongside the Franchise Agreement. During the franchise term, WMR would gradually take on increasing local responsibility for franchise specification, management and funding. The contractual arrangements would need to have sufficient flexibility to allow the progressive transfer of responsibility and risk. It is expected that this would eventually lead to WMR becoming the franchising authority for fully devolved rail services for future contracts.

1.17 The WCC franchise would continue to be managed by the DfT and WMR would wish to enter into an agreement with the DfT to jointly specify local services operated by the WCC franchisee along the Birmingham to Northampton and Birmingham to Stafford corridors.

1.18 The Commercial Case also demonstrates how WMR proposes to develop an outline specification for the franchise that meets the objectives set out in the Strategic Case and will deliver the benefits identified in the Economic Case.

The Management Case

1.19 This Management Case demonstrates that the Local Transport Authorities in the West Midlands are developing robust and clear governance arrangements for WMR which will both provide democratic accountability and allow effective and efficient management of the contracts that form part of this devolution proposition.

1.20 The Management Case describes how the capability of WMR will grow and develop in order to carry out its responsibilities as devolution of rail services is phased in. This will deliver value for money and manage the risks for the DfT and the local transport authorities.

40 41 2. The Strategic Case

2.1 This Strategic Case sets out the Government’s and WMR’s shared objectives for the devolution of rail services. Aligned to these objectives and in response to the DfT’s request for this proposition, the Strategic Case demonstrates why change is needed. The Strategic Case considers the policy context of the proposition, the problems the proposition would address, the alternative options considered and the overall objectives of the proposition. Policy Context

2.2 The policy context for the devolution proposition considers the strategic aims and responsibilities of the organisations involved in, or affected by, the proposition. These organisations are:

• Department for Transport • The local transport authorities • The Local Economic Partnership (LEPs) covering the West Midlands area • Network Rail, and • Office of Rail Regulation. Department for Transport

2.3 In the context of the Strategic Case, the DfT is responsible for national transport policy including the provision of policy and guidance to local authorities, as well as setting the strategic direction for the rail industry. The Local Transport Plans, summarised in Appendix A reflect the DfT’s guidance to local transport authorities.

2.4 A key element of the context for rail devolution is the Coalition Government’s localism agenda. The Coalition agreement1 states that the Government will “promote decentralisation and democratic engagement, and we will end the era of top-down government by giving new powers to local councils, communities, neighbourhoods and individuals.”

2.5 The decentralisation strategy for rail is captured in the DfT Command Paper ‘Reforming our Railways: Putting the Customer First’2 , which outlines its vision for the railways. Within this document, the “potential benefits from greater local authority involvement in decision-making relating to local and regional railways” were recognised, following recommendations made in the McNulty Value for Money Review of UK Railways (May 2011)3 .

42 4. Supporting Economic Growth

2.6 The McNulty review outlines recommendations to reduce costs by 2019 including greater local decision making by PTEs and LTAs, in return for budget responsibility and accountability. The review recognises the need for a framework for local decision making and accountability which addresses:

• A common agenda between national government looking to reduce costs and local authorities prioritising increased services; and • The creation of groupings of authorities which interface effectively with franchise geographies.

2.7 The DfT consultation alongside ‘Reforming our Railways’ considered the objectives of a decentralisation programme to be:

• Cost reduction and enhanced value for money; • Local democratic control; • Benefits for passengers; • Supporting and stimulating economic growth; and • Contribution to carbon reduction.

2.8 The West Midlands rail devolution proposition is designed to meet these objectives.

2.9 The Laidlaw Inquiry4 and the Brown Review5 provided guidance to Government following the cancellation of the competition for the West Coast franchise in 2012. The Laidlaw inquiry focused on the specific problems of that franchise award while the Brown review asked more fundamental questions of the Government’s franchising policy.

2.10 Whilst the Brown Review concluded that the current rail industry structure is working and that there is no case for major structural changes, it recommended that the specification and oversight of franchises should be managed by authorities that are closest to their communities and local economies with devolution of franchises to local control by the relevant Integrated Transport Authority (ITA). In the case of London Midland, Brown suggested that it is likely to require some re-mapping of services, and the review expected this to be a staged process, to allow the ITA to gain experience and build their own capacity, whilst avoiding adding unnecessary costs.

1https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/78977/coalition_programme_for_government.pdf 2https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/4216/reforming-our-railways.pdf 3https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/4203/realising-the-potential-of-gb-rail-summary.pdf 4Report of the Laidlaw Enquiry (2012) https://www.gov.uk/government/publications/report-of-the-laidlaw-inquiry 5The Brown Review of the Rail Franchising Programme (2013) https://www.gov.uk/government/publications/the-brown-review-of-the-rail-franchising-programme

42 43 2.11 The Government welcomed and agreed with the Brown Review’s support for the principle of devolution, subject to resolution of issues prior to entering into any decentralisation agreement. The Government would require the devolution proponents to demonstrate that they have a business case and have widespread support from within the areas affected by the proposal.

2.12 The Brown Review also recognised that if, as recommended, franchises are devolved to LTAs there may be a case for further management contract type arrangements such as gross cost contracts. For such contracts to work the concessioning authority must have the capability to market services, sell tickets and collect revenue.

2.13 Most recently, the Secretary of State has encouraged WMR to continue developing a proposition for devolving responsibility for local rail services in the West Midlands6.

West Midlands Local Transport Authorities

2.14 While WMR will be the contracting body, it will represent the interests of Local Transport Authorities throughout the West Midlands. These Local Transport Authorities’ strategic objectives for transport in general, and rail specifically, are central to informing the strategic aims of the devolution proposition.

2.15 The statutory Local Transport Plans (LTPs) set out the longer term strategy for transport as well as the short term implementation plan. The strategic objectives identified in each individual Authority’s Local Transport Plan can be summarised within the following five categories:

• Economy: Supporting economic growth; • Climate Change: Minimising the negative impacts of transport on the climate by reducing emissions of greenhouse gasses; • Equality of Opportunity: Ensuring travel opportunities are available to all; • Health, Personal Security & Safety: Providing safe journeys and realising the health benefits of more sustainable modes; and • Quality of Life & Local Environment: Realising the benefits of transport in terms of improved quality of life and reduced impacts on the local environment.

2.16 Appendix A provides a summary of the transport objectives (applicable to rail in the context of the devolution proposition) for each LTA and how these map to the summary categories. The review of these LTP objectives indicates that fundamental transport objectives across all the LTAs are consistent and complementary.

44 2.17 Local authorities in the West Midlands have formed the West Midlands Rail Forum (WMRF) to develop a coordinated pan-regional rail strategy. In addition the forum also includes representatives from the rail industry and local business interests including Birmingham Airport. As rail services are largely planned within a geographic and financial scope that is wider than each local authority, in isolation, can effectively influence, the forum enables the local authorities to work together to meet the challenge of delivering their LTP and rail specific objectives. The Rail Forum is supported by a West Midlands Rail Members Group (WMRMG) providing cross-regional political support on rail issues.

2.18 The guiding strategy for rail devolution is the Autumn 2014 Rail Vision, ‘A World Class Rail Network for the West Midlands’, published by the West Midlands Regional Rail Forum on behalf of all the local authorities making up WMR7 . The document sets out an action plan bringing together the strategies and policies that support these.

2.19 The headline of this vision document is “to develop the rail network to promote job creation & retention, sustainable economic development and social cohesion in the West Midlands Travel to Work area”. To achieve this the following four actions are identified:

• creating a locally managed, locally accountable rail franchise, which is specifically designed to support the regional economy and provide the core of an affordable, accessible and low carbon public transport network which offers a viable alternative to less sustainable modes of transport;

• enhancing connectivity between current and emerging centres of economic activity, housing, leisure and retail facilities, as well as to the major transport hubs which connect the region to other national and international centres;

• providing the capacity enhancements needed by the region to cater for growth across all rail sectors, including maximising the capacity released by the new high speed rail line (HS2); and

• Improved local, national and international rail services.

2.20 The Rail Vision confirms that, in principle, the local authorities represented by the West Midlands Rail Forum support the concept behind moving towards a devolved rail franchise.

2.21 The consistent and complementary nature of the various LTP objectives means there is scope for them to work together through WMR in order to secure better value from the existing rail network and, subject to standalone business cases and funding, enhancements to the network.

6Letter dated 12 March 2014 from the Secretary of State to Councillor Roger Lawrence.

7A World Class Rail Network for the West Midlands’ www.westmidlandsrail.com/strategy

44 45 Partnership working in the West Midlands

WMR authorities have effectively worked together on rail issues over many years. Within the metropolitan area Centro has acted on behalf of the district councils as the coordinating body on public transport issues since 1974 and has strong governance arrangements in place through the Integrated Transport Authority.

Other examples of joint working include

West Midlands Rail Forum

• A body of local authority officers, rail industry representatives and business representatives that covers the whole West Midlands Government Office Region.

• The Forum has been in place for many years, previously linking into regional governance structures.

• It meets at least quarterly with good representation from all sectors.

• It is seen as the key body that can coordinate rail issues across the region.

• The Forum Sponsors the “West Midlands Rail Vision” setting out a rail development strategy for the region.

West Midlands Rail Members Group

• Members representing all West Midlands authorities come together to discuss rail issues on a quarterly basis. It was set up following dissolving of regional governance arrangements.

• The group provides political accountability for the Rail Forum.

Cross-LEP Transport Group

• The LEPs in the West Midlands require joint working between authorities (for example the Greater Birmingham and Solihull LEP covers not just Birmingham and Solihull but also parts of Staffordshire and Worcestershire).

• A Cross-LEP transport group has been set up to coordinate transport issues across all the LEPs and is championing issues such as the developing ‘Midlands Connect’ plans.

Individual Projects – authorities have a long history of cooperating on individual schemes and projects including:

• Bromsgrove new station – joint project between Centro and Worcestershire

• Chase Line service enhancements – jointly funded by Centro, Staffordshire and Cannock Chase Councils

• Birmingham – Stratford service enhancements – jointly funded by Centro and Warwickshire

• Coventry – Nuneaton (NUCKLE) project – jointly funded by Coventry CC, Warwickshire and Centro

These examples demonstrate that authorities in the West Midlands have a long history of working together and cooperating on rail issues. Forming a formal WMR partnership would be a natural next step. 46 Local Enterprise Partnerships

2.22 Local Enterprise Partnerships (LEPs) are partnerships between local authorities and businesses tasked with deciding priorities for investment to support economic growth that are appropriate to local circumstances. This provides a model which could be complementary to a devolved rail service, with decisions on rail investment being taken in line with wider decisions on local economic priorities. There are seven LEPs covering the area for which WMR will specify and manage rail services. These are:

• Black Country • Coventry & Warwickshire • Greater Birmingham and Solihull • Northamptonshire • Stoke-on-Trent & Staffordshire • The Marches • Worcestershire

2.23 The Government is committed to negotiate a Growth Deal with every LEP. These will allow each LEP freedoms, flexibilities and influence over resources from Government, and a share of the Local Growth Fund to achieve their identified growth priorities. In return, the LEPs are expected to set out their growth agenda, including developing ambitious, multi-year strategic economic plans. Local Authority members of LEPs are also expected to prioritise economic development and work collaboratively across the LEP area. Each LEP has developed a strategic economic plan (SEP) which important direction to economic development within the West Midlands.

2.24 There are various funding streams that are available to LEPs including City Deals, the Regional Growth Fund and the Single Local Growth Fund. At the heart of these initiatives is the proposition that where local authorities have appropriately robust governance arrangement in place, powers and funding should be devolved. This should minimise the amount of ring-fencing to allow the best possible mix of local investment to be identified in the interests of stimulating economic growth. There will be an increased opportunity for devolved rail management to draw upon these LEP managed funding streams.

Network Rail

2.25 Network Rail’s role in operating, maintaining and enhancing the UK rail network would not change with this devolution proposition. The key strategies relating to the development of rail services in the West Midlands are currently the Route Utilisation Strategies (RUS) which will be superseded by the Long Term Planning Process (LTPP) market and route studies.

46 47 2.26 As part of Network Rail’s long term planning process it has published a Regional Urban Market Study which is applicable to the West Midlands. The study identifies the key goals that the regional urban rail market needs to fulfil, as:

• Enabling economic growth • Reducing carbon and the transport sector’s impact on the environment • Improving the quality of life for communities and individuals, and • Improving affordability and value for money for Government and other funders.

2.27 The devolution proposition will help to meet these objectives by providing more effective local management of the contract and allowing WMR greater flexibility in agreeing service levels that best meet the local economic requirements.

Office of Rail Regulation

2.28 As part of the devolution proposition the role of the regulator would not change. The following ORR strategic objectives8 relate to this devolution proposition:

• Drive for a safer railway • Support a better service for customers • Secure value for money from the railway, for users and funders, and • Promote an increasingly dynamic and commercially sustainable sector

2.29 The ORR objectives are consistent with and complement both the devolution and LTP objectives. Therefore the benefits of this devolution proposition would contribute towards the realisation of the ORR’s objectives.

Problems and Opportunities

2.30 Underpinning the case for change, this devolution proposition seeks to address the following problems:

• the lack of responsiveness to locally defined needs for rail services; • the distortion of incentives to the franchisee; and • the cost and complexity of delivering change.

48 Lack of Responsiveness

2.31 As the policy context demonstrates, a key objective for rail devolution is to secure economic growth. While it is important at a national level that the government puts in place economic policy to drive economic growth, achieving that growth is also reliant on local communities rising to the economic challenges and opportunities that face them. Many of the decisions required to achieve economic growth are therefore better made at more local levels.

2.32 This generic problem has been acknowledged by the Government in the Coalition Agreement and, in the specific context of rail, in the Command Paper and resulting rail decentralisation consultation. The Command Paper and parallel consultation also identifies the opportunity to address this, through devolving responsibility for local rail services to local authorities.

2.33 Rail services are largely planned within a geographic and financial scope that is wider than each local authority, in isolation, can effectively influence. Whilst the West Midlands Rail Forum and Rail Members Group have already been established, the problem remains that there is misalignment between the time it takes to identify a need for change and the franchising authority’s ability and willingness to implement change.

2.34 The current franchising arrangements require the DfT to make both day-to-day management and investment decisions at a detailed local level. These decisions include areas such as ticket office opening hours at an individual station or detailed changes to the train service specification. There can be a significant delay between identifying the problem and implementing the solution. This delay is a function of the distance between central Government and the local issues. The DfT must undertake a lengthy analysis and decision making process in order to ensure they have understood the issues and consulted with stakeholders. Decentralisation of decision making can both accelerate and improve the resolution of these issues. Strong local political accountability with local engagement in analysis and decision making would enable WMR to make and implement both day-to-day management and investment decisions more quickly resulting in faster delivery and improved value for money of the outcome.

8http://www.rail-reg.gov.uk/server/show/nav.77

48 49 Distortion of Franchisee Incentives

2.35 WMR believes that the existing London Midland franchise structure does not provide sufficient incentives to the franchisee to improve services in the West Midlands. The analysis presented in the financial case suggests that there is in effect a cross subsidy within the franchise between premium paying long distance and London commuter routes and the subsidy requiring local services in the West Midlands. The operator will inevitably focus on enhancing the service where greatest passenger revenue can be secured. Consequently, services in the West Midlands appear to be a lower priority for development. For example, the current franchisee has made significant service improvements to journey time and frequency of the West Coast services to exploit the commercial opportunities offered. There have been no such initiatives on the local West Midlands services.

2.36 The construction of HS2 will have a significant impact on the operation of the rail service in and out of Euston station. Inevitably, franchisee management attention will become focussed on delivering the train service during the disruption resulting from the construction of HS2 at Euston, thereby reducing even further the attention on services in the West Midlands.

2.37 The existing franchise could be re-mapped without any devolution of responsibility. However, WMR believes that that local engagement in analysis and decision making would deliver the best value for money in a rail network that requires public subsidy. A local franchising authority can ensure that the operator focuses on customer service and quality with appropriate incentive mechanisms. WMR believe that these incentive mechanisms would drive additional revenue that would more than offset their costs.

Cost and Complexity of Change

2.38 Changes initiated by the DfT during the franchise (such as a change of fares policy or train service (specification) can involve extended and complex negotiations with the franchisee. Although the change will be considered beneficial, the uncertainty of future revenues and the lack of a competitive tender can make it difficult for the franchising authority to achieve good value for money from the change.

2.39 The DfT agree with the Brown Review recommendation that improved flexibility and change mechanisms should be built into future franchises. Local analysis and decision making will allow changes to be made more quickly and at a lower cost than currently. WMR proposes to work in partnership with the DfT to develop locally managed change mechanisms for inclusion in the franchise specification. WMR will consider whether the cost and complexity of these changes can be reduced though WMR moving towards a greater share of the revenue risk associated with the changes.

50 Delivering for Passengers

Passengers would benefit from the WMR proposal by:

• The creation of a strongly-branded, reliable, value-for-money service that is integrated into the wider transport network • Introduction of improved timetables over time, for example the introduction of improved Sunday services • Improved Passenger Charter compensation arrangements • Faster and wider roll-out of improved integrated ticketing arrangements, such as Smartcard • Better facilities at stations • An approach to changing timetables and delivering capacity that is more responsive to needs of local businesses and passengers

2.40 It is the three problems of responsiveness, incentives and change that the devolution proposition is seeking to solve. WMR propose to develop an organisation and governance structure that can maximise the delivery of local improvements that contribute towards the wider policy objectives. This devolution proposition is not about spending more money, but rather about allocating existing funding more effectively to meet local needs and so realise local and national strategy objectives. Devolution Objectives

2.41 Based on the policy context and the problems and opportunities identified, the strategic objectives for rail devolution in the West Midlands have been identified as:

• To support economic growth by delivering more capacity and connectivity; • To deliver a better service for passengers, encouraging use and reducing carbon emissions; • To deliver a more efficient railway which is better value for the tax payer; • To unlock the potential of HS2; and • To make the West Midlands rail network more accountable to local people. Measures for Success

2.42 In order to measure the success of the proposition in addressing the identified objectives it is necessary to consider the outcomes that the devolution proposition should secure. WMR’s phased approach to devolution provides the potential for both parties to monitor progress at each stage and give all parties the confidence to progress further with the devolution plans and refine them as appropriate. This will help mitigate the risks associated with devolution.

50 51 Support Economic Growth

2.43 The key objective is to support economic growth. Whilst economic growth is a function of many factors it is recognised by Government that rail connectivity plays an important part and this is why Government is supporting enhancements to rail connectivity through its rail investment strategy, the CP5 programme and HS2. While it is not possible to isolate the effects of enhanced connectivity from all the other influences on economic growth, measuring success in this regard can be achieved using a range of proxy measures such as rail demand to, from and between the key economic centres. To Deliver a Better Service, Encourage Use and Reduce Carbon Emissions

2.44 The degree to which passengers perceive a better service can be measured through the National Rail Passenger Survey (NRPS). Other franchises that have devolved management (London Overground, Merseyrail, and ScotRail) have all seen NRPS scores improve following the introduction of local control. Consequently it may be expected that NRPS scores for services and stations that form the West Midlands Rail Contract will improve following devolution.

2.45 Demand growth is the appropriate measure of the extent to which the proposition encourages use of rail. WMR believes that devolution will result in levels of demand growth and rail patronage growth that exceed national benchmark rates.

2.46 There are two ways in which rail devolution can contribute to reducing carbon emissions. Rail is an inherently more carbon efficient mode of transport than car. Therefore increasing rail mode share can be seen as a measure of reducing carbon emissions. It would be expected that rail mode share would increase through the period of the devolved franchise (rail demand will grow faster than car demand). Accommodating high loads per train (subject to available capacity) will further increase the carbon efficiency of rail, as more people are transported with the same carbon output. It would be expected that average train loads, particularly during off peak periods, would increase during the franchise.

52 How would WMR Innovate?

WMR believes that there are a number of opportunities to innovate in the delivery of services in order to deliver better outcomes for passengers and taxpayers.

A recent example of innovation in the West Midlands has been the introduction of the Class 139 Parry People Mover vehicles on the Stourbridge Town branch (which is the shortest branch line in Britain at 0.75 mile length).

This was achieved by:

• Centro supporting the development of the vehicle in the Black Country and the subsequent Sunday service trial to prove the technology • London Midland agreeing to introduce the service as part of its franchise bid, including the contracting out of the day-to-day operation to a separate operator.

The new service has delivered an increased frequency service to passengers, while reducing operating costs.

Under the WMRC there will be the opportunity to further review the provision of services on the Stourbridge Town branch, including options such as operating the line as part of Centro’s light-rail portfolio rather than as part of the national network which may bring further benefits for passengers and taxpayers.

WMR believes that the greater management focus on the West Midlands that is possible with the WMRC will lead to opportunities for both the operator and WMR to innovate in the delivery of services. While services will necessarily have to be specified quite rigidly it will be important to ensure that effective change mechanisms are in place so that innovative ways of delivering services can be introduced where there are better outcomes overall. WMR would expect to work closely with operators to identify such opportunities.

52 53 A More Efficient Railway

2.47 A successful outcome will be to secure a reduction in operating cost relative to the number of passengers being carried. Standard rail industry metrics can be used to assess this and comparisons can be made with similar operations elsewhere. It would be expected that increased efficiency of operation would be achieved through the period of the devolved franchise. Unlocking the Potential of HS2

2.48 To capture and maximise the distribution of HS2’s potential benefits, authorities across the West Midlands region have prepared a Transport Connectivity Package, which will deliver significant benefits to the region as a whole. The Connectivity Package is expected to double the economic benefits of HS2 to deliver 50,000 new jobs and a £4bn GVA increase for the region per year. Local devolution of rail services would make delivery of service changes easier to achieve. A successful outcome will be a rail network that is considered to be HS2 ready.

Delivering HS2

The WMR proposal will significantly assist in the delivery of HS2 and the economic benefits it will create for the West Midlands

• WMR will have increased flexibility to make timetable changes to improve connectivity to the HS2 stations in the region, supporting the HS2 Connectivity Package agreed between authorities in the region.

• WMR will be able to let the subsequent West Midlands franchise 1-2 years prior to the HS2 launch with the appropriate commercial structure to reflect the significant change in services and patronage that HS2 will drive.

• Creating West Coast Connect with a homogenous fleet of EMUs will considerably simplify the implementation of timetable changes necessary as a result of Euston rebuilding.

• DfT would have the opportunity to merge WCC and West Coast franchises either in 2017 or prior to HS2 implementation in order simplify management of the impacts of HS2 on the existing WCML.

54 More Accountable to Local People

2.49 The greater degree to which the devolved franchise will be more accountable to local people will be reflected in the governance arrangements. The arrangements will ensure strong local political accountability with elected members taking policy decisions tailored to the needs of the West Midlands. It is local accountability that will drive the responsiveness to locally defined needs. Scope of Devolution

2.50 The following paragraphs set out the scope of the business case for both the continuation of the existing arrangements (‘do nothing’) and the devolution proposition (‘do something’). The current West Midlands Franchise

2.51 Since privatisation, the West Midlands travel to work area has been primarily served by two different franchisees: Central Trains from 1997 until 2007, and London Midland from 2007 to the present day. In addition to this, inter-city operators and Cross Country operate services through the region, as do and Chiltern Railways providing both peak and off-peak capacity.

2.52 Between 1997 and 2007, incremental changes were made to Central Trains’ services with Class 170 trains being introduced to replace some Class 15X Sprinter sets. These newer trains were generally employed on longer distance services, meaning that many local services in the West Midlands travel to work area continued to be operated by older, poorer quality rolling stock. Central Trains suffered from significant punctuality and customer service issues.

2.53 The franchise map was redrawn in 2007, with most of the routes in the West Midlands passing to the new operator, London Midland. The London Midland franchise which is scheduled to operate until March 2016 also includes commuting services to London Euston. The new franchise has seen the replacement of old rolling stock, with the Class 150 fleet almost completely replaced by new Class 172 trains, benefiting passengers in the West Midlands travel to work area. London Midland has also introduced a large new fleet of Class 350 trains. These trains are principally used on London services and along the Birmingham – Northampton corridor.

2.54 London Midland has suffered, like its predecessor Central Trains, from a poor record on punctuality and has experienced significant staffing problems resulting in many cancelled services. Cancellations were a particular problem in autumn 2012 creating significant problems for both the DfT and the operator.

54 55 Do Nothing – DfT Specified and Managed Franchise

2.55 The Do Nothing case is that the DfT would continue to specify and manage the London Midland franchise in its current form with the addition of any enhancements that can be shown to be affordable and value for money. The key features of this like-for-like franchise renewal in the context of devolution are:

• There would be no remapping of services and the shape of the current London Midland franchise would be unchanged;

• The franchise would be required to deliver service enhancements to meet the CP5 (and in due course CP6 and CP7) requirements, including capacity metrics for London Euston and Birmingham and national performance targets;

• Revenue risk would lie primarily with the franchisee in line with current DfT franchising policy; and

• Fares would continue to be set in line with national fares policy.

2.56 This approach would mean that the previously identified problems and opportunities would remain unaddressed, namely:

Lack of responsiveness to locally defined needs

• The lack of local engagement in analysis and decision making will mean opportunities for improving the value for money of local services and investments are either not realised or delayed.

• A focus on the delivery of the national targets may mean that local opportunities to secure service enhancement and therefore economic growth are missed.

• The full potential benefits of initiatives such as smart ticketing will not be realised as the franchisee has limited direct incentive to enhance multi-modal travel in the West Midlands.

56 Distortion of incentives to the franchisee

• Franchise development and the franchisee management will remain prioritised on maximising revenue on the flows to the south of the franchise, especially as the construction of HS2 may well disrupt operations at Euston station. This will result in a sub-optimal deal for passengers and stakeholders in the West Midlands. • Cost and complexity of delivering change • Delivering locally funded enhancements will require lengthy increment / decrement negotiations with TOCs and/or Network Rail. • A revised fares policy that meets local economic needs would be costly to implement.

Do-Something – The West Midlands Rail Devolution Proposition

2.57 The West Midlands rail devolution proposition has been developed to support the delivery of the policy objectives by addressing the problems identified in the preceding section.

The Devolution Proposition – Geographic Scope

2.58 The proposition is that the current London Midland franchise is remapped with the local and regional services wholly within the West Midlands being transferred to a new West Midlands Rail Contract. For the purposes of this business case, a new WCC franchise will operate services to and from London on the West Coast Main Line, Birmingham – Liverpool services and local services between Birmingham and Northampton.

2.59 Diagrams showing the current London Midland franchise and the proposed WMRC and WCC franchise services are shown below in Figures 2.1and 2.2.

56 57 Ledbury Hereford Worcester Worcester Colwall Shrewsbury Malvern Link Malvern Foregate Droitwich Kidderminster Town Stourbridge Wellington Hartlebury Blakedown Malvern Great Oakengates St Hagley Cradley

Spa Telford Central Lime St Lime Liverpool

Wolverhampton Shifnal Heath Shrub Hill Shrub Worcester Stourbridge Stourbridge Cosford Old Hill Old Bridge Galton Smethwick Rowley Regis Albrighton Lye Langley Green Sandwell & Dudley & Sandwell

Coseley Codsall Dudley Port Bromsgrove Tipton Bilbrook Liverpool South Pky Jn Runcorn Penkridge Acton Bridge Rolfe St Smethwick Barnt Longbridge Norton Kings Oak Selly Bournville Northfield Alvechurch

Tame Bridge Bridge Tame Hartford University Bescot Green Bloxwich Redditch The Winsford Crewe Five Ways Five Hawthorns Bloxwich Landywood Walsall Stadium New St New North Stafford

Birmingham Birmingham Jewellery Pky Wootton Henley Quarter Cannock Yardley Wood Yardley Hednesford Alsager Whitlocks Moor St Moor Rugeley Spring Road Spring Hall Green Hall Wood End Wood Earlswood Kidsgrove Perry Barr The LakesThe - Snow Hill Snow Birmingham Wilmcote in Stratford Stoke on Trent Stoke on Blake Street Stone Wythall Wawen Danzey - Hamstead Shirley Arden Town End Shenstone Witton Bordesley Lichfield City Lichfield - Small Heath Small upon Tyseley Valley Ru Stratford Acocks g - Avon eley Wylde Sutton Coldfield Bearley Butlers Lane Duddeston Gravelly Hill Gravelly Erdington OaksFour Adderley Chester Road Aston Olton Solihull Widney Trent Trent Green - Claverdon upon Valley Trent Lichfield Green Dorridge Lapworth Water Orton Water Park Stechford - Avon ParkwayAvon Manor Lea Hall Lea Hatton Wilnecote Marston Green Birmingham International Birmingham Coleshill Hampton Tamworth Parkway Warwick Berkswell Pky Polesworth - i -

Tile Hill A Atherstone Warwick Bedworth Coventry Arena Bermuda Bermuda

Canley Nuneaton Coventry London Midland Service London Midland London Midland Station Station London Midland 2016) Kenilworth Park (opens 16) 2015/ Leamington Spa Leamington Harrow and Wealdstone and Harrow itnKye Central Keynes Milton (opens 16) 2015/ ( opens opens ( Hemel Hempstead Wembley Central Watford Junction Watford Leighton Buzzard Rugby London Euston Kings Langley Kings Berkhamsted Cheddington Wolverton Bletchley Apsley Long Long Tring Northampton Buckby

Watford North Fenny Stratford Garston Bow Brickhill Bricket Wood Woburn Sands How Wood Apsley Guise Park Street Ridgmont Lidlington Abbey Albans St Millbrook Stewartby Kempston Hardwick Bedford St Johns Bedford

Figure 2.1 – Existing London Midland franchise

58 Ledbury Hereford Worcester Worcester Colwall Shrewsbury Malvern Link Malvern Foregate Droitwich Kidderminster Town Stourbridge Wellington Hartlebury Blakedown Malvern Great Oakengates St Hagley Cradley

Spa Telford Central Lime St Lime Liverpool

Wolverhampton Shifnal Heath Shrub Hill Shrub Worcester Stourbridge Stourbridge Cosford Old Hill Old Bridge Galton Smethwick Rowley Regis Albrighton Lye Langley Green Sandwell & Dudley & Sandwell

Coseley Codsall Dudley Port Bromsgrove Tipton Bilbrook Liverpool South Pky Jn Runcorn Penkridge Acton Bridge Rolfe St Smethwick Barnt Longbridge Norton Kings Oak Selly Bournville Northfield Alvechurch

Tame Bridge Bridge Tame Hartford University Bescot Green Bloxwich Redditch The Winsford Crewe Five Ways Five Hawthorns Bloxwich Landywood Walsall Stadium New St New North Stafford

Birmingham Birmingham Jewellery Pky Wootton Henley Quarter Cannock Yardley Wood Yardley Hednesford Alsager Whitlocks Moor St Moor Rugeley Spring Road Spring Hall Green Hall Wood End Wood Perry Barr Earlswood Kidsgrove The LakesThe - Wilmcote in Snow Hill Snow Birmingham Stratford Stoke on Trent Stoke on Blake Street Stone Wythall Wawen Danzey - Hamstead Shirley Arden Town End Shenstone Witton Bordesley Lichfield City Lichfield - Small Heath Small upon Tyseley Valley Ru Stratford Acocks g - Avon eley Wylde Sutton Coldfield Bearley Butlers Lane Duddeston Gravelly Hill Gravelly Erdington OaksFour Adderley Chester Road Aston Olton Solihull Widney Trent Trent Green - Claverdon upon Valley Trent Lichfield Green Dorridge Lapworth Water Orton Water Park Stechford - Avon ParkwayAvon Manor Lea Hall Lea Hatton Wilnecote Marston Green Birmingham International Birmingham Coleshill Hampton Tamworth Parkway Warwick Berkswell Pky Polesworth - i -

Tile Hill A Atherstone Warwick Bedworth Coventry Arena 05 16) 2015/ Bermuda

Canley Nuneaton Coventry WCC Station Station WMRC Specified by Jointlyby specified andDfT WMR WestCoast Connect (WCC)Service: West Midlands Rail Contract (WMRC) Service 2016) Kenilworth Pa rk ( opens opens ( rk Pa Leamington Spa Leamington Harrow and Wealdstone and Harrow itnKye Central Keynes Milton (opens 16) 2015/ ( opens opens ( Hemel Hempstead Wembley Central Watford Junction Watford Leighton Buzzard Rugby London Euston Kings Langley Kings Berkhamsted Cheddington Wolverton Bletchley Apsley Long Long Tring DfT Northampton Buckby

Watford North Fenny Stratford Garston Bow Brickhill Bricket Wood Woburn Sands How Wood Apsley Guise Park Street Ridgmont Lidlington Abbey Albans St Millbrook Stewartby Kempston Hardwick Bedford St Johns Bedford

Figure 2.2 – Proposed West Midlands Rail Contract and West Coast Connect franchises

58 59 2.60 The local services between Birmingham and Northampton are retained as part of the WCC franchise for both operational and market reasons. The local services currently work through Northampton to provide direct services to London Euston. Since the introduction of through local Birmingham – Milton Keynes – London Euston services patronage has grown significantly as they have provided cross Northampton connectivity and competition with other West Coast services. Splitting the current London Midland services at Northampton could also result in less efficient rolling stock diagrams thereby increasing the overall cost of the two franchises. There may also be inefficiencies resulting from the splitting the current Class 350 fleet between two operators. It is proposed however, that the standalone Birmingham New Street to Birmingham International services form part of the West Midlands Rail Contract.

2.61 Re-mapping the current London Midland franchise will mean that the West Midlands Rail Contract operator management will not be distracted by managing disruption at Euston during the construction of HS2. Remapping will also remove the high revenue earning London services and thereby create greater transparency and focus on the costs and revenues of services in the West Midlands.

The Devolution Proposition – A smooth transfer of responsibility

2.62 This proposition is a transfer of roles and responsibilities for local rail services from the DfT to WMR. A central pillar of this proposition is that this devolution of responsibilities takes place in a way that manages the risk and ensures the continued resilience of the franchising process. Devolution can only be successful if the confidence of all parties including tax payers and owning groups is maintained throughout. Our proposed approach is a phased handover of responsibilities during the next franchise term with a view to WMR taking on full responsibility for the subsequent franchise competition. WMR’s thinking on the exact timing when specific responsibilities are transferred is still being developed and subject to continued discussions with the DfT.

2.63 WMR recognises that it needs to complement its detailed knowledge and understanding of the West Midlands rail market with a capability to manage complex contracts with train operators. Therefore, as part of the phased approach WMR will work in partnership with the DfT to build an organisation that will be resilient and earn the confidence of the franchising market as a competent franchising authority capable of attracting new participants to the franchising market.

2.64 The specification, procurement and management of the West Midlands franchise would initially be undertaken by the DfT in partnership with WMR. The partnership structure would allow for WMR to progressively take on greater responsibility (and risk) throughout the franchise term.

60 The Devolution Proposition – Revenue Risk

2.65 WMR understands the DfT’s preference for the train operator to take revenue risk. WMR will work with the DfT to manage the WMRC as a net cost contract with the train operator taking revenue risk. During this period WMR would look to evaluate different approaches to the sharing of risk and reward between the operator and the franchising authority. WMR’s current thinking is that the balance of revenue risk in the subsequent contract may shift more towards a gross cost basis with WMR taking some revenue risk whilst potentially allowing for some benefit sharing from enhancement schemes.

2.66 With the introduction of HS2 during the term of a subsequent contract, a gross cost contract may incentivise the train operator to focus on quality management and delivery of the agreed service specification in the most efficient way possible. The operator would have the incentive to lead investment and specification decisions that will reduce costs. However, in order to support economic growth with a rail network that requires public subsidy, investment and specification decisions need to be led by the contracting authority which can take into account the wider economic value for money case.

2.67 With the correct incentives, a gross cost contract could provide incentives for the Operator to respond to passenger and industry challenges with innovative solutions when the revenue benefits may be uncertain in a changed market environment. The gross cost approach would simplify and speed up changes to the franchise specification as WMR’s negotiations with the contract operator would need only concern the changes to the cost of the operation.

2.68 Moving towards a gross cost contract approach would ensure that any additional revenue from enhancements would be captured by WMR and could be reinvested into the rail network in the West Midlands. Potential schemes that would benefit from this includes frequency enhancements, service extensions and new stations, station refurbishments and rolling stock refurbishment.

2.69 WMR also believe that a gross cost contract would be attractive to the franchising market and would potentially achieve the best possible value for money from the bidding process. WMR’s informal discussions with potential bidders indicate that there is substantial interest from a number of owning groups for a relatively small and well defined gross cost contract. This interest has included potential new entrants to the UK franchising market. Bidders would not need to price revenue risk into their bids and, as a consequence, lower margins could be expected and the chance of operator failure is reduced. It is likely that HS2 will become operational during the lifetime of the subsequent contract and there will be significant uncertainty in revenue forecasting. In this situation, the train operator may not be the best place for revenue risk to reside.

60 61 Alternative Strategic Options Considered

2.70 In developing the Do Something case, WMR has considered a number of alternative approaches to both the geographic scope of devolution, and the decentralisation of rail services. These are summarised in Tables 2.1 and 2.2 below.

2.71 The assessment summarised below (table 2.1) identifies that the ‘do nothing’ option does not meet the policy objectives of decentralisation. Option E has the potential to deliver more of the policy objectives than the alternative packages for decentralisation. However, there is significant risk is moving to this approach from day one. Whilst Option E is WMR’s preferred final outcome, it believes that option D provides a step towards full devolution with a manageable level of risk. However it is recognised that this approach is probably not optimal for services along the Birmingham – Northampton and Birmingham – Stafford corridors. In these cases WMR believe that the best alternative is option B which allows for in WMR to specify the local services within a DfT specified and managed franchise.

Remapping

2.72 The starting point for the remapping process was the current London Midland franchise specification as described in its Service Level Commitment. Those routes that are wholly within the West Midlands travel to work area were assumed to become part of the new franchise and were not considered further as part of the re-mapping options. Whilst Northampton to Birmingham New Street can be considered to be in the travel to work area, it is operationally interlinked with routes that are not and hence was considered as part of the re-mapping exercise. London Euston to Crewe services also pass within the West Midlands travel to work area but do not provide services into the core West Midlands area so are assumed to transfer to the WCC franchise.

2.73 The focus of the remapping is the West Midlands travel-to-work area. As well as London Midland, four other franchised operators provide peak time capacity into Birmingham; West Coast, Cross Country, Wales and Borders, and Chiltern. WMR identified the Cross Country Leicester to Birmingham services as operating wholly within this area.

2.74 The following routes were considered for assessment as options for the re-mapping:

• Birmingham to Northampton to London Euston • Birmingham to Liverpool • Birmingham to Leicester (Cross Country)

2.75 The options for franchise re-mapping were assessed on the basis of:

• Market fit and revenue generation; • Operational efficiency and effectiveness; • Fit with WMR and DfT policy objectives; • Impact on rail franchising schedule and network development plans; • Legal and contractual complexity; and, • Stakeholder acceptability.

62 2.76 The assessment summarised below (table 2.2) identifies that the ‘do nothing’ option does not meet the shared policy objectives. WMR believe that option 2 provides the best market fit and is operationally efficient. Services between Birmingham and Northampton and Birmingham and Liverpool should form part of the WCC franchise.

62 63 Table 2.1 Approaches to Decentralisation

Approach Application in the West Midlands

A: Do Nothing Description DfT would continue to specify and manage the London Midland franchise in its current form with the addition of any enhancements that can be shown to be affordable and value for money.

Advantages: Established DfT specification, procurement and management procedures for a single franchise.

Disadvantages: Does not address DfT or WMR policy objectives on decentralisation Little or no local political accountability Significant risk of poor value for money from lack of local engagement in analysis and decision making

B: One Description WMR would specify certain service groups within the London Midland franchise franchise, (for example Birmingham to Lichfield) with the option of funding increments or multiple decrements. These increments/ decrements may be priced options in the ITT. specifications

Advantages: Addresses to a limited extent the DfT and WMR objectives WMR has the freedom to specify local service groups with limited local accountability and management Service groups remain within a larger franchise so efficiency savings are maintained

Disadvantages: Not clear who carries the cost or the risks of the specification. May be challenging to split some service groups between WMR and DfT. Managing a contract with numerous stakeholders interested in various service groups would be complex and costly. WMR has limited influence over the base specification – difficult to ensure that priced options are fully included in the bid evaluation resulting in a significant risk of not achieving value for money.

C: One Description Within the principal DfT managed London Midland franchise, WMR would be principal able to let ‘micro-franchises’ consisting of one or more service groups, which could franchise, one be let to a different operator than the principal franchisee or more ‘micro- Advantages Meets some of DfT and WMR rail decentralisation objectives Local authority has franchises’ full control and takes risk over the specific micro franchise Greater transparency of costs and benefits of each micro franchise

64 Approach Application in the West Midlands

Disadvantages: Difficult to identify suitable micro franchises Likely to be a high cost approach as efficiency and resilience from larger operations will be lost Additional bidding and administrative costs associated with a greater number of franchises and complexity Unclear where the risks lie between the principal franchise and the micro franchises

D: Re-mapped Description WMR would become co-signatory of the whole of the new smaller West Midlands Franchise – Contract with involvement in franchise specification specified and WMR would have a role in the management of some aspects the franchise managed by including some tasks on behalf of the DfT DfT in partnership Advantages: An established approach which limits the potential risk to the local authorities with WMR Allows WMR to gain experience of the franchising process and detailed under- standing of the role of a franchising authority.

Disadvantages: Potentially complex and costly multi-party negotiations required to secure changes to the franchise agreement causing delay to the introduction of beneficial schemes Local political accountability remains limited. Failure to agree terms with partners may prevent WMR from quickly pursuing options in the local interest.

E: Re-mapped Description WMR would specify and manage a new West Midlands Rail Contract. franchise devolved to Advantages: Fully addresses DfT and WMR policy objectives on decentralisation WMR The size of the re-mapped franchise allows efficiencies of scale to be realised and regional services to be optimised A West Midlands Rail Contract will be able to secure external funding sources as it matches regional decision making for local transport funding Local accountability and local engagement in analysis and decision making would speed up delivery and improve value for money

Disadvantages: Needs to be clear governance and risk sharing arrangements between the local authorities, WMR and DfT WMR will need to develop the capabilities and resilience required to act as a franchising authority There may be conflicts of specification between authorities

64 65 Table 2.2 Approaches to Remapping

Approach Application in the West Midlands

A: Do Nothing Description Existing franchise geography – no remapping of services

Advantages: Short term avoids cost of change

Disadvantages: Doesn’t meet policy objectives of DfT and WMR.

1 Description All services on the Coventry Line provided by WCC

Advantages: Maintains through services to London for passengers and competition with West Coast franchise. WMR do not need to consider on commuting services into Euston. Operationally efficient.

Disadvantages: Local services within the West Midlands would not form part of devolved franchise – reduction in benefits for passengers and taxpayers.

2 Description All services on the Coventry line except the Birmingham New Street to Birmingham International shuttle are provided by WCC

Advantages: Maintains through services to London for passengers and competition with West Coast franchise. Operationally efficient split of services. Minimises incremental cost from additional resource requirements.

Disadvantages: Travel to work services between Birmingham and Northampton are not directly part of the devolved franchise

2 Description All services on the Coventry Line provided by West Midlands Rail Contract (termi- nating at Northampton) with WCC providing Northampton to Euston services.

Advantages: Devolved local control over majority of services between Northampton and Birmingham

Disadvantages: Loss of passenger benefits for through services to London and competition with West Coast franchise. Operationally inefficient. Potential operational difficulties to accommodate terminating services in Northampton.

66 Approach Application in the West Midlands

4 Description Two trains per hour Birmingham – Northampton - Euston services are provided by WCC, with one train per hour Birmingham to Northampton plus Birmingham International shuttle provided by West Midlands Rail Contract

Advantages: Maintains cross . West Midlands franchise can provide local travel to work services between Birmingham and Northampton.

Disadvantages: Operationally inefficient and operational issues with trains terminating at Northampton. Reduces capacity on Euston to Birmingham.

5 Description Birmingham to Liverpool services are provided by West Midlands Rail Contract

Advantages: Travel to work area services are provided by the West Midlands Rail Contract.

Disadvantages: Operationally inefficient. Services beyond Stafford not part of the West Midlands travel to work area.

6 Description Birmingham to Leicester local services are provided by West Midlands Rail Contract

Advantages: Local services in the travel to work area will benefit from devolved specification management. Services can be optimised for delivery of local services.

Disadvantages: Services need to be remapped from Cross Country franchise (contractually complex unless undertaken at start of next franchise in 2109). Operational and cost impacts to be determined.

66 67 Conclusion

2.77 There is a strong strategic case for the devolution of rail services to the West Midlands as they would better support the West Midlands economy than a continuation of the present arrangements. Re-mapping the current London Midland franchise into more market-focussed businesses creates strong benefits. Local specification of rail services will allow for investment decisions to be considered both as part of an integrated transport system and in the context of national rail policy, so delivering the greatest economic return for investment.

2.78 Devolution will allow WMR to tailor the local rail network and services to the needs of the region. This will be based on strong local political accountability and the ability to make changes quickly. Local contract management will improve service quality as a result of incentives for the operator being focussed on locally defined targets and schemes.

68 3. The Economic Case Introduction

3.1 The economic case demonstrates that the devolution proposition offers value for money. In line with the DfT’s suggested content for a devolution business case this case seeks to draw out, insofar as is possible at present, the net economic costs and benefits of the proposition.

3.2 The do nothing and do something scenarios in this devolution business case need careful definition. It is unlike a conventional business case for capital investment or service changes, where a clear change in capital and or operating costs result in a set of clearly defined scheme outputs. The input in the case of devolution is the transfer of roles and responsibilities from the DfT to WMR and the consequent change of the governance and management relationship between the DfT, local transport authorities and the franchise operator. The output is greater efficiency and effectiveness that can be achieved through the revised arrangement which, in turn delivers enhanced economic outcomes.

3.3 The case does not include the costs and benefits of possible capital investment options or specific service enhancements. Such changes could be delivered with or without devolution. The only exception to this is where there is compelling evidence that the DfT could not pursue such a change whereas under a devolved structure WMR could do so. In this case, the devolution proposition includes both the costs and the benefits. The change would also demonstrate an investment case in its own right.

3.4 There are a number of enhancements that WMR proposes to pursue through the West Midlands Rail Contract which will be subject to a separate assessment of affordability and value for money. They have not been included in this assessment.

Cost Impacts

3.5 The Economic Case takes into account the net effect of changes to both DfT and WMR costs as well as any changes to the operating costs of the train operator(s) resulting from the franchise remapping. Initial Costs

3.6 The one-off costs of creating WMR and procuring the new West Midlands Rail Contract are detailed in the financial and management cases. Based on discussions with the DfT, WMR have assumed that there will be incremental DfT costs as there will need to be an additional franchise competition. There are expected to be some legal, financial and management costs associated with the remapping and creating the new West Midlands Rail Contract and WCC franchises.

68 69 On-going Costs

3.7 WMR propose to develop the necessary capacity to undertake the new roles and responsibilities that will be transferred to it with a small core team. The additional WMR staff will drive efficiency and effectiveness through monitoring and enforcing the operator incentive regimes and by improving allocation of existing budgets to yield greater local benefits. The management case sets out the proposed approach to management staffing and operating cost impacts.

3.8 Analysis undertaken by WMR suggests that this remapping of the franchise does not materially change the number of services operated nor does it significantly alter the vehicle mileage operated. The analysis suggests that there is a need for an additional two rolling stock diagrams and associated crew. The scale of each of the two operations remains sufficiently large as to avoid diseconomies of scale in overhead costs. WMR expects any additional cost to be offset by a reduced bidder’s risk premium and additional revenues described later in this case.

Benefit Opportunities

3.9 The economic basis for the devolution of rail franchises is driven by local franchise management resulting in better outputs from the rail network which in turn generates improved economic outcomes. This is supported by evidence from the franchises that are currently devolved to local authorities in the UK, notably Merseyrail (with Merseytravel as concessionaire), London Overground (TfL) and to an extent ScotRail and Arriva Trains Wales. Case studies of the benefits secured by these rail concessions and franchises are included in Appendix B. The positive experience identified in these case studies is used as the evidence base for identifying the benefit opportunities for West Midlands devolution.

3.10 The most significant feature of these case studies is the improvement to passenger satisfaction and punctuality. Whilst improvements to passenger satisfaction were highly correlated to improvements in punctuality, satisfaction was increased further by improvements to stations, trains and journey times.

3.11 WMR has identified that the devolution process will contribute to the following incremental benefits for passengers over and above that in the ‘do nothing’ case:

• passengers perception of improved journey ambience from cleaner and well maintained rolling stock • reduced passenger journey times as a result of more effective timetable solutions • improved service reliability resulting in passenger perceived reliability benefits • better revenue protection • improved fares and ticketing arrangements particularly for multi modal journeys • improved station quality, resulting in passengers perception of improved journey ambience, and • better integration between stations and the communities they serve.

70 Improving Integration

WMR believes there are considerable opportunities to deliver improved integration under a devolved contract. This will build on Centro’s role as the delivery body for the Integrated Transport Authority in the metropolitan area, and other partner authorities’ roles as transport and highway authorities.

Centro has promoted the “Network West Midlands” concept as an umbrella brand for public transport in the metropolitan area and sees rail as the key mode to attract car drivers onto public transport. This can only be achieved with high-quality park and ride provision and excellent and seamless interchange between rail and other modes. Other WMR authorities have also tried to deliver excellent integration, such as at Warwickshire’s new Stratford-upon-Avon Parkway station.

Some opportunities that could exist for improving integration that would be easier to deliver under a devolved contract include:

• Putting more information on bus connections into rail timetables and information systems (for example Cradley Heath to Merry Hill, Telford to Ironbridge, etc)

• Investment in new park and ride, cycle/walking provision and bus interchange at rail stations will be easier to achieve with an operator incentivised to cooperate with WMR authorities and where station delivery potentially is undertaken with a new approach

• Delivering improvements to the multi-modal ticketing offer will be much easier to achieve with the strong WMR input into the specification and management of the contract, building on the multi-modal tickets already overseen by Centro.

3.12 Devolution is expected to provide greater incentive for LEPs and local authorities to invest in rail. The local approach to securing enhancements through the devolved franchise will allow specification of the rail network outputs to be adjusted quickly and effectively to meet local economic needs. Any additional benefits resulting from the franchise Change could be reinvested in further local enhancements. This circle of impacts will encourage LEPs and local authorities to take a more active role in developing their rail service and network.

70 71 3.13 The new West Midlands Rail Contract will be specified by the DfT as a net cost contract. During the franchise lifetime WMR will explore whether greater value for money could be secured in future franchises by WMR taking a share of the revenue risk. In particular, the introduction of HS2 will increase the level of uncertainty in any forecast revenue. By taking a share of revenue risk WMR believes it could:

• make bidding more straightforward when the revenue stream is uncertain, securing more transparent and better value for money bids • reduce the complexity of negotiating subsequent service changes making it easier to deliver further benefits sooner • ensure the chosen operator is focused on cost and service quality management • place greater emphasis on optimising the detailed operation of the West Midlands rail services; • change fares levels and structures more rapidly to respond to the changed local needs of the West Midlands travel market, and • ensure the benefits of investment are reinvested into local transport.

Improving Performance

WMR believes that having a devolved, locally focused rail contract will deliver improved performance. This would be achieved by:

• WMR having a hands-on contract management approach with the operator that maximised the benefits of being locally based and close to the day-to-day operations • WMR ensuring that the contract builds in the appropriate incentive arrangements that reflect the highly subsidised nature of the services • WMR building a strong partnership approach with the operator to ensure that both parties can support each other in rolling out projects designed to deliver better performance. • WMR using its role as specifier and funder of services to develop stronger working arrangements with Network Rail; challenging investment plans, contractual arrangements and operational restrictions to improve performance.

Value for Money

3.14 A value for money summary table has been developed to illustrate the potential scale of the economic benefits arising from the proposition. The benefits quantified relate to what could be achieved by maximising value from existing infrastructure and resources.

3.15 It is not possible to quantify the scale of specific benefits accruing from more and better investment decisions at this stage. The devolution proposition is a transfer of power and governance reform which creates the framework and circumstances that will result in investment decisions which can create improved value for money outcomes. On this basis, the identified economic benefits are a conservative estimate of what could be achieved through devolution.

72 Improving Integration

WMR believes there are considerable opportunities to deliver improved integration under a devolved contract. This will build on Centro’s role as the delivery body for the Integrated Transport Authority in the metropolitan area, and other partner authorities’ roles as transport and highway authorities.

Centro has promoted the ‘Network West Midlands’ concept as an umbrella brand for public transport in the metropolitan area and sees rail as the key mode to attract car drivers onto public transport. This can only be achieved with high-quality park and ride provision and excellent and seamless interchange between rail and other modes. Other WMR authorities have also tried to deliver excellent integration, such as at Warwickshire’s new Stratford-upon-Avon Parkway station.

Some opportunities that could exist for improving integration that would be easier to deliver under a devolved contract include:

• Putting more information on bus connections into rail timetables and information systems (for example Cradley Heath to Merry Hill, Telford to Ironbridge, etc)

• Investment in new park and ride, cycle/walking provision and bus interchange at rail stations will be easier to achieve with an operator incentivised to cooperate with WMR authorities and where station delivery potentially is undertaken with a new approach

• Delivering improvements to the multi-modal ticketing offer will be much easier to achieve with the principal rail operator under contract to WMR.

3.16 Devolution is expected to provide greater incentive for LEPs and local authorities to invest in rail. The local approach to securing enhancements through the devolved franchise will allow specification of the rail network outputs to be adjusted quickly and effectively to meet local economic needs. Any additional benefits resulting from the franchise Change could be reinvested in further local enhancements. This circle of impacts will encourage LEPs and local authorities to take a more active role in developing their rail service and network.

72 73 Improved Journey Ambience from Clean and Well Maintained Trains

3.17 A local franchising authority will inevitably place the franchisee under greater day to day scrutiny with a consequent increased focus on rolling stock presentation. Improved internal maintenance and cleaning will result in trains offering a better journey experience, alongside the trains carrying a strong brand creating the explicit linkage into the wider transport network. PDFH does not provide a value of benefit for the improved presentation of rolling stock. However, it does suggest that passengers perceive the ambience benefits of new rolling stock as a percentage of fare, typically ranging between 1% and 4%. Recognising that improving the presentation of rolling stock does not equate to new rolling stock, this assessment has assumed an ambience benefit equivalent to 0.5% of fare, half that of the lowest value for new rolling stock. This benefit is applied to all passengers that would use West Midland Rail Contract services. More Effective Timetable Solutions Resulting in Reduced Journey Time

3.18 Devolution will provide greater incentive to focus on timetable development to deliver local economic benefits. For example, the local focus could identify areas where journey time could be reduced by removing unnecessary performance time, which is typically found on the approaches to Birmingham New Street, as well as at other locations. While these allowances may contribute towards a robust timetable, excessive use serves to lengthen journey time and represents inefficient use of track capacity. The valuation assumes an indicative ½ minute reduction in journey time for all passengers on West Midlands Rail Contract travelling to Birmingham New Street. While this is a notional example, the closer engagement by WMR in the development of timetables will result in the operator developing more passenger-focused service patterns that generate revenue and patronage benefits. Improved Service Reliability Resulting in Passenger Reliability Benefits

3.19 A benefit of devolution observed in London, Wales, Scotland and Merseyside is improved reliability and punctuality, typically by around 10% (measured by PPM). It is therefore assumed for the purpose of this assessment that PPM of the current regional London Midland Services (largely representing those services that will form the West Midlands Rail Contract) will increase from around 85% currently to around 92.5%. The increases is lower than seen elsewhere reflecting the higher current London Midland PPM and that the DfT have committed to average PPM across the national rail network of 92.5%. The benefit of this has been calculated by assuming a ½ minute journey time reduction (weighted by a factor of 3 reflecting that it is unplanned journey time) to 7.5% of West Midlands Rail Contract passengers (reflecting the increase from 85%-92.5% PPM).

74 74 75

Improved Revenue Protection

3.20 The devolution case studies have illustrated that local control can secure a greater emphasis on ensuring that all passengers pay the correct fare for their journey. Evidence suggests that London Midland has not had the economic incentive to prioritise revenue protection over the course of its franchise leading to passenger and stakeholder concern about the level of ticket checking.WMR intends to put in place and use its local knowledge to closely monitor an incentive regime with the operator that will minimise ticketless travel and increase revenue. For the purpose of this assessment it is assumed that more effective revenue protection using existing staff numbers could result in a 1% net increase in total revenue over and above any benefit that could be achieved through an incentive regime managed by the DfT. Improved Station Quality Resulting in Journey Ambience Benefits

3.21 The devolved West Midlands Rail Contract will provide a greater focus on ensuring stations are maintained to the best possible standard given the available funding. With a large franchise it might be expected that maintenance and enhancement activities would focus where there greatest return could be found, namely the busier stations. The local focus of the West Midlands Rail Contract will help ensure that available funding is better distributed to provide improvements at more lightly used stations too. PDFH identifies that station enhancements can yield passenger ambience benefits up to 5% of fare. However given the benefit here is assumed to be from smaller scale maintenance and enhancement activities a smaller value is considered appropriate and a rate of 2.5% has been adopted. This has been applied to passengers using lightly used stations, assumed for this case to be those used by less than 200,000 passengers (station entries) per year and those interchanging at West Midland Rail Contract stations.

Better Access to Stations Resulting in Perceived Journey Time Savings

3.22 With greater local control there will be a greater incentive for local authorities to better integrate stations with the communities they serve and integrate rail services with other modes. This need not include additional expenditure but rather ensuring access routes to and from stations are well maintained and signposted and that local car, bus taxi and cycle access is well managed. The benefit is valued by assuming an average ½ minute improvement in access time (weighted by a factor of 3 reflecting passengers’ perception of access time). As with station ambience this has been applied to passengers using the more lightly used stations, i.e. those with less than 200,000 passengers (station entries) per year9. Improved Fares and Ticketing Resulting in Reduced Fares

3.23 In subsequent franchises WMR are looking to take a degree of revenue risk. This will make it easier for WMR to adjust fares and ticketing arrangements, such as multi-modal ticketing and smart tickets. Some enhancements to these products could be undertaken without any material capital investment. This could result in passenger perception of reduced fares (although point- to-point fares may not reduce). For the 2017 franchises WMR will consider what opportunities exist to improve the fares and ticketing offer for passengers (see box below) and in particular how we roll out smart ticketing benefits. 9 Sourced from ORR station usage data

76 How would WMR Review Fares?

The fares structure in the West Midlands has changed little since its last major review in 1995/96. Features of the fares structure include:

• Fares within the Centro area all set by London Midland (even on Coventry-Birmingham and other flows where Virgin Trains take most revenue) based on a fares structure developed by Centro in 1995/96. • Fares on most cross-boundary routes are set by London Midland (previously Central Trains). • Fares on routes out to Tamworth and Nuneaton set by CrossCountry. • Centro area fares were increased by 1% above national guidelines for a period of five years from 1999 to 2003 generating additional income for the rail industry and ensuring that fare levels moved more in-line with national levels. • Season tickets use a zonal-system developed by Centro and last changed in 1995/96. The rail-only season ticket is main ticket used by commuters and features add-ons to go beyond the Centro boundary. Various multi-modal and concessionary tickets also exist. • The Standard Anytime fares are regulated by a West Midlands fares basket. Off-peak tickets are not regulated and London Midland introduced evening peak restrictions and significantly raised some off-peak fares. • CrossCountry commuter fares are not regulated and CrossCountry has significantly raised fares over the years, partly to discourage the use of long-distance trains for short-distance commuting. This has made travel into Birmingham from towns such as Nuneaton extremely expensive. • For some journeys the regulated rail fare is now out of step with the wider transport market, and for some short-distance flows (e.g. Selly Oak to Birmingham) the rail fare is now cheaper than the equivalent bus fare. • London Midland is required to offer Friends and Family and Evening return tickets previously introduced by Centro, however they are not widely promoted.

WMR believes that there are considerable opportunities to review this fares structure which has been ossified for nearly 20 years. Options could include:

• Having a wider zonal system for season tickets that is not artificially constrained by the Centro boundary and better reflects the commuting markets • Introducing multi-modal tickets beyond the historic Centro area • Reviewing fares which undercut equivalent bus fares or which do not reflect the wider travel market on a corridor • Bringing fares set by CrossCountry into a coherent West Midlands fares structure

The fares structure will need to be reviewed to ease the implementation of new smart-ticketing arrangements. Delivering these changes may only be possible if WMR were to hold revenue risk in a future contract, however WMR would wish to explore the opportunity to make some of these changes from 2017 with a new operator.

76 77

Value for Money Summary Table

3.24 Table 3.1 provides a summary of the economic and financial impact of each of the examples described above. The economic impact presented is the Present Value assuming a 10 year appraisal period to correspond to a period of the contract from 2017 to 2026. In line with WebTAG all benefits are discounted to 2010 prices and values. The financial column shows the revenue benefit of each benefit stream for a single year (2018, the first full year of the contract). The total benefit that can be attributed to devolution is dependent upon the extent to which each of these examples can be realised in the new franchise. As WMR and the DfT work together to develop the new franchise specification, the scale and scope of each of these examples can be refined.

Table 3.1 Value for Money Summary for West Midlands Devolution Impact Economic (PV 2010 millions) Financial (2018 millions)

Rolling stock maintenance £5 £0.3

More effective timetable £14 £0.3

Improved punctuality £17 £0.4

Better revenue protection £5 £0.9

Station ambience benefits £6 £0.3

Station access improvements £21 £0.5

3.25 Our initial assessment of the potential benefits of devolution suggests that, if all the opportunities are fully exploited, up to £68m (PV 2010 prices) economic benefits could be realised over the franchise period, equivalent up to £2.7m in additional revenue per year (2018 prices). This could be secured as a result of managing the baseline railway more effectively and redeploying staff to maximise the benefits to passengers. By contrast it is estimated that the additional costs associated with WMR managing the West Midlands Rail Contract and overseeing part of the WCC franchise could cost in the region of £18m (PV 2010 prices) over the contract period, and around £2m per year (2018) excluding any savings from reduced train operator risk premiums. This analysis excludes any DfT costs for undertaking an additional franchise competition. This initial assessment suggests that the devolution proposition has the potential to offer high value for money. A key element of the further iterations of this case will be to review and develop the economic case in light of the advancing devolution proposition.

78

Conclusion

3.26 This Economic Case adds further weight to the strong case for devolution. By drawing on the evidence of improvements with other devolved rail operations it has been possible to identify those areas where the West Midlands Rail Contract can deliver improved outcomes over the do nothing case. The analysis of these potential benefits suggests that devolution could secure economic benefits up to £68m (PV 2010 prices) over the course of the franchise, while the incremental costs of WMR could be around £18m (PV 2010 prices).

78 79

4. The Financial Case

4.1 The financial case demonstrates the affordability of the proposition. WMR believes that the overall subsidy requirement to be no greater than if a single London Midland franchise continued to exist. For this devolution proposition the financial case considers:

• The incremental cost of the devolution proposition. This includes changes to operational costs as a result of re-mapping existing rail franchise to form the West Midlands Rail Contract, changes in franchise management cost as a result of transfer of responsibility from the DfT to WMR and changes to the risk premiums that TOCs factor into their bids.

• The total financial commitment for WMR and its risk taking authorities. While the incremental financial impact of the proposition may be small initially, the transfer of financial risk from the DfT to WMR will become increasingly significant as devolution progresses. It is therefore important to set out the scale of the financial transfer, how this will be funded, the risks to WMR and the steps to be taken to mitigate these risks. Cost and Revenue Changes

4.2 The changes to costs and revenues resulting from devolution are:

• The incremental revenue and operating cost impacts associated with re-mapping the current London Midland franchise to form the West Midlands Rail Contract; • The operating costs of WMR as franchise manager, offset by any cost savings that may be made by the DfT; • The reduced risk premium and profit margin offered by TOCs resulting from a more attractive market offer and more competitive bidding competition; and • The additional revenue and cost savings generated as a direct result of implementation of the West Midlands Rail Contract.

Franchise Re-mapping

4.3 The re-mapping proposition is that services wholly within the West Midlands would transfer to the West Midlands Rail Contract while those operating externally to the West Midlands will form either another franchise or part of a franchise.

4.4 The re-mapping is not expected to significantly change the number and train mileage of services operated. The proposed re-mapping does not require significant changes to the passenger timetable and allows for a straightforward split of existing rolling stock between the West Midlands Rail Contract and the WCC franchise (possibly as part of a larger franchise). Initial analysis undertaken on behalf of WMR on the re-mapping suggests there is a need for an additional two rolling stock diagrams and associated crew, which is an estimated £1.2m per year incremental costs. This additional cost is largely the impact of there being a slight increased requirement for EMUs to cover the Euston PM peak, and any future timetable changes relating to Euston commuter services may allow this capacity to be provided in a different way.

80

4. The Financial Case

4.5 WMR has identified that there may be some one-off costs for separating the existing London Midland franchise into two parts. These have not yet been quantified and WMR would wish to have further discussions with the DfT to understand in more detail the scale of these costs. These are expected to be predominantly any legal, financial and management costs associated with creating a new separate West Midlands rail operator.

WMR Operating Costs

4.6 WMR will incur set up and operating costs. These costs are predominantly staffing and the use of specialist technical advisors where appropriate. The staff will drive up the efficiency and effectiveness in the new franchise through monitoring and enforcing the operator incentive regimes and take a gradually increasing role in managing the franchise. More details of the employment assumptions are provided in the Management Case. Not all of WMR’s operating costs will be incremental to the do-nothing business case as responsibilities for management of the franchise are transferred to WMR, the DfT may be able to realise cost savings.

4.7 WMR expect to have a small core team and will look to make use of the shared services provided by partner authorities to keep administration costs low. In addition, there will be support from the existing expertise and staff of the local transport authorities and Centro. The incremental cost of employing these staff is expected to be less than £0.5m pa.

4.8 During the franchise competition in the run up to 2017, based on discussions with the DfT, there will be additional one-off procurement costs predominantly made up of technical, legal and financial advisor costs which are estimated to be in the region of £1m.

4.9 Should the DfT choose to re-map the current London Midland operation to form the West Midlands Rail Contract and WCC franchise then the DfT would incur the cost of running an additional franchise competition. This is not the only re-mapping option available. For example, there may be benefit in re-mapping WCC services into another franchise and so avoiding the cost of an additional franchise competition. The incremental / decremental costs for the DfT resulting from subsequent further re-mapping are outside the scope of this business case.

4.10 For this business case therefore, based on discussions with the DfT, WMR have assumed that there will be no DfT on-going cost savings as they will still have to let and manage the WCC franchise. WMR welcome further discussions with DfT to agree an approach to identifying the Department’s true long-run avoidable costs associated with WMR’s management of the franchise, if indeed any savings are available.

80 81

Reduced Risk Premium and Profit Margin

4.11 WMR informal discussions with potential bidders and Rail Delivery Group, suggest that the West Midlands Rail Contract will be more attractive to the market than the existing London Midland franchise, especially to new entrants. While it is difficult to predict exactly how much the increased attractiveness will have on bids, there is evidence that this could be up to 1.5% of revenue10 . This would suggest a reduction of up to £3m pa in subsidy required by the train operator. This figure is driven largely by the reduced risk premium required by a train operator when it bears only a smaller amount of revenue risk. The full amount of this saving could be achieved in a fully devolved franchise. Initially, WMR believe that a saving of nearer to £1m per annum is more achievable recognising that the West Midlands Rail Contract will be simpler to run once the complexities of the West Coast are removed.

4.12 WMR has undertaken a market consultation covering nine existing and potential bidders for rail franchises. Overall, the main points raised by the participants were:

• In terms of costs and benefits, a franchise focused on a specific market was seen as beneficial

• A smaller franchise would be more attractive to some owning groups compared to others

• The decision to bid for the West Midlands Rail Contract would depend on the owning group’s portfolio at the time. For an owning group with a number of large value or premium only franchises it could be attractive.

• There was a diverse range of views on what could happen to WCC services. From standalone franchise or split with parts to West Coast, LOROL, Cross Country and Chiltern

• The possible move towards some revenue risk being held by the franchising authority was not seen as a major issue. Participants were keen to understand what a gross cost contract would deliver compared to a well specified franchise. They also emphasised that the size of the WMR client function and the work required should not be underestimated.

Additional Revenue and Cost Savings

4.13 As set out in the strategic and economic cases, WMR believes that there are opportunities for a devolved franchise to offer a more effective service and therefore to secure additional fare box revenue. The approach to calculating this additional revenue is set out in chapter 3. This analysis suggests that additional revenue of up to £2.7m per annum could be generated.

10 NERA Economic Consulting, March 2011, The Costs and Benefits of Devolving Responsibility for Rail Services in London.

82 Driving Efficiencies

WMR sees a number of opportunities to drive efficiencies under a devolved franchise. These would include:

• Reviewing train service specifications – most routes and services are well used but some opportunities exist to deliver services in a more efficient way. For example Chiltern Railways operates a local service between Birmingham and Leamington which might be more efficiently delivered by extending a WMR Birmingham to Dorridge local service to Leamington.

• WMR will review how services on the Stourbridge Town branch are delivered and consider whether a new approach based on Centro’s Light-rail portfolio may deliver both passenger benefits and long-run efficiencies.

• By developing a dedicated fleet of refurbished electric trains to operate in the West Midlands, catering for growth should be more straightforward and affordable than having to supplement the expensive Class 350 fleet.

• Having a workforce fully focused on delivering high quality services to passengers in the West Midlands should give opportunities to review working practices so that train performance and passenger experience is enhanced.

• WMR would specify a clear brand for local rail services that would continue beyond the franchise term. This would build long term value and avoid expensive rebranding exercises whenever a franchise operator changes.

• By WMR taking a long-term view on the delivery of stations and rolling stock, better value solutions can be developed which challenge normal industry practices

• WMR will actively challenge industry cost, charging and incentive structures and build strong partnership arrangements with Network Rail to ensure that costs can be brought down.

Summary Cost Changes

4.14 The table below summarises the incremental financial cost changes resulting from this proposition against the Do Minimum case. For this strategic outline business case, these costs represent WMR’s initial findings and will be updated and verified in discussion with the DfT as the business case is developed.

82 83

Table 4.1 Outline incremental cost and revenue estimates for devolution

Pre 2017 2017 - 2024 Post 2024

2012/13 prices One off costs (£m) Annual costs (£m) Annual costs (£m)

Re-mapping 0 -1.2 -1.2

WMR costs -1 -0.5 -1

DfT costs tbc tbc tbc

Bidder risk premium and profit margin 0 +1 +3

Additional franchise revenue and savings 0 +2.7 tbc

Financial Scale of the Proposition

4.15 As set out previously the proposition creates a new franchise by re-mapping the existing London Midland franchise. It is important to understand the scale of the cost and revenue for the West Midlands Rail Contract, as WMR will ultimately be responsible for the financial risk associated with the contract.

4.16 Drawn from a range of publically available revenue and cost information, the table on the next page provides an indication of the financial scale of the proposed remapped franchise. Detailed financial data for the London Midland franchise has not been made available to WMR. The cost breakdown between the West Midlands Rail Contract and WCC is based on the assumed train mileage for each, which in turn has been estimated from the passenger timetable. The division of passenger and other revenue is based on demand to and from London Midland stations that are served by the new franchises, while the subsidy revenue has been assumed to ensure that the overall financial position is broadly equivalent to the overall existing London Midland position. The costs and revenues in table 4.2 exclude the incremental operational (re-mapping) cost changes detailed in table 4.1.

84

Table 4.2 Indicative Split of Costs and Revenues

Single Franchise West Midlands WCC 2012/13 prices (do mimimum) Rail Contract franchise

Operating Metrics

Train Miles (millions) 15.9 6.2 9.7

Passenger Miles (millions) 1,100 306 794

Passenger Journeys (millions) 58 30 28

Revenue (£ millions)

Passenger Revenue 231 56 175

Other Revenue 67 37 30

Subsidy 50 66 (16)

Total Revenue 348 159 189

Costs (£ millions)

Staff 109 54 55

Rolling Stock Charges 60 24 36

Access Charges 56 22 34

Fuel and Electricity 18 7 11 Other (inc operator profit) 105 52 53

Total Cost 348 159 189

84 85 4.17 This analysis suggests that the West Midlands Rail Contract would handle around 30 million annual passenger journeys, generating passenger revenue of around £56m and total revenue of around £159m. The key observation from this table is that (assuming the net subsidy requirement remains unchanged) there is a subsidy requirement for the West Midlands Rail Contract and there is a premium payment from the WCC franchise. Rail services in the West Midlands with their short journeys and commuter peak driven cost base means that fare box revenue will not cover costs.

4.18 This highlights one of the key problems with the current London Midland franchise. Where the passenger revenue exceeds costs there will be greater incentive (and therefore management attention) for the franchise to grow the business through innovation to attract additional passenger revenue, in this case on the routes at the southern end of the West Coast Main Line. However there will be less incentive to grow the passenger revenue in the West Midlands because passenger revenue represents a much smaller proportion of the overall franchise revenue. This may result in the West Midlands receiving a poorer deal from a franchise that combines premium paying and subsidy receiving services, such as with the current London Midland franchise.

4.19 During CP5 and prior to the start of the franchise there will a number of enhancements delivered which will impact on the shape of both the West Midlands and WCC franchises. These include:

• An additional 10 Class 350/3 trains, initially three of which will cascade Class 323s for use on Cross City Line services. The proposed remapping will then see all the Class 350 trains operating for WCC, creating a homogenous fleet of units operating commuter services out of Euston. London Midland’s small fleet of Class 321 trains would transfer to the West Midlands to operate on the Walsall, Wolverhampton and Birmingham International routes.

• Bromsgrove electrification. This Network Rail scheme will support an increase in capacity and new journey opportunities by extending a service of three trains an hour on the cross city line to Bromsgrove that currently terminate at Longbridge.

• Walsall to Rugeley Trent Valley Electrification. This Network Rail scheme will enable the running of a faster half hourly electric service from Birmingham New Street to Rugeley Trent Valley. The released diesel trains can then provide additional Coventry - Nuneaton services, the Coventry - Leamington shuttle service and strengthen services on the Snow Hill and Shrewsbury Lines.

4.20 WMR have not had access to either the Network rail or DfT business cases for these enhancements and can therefore only provide indicative high level estimates for how these may impact on the finances of the new franchises. Table 4.3 below shows high level indicative estimates of the remapped costs and revenues in 2018/19 (at 2012/13 prices).

86

Table 4.3 Estimated 2018/19 costs and revenues

Single Franchise West Midlands WCC 2012/13 Prices (do mimimum) Rail Contract franchise

Revenue (£ millions)

Passenger Revenue 278 69 209

Other Revenue 71 39 32

Subsidy 15 58 (43)

Total Revenue 364 166 198

Costs (£ millions)

Total Cost 364 166 198

Funding Requirements

4.21 Funding for the West Midlands Rail Contract will come from Government subsidy. Initially, it is expected that the Management Agreement with the DfT will address the costs of WMR in managing the franchise. As responsibilities are progressively transferred to WMR it is expected that any financial settlement will need to be amended to reflect the changing responsibilities.

4.22 The funding settlement will need to reflect the agreements developed between WMR and DfT over the management of the franchises, as well as the outcomes of the proposed mid-franchise review. It will need to fund both WMR costs and relevant payments to the train operator as well as any service and capacity changes driven by national policy and regulatory changes in the rail industry. WMR will wish to develop arrangements with the DfT to have effective change mechanisms in place in the franchises, and the ability for WMR to receive any financial benefits arising from any changes that it specifies.

4.23 As part of the franchise development process, WMR will wish to explore putting in place a performance regime with a risk/reward sharing mechanism with the franchisee. Should the devolved franchise be in a position where its financial performance is ahead of plan through higher revenue and/or lower costs, then WMR would expect to share in this upside to reinvest back into enhanced service provision.

86 87

4.24 WMR would also expect the DfT to maintain its Rail Investment Strategy, growth funding and project specific funding through rail industry and other processes. WMR will want to explore whether some of these funding streams (e.g. National Stations Improvement Programme) can be devolved to WMR.

4.25 LEPs and partner authorities will be able to fund further rail enhancements above the agreed baseline, subject to available capital and revenue funding sources. Rail devolution will provide much greater transparency to the LEPs and local authorities on what locally funded rail investment can actually deliver in terms of meeting the economic objectives for the region.

Financial Risk

4.26 WMR recognises that the DfT will only agree to devolve responsibility for rail services alongside a transfer of risk to the devolved authority. WMR and its funders have therefore developed a proposition with a level of risk exposure resulting from taking on responsibility for franchise management and balancing this against the potential benefits and rewards it offers to the West Midlands region.

4.27 The financial risk to WMR will be borne by WMR’s partner authorities. The exact method to apportion risk is still being developed, with consideration being given to apportionment by demand, population, funding contributions and service operating characteristics.

4.28 WMR proposes that the financial settlement:

• Allows for the progressive transfer of day-to-day operational and financial responsibility from central government to WMR and its funders;

• Protects WMR from the financial impacts of national policy risks under the control of Government (for example changes in national fares policy) and changes in regulation;

• Protects WMR from the financial impact of changes to Network Rail charges determined as part of the Access Charge review process;

• Continues to provide national funding to enhance services to accommodate growth through the industry business planning and Rail Investment Strategy/High Level Output Specification processes. Any deviations in service, fares and quality from this baseline would be at the benefit and risk of WMR and its funders; and

• Continues to provide access to existing and possible future national funding sources, for example the National Station Improvement Programme.

88

4.29 The exact terms of the financial settlement, and the risks associated with it, will be the subject of further discussions between WMR and DfT. WMR recognises that it will not be possible to conclude any funding settlement with the DfT until the final business case is approved following receipt of the bids in the franchise letting process. To mitigate this risk WMR will look to discuss with the DfT how agreement in principle can be reached at an earlier stage.

4.30 WMR has undertaken a high-level assessment of the financial risks faced by the funding partners. The table below sets out a summary risk register. A key element of work moving forward will be to develop the quantified risk assessment on the basis of the initial risks that have been identified.

Table 4.4 Financial Risk Register Summary

Risk Description Mitigation

Revenue Revenue is lower than expected due to WMR’s local market knowledge and the WMR initiatives or Changes. ability to respond quickly to changes in local market conditions. WMR would undertake detailed analysis of the affordability of any changes from DfT policy prior to implementation. Subsidy would reflect DfT policy and WMR would have less or extra funding depending on the Change.

Operating Costs – Over the course of the franchise, there will Expect WMR to be ‘held harmless’ for Network Rail charges be several Control Periods where Network any changes in costs in subsequent Control Rail Charges may change. TOC is held Periods, apart from any investments in harmless to these changes and usually DfT infrastructure specified WMR. which compensates the TOC via changes to the subsidy / premium profile.

Performance – Service Payments to operator for service quality Appropriate contractual mechanisms – Quality regime are higher than expected improved service quality should lead to (assuming such a regime is put in place for higher revenues and profit share initial franchises)

88 89 Risk Description Mitigation

Service enhancements Cost of delivering service enhancements is WMR risk management and QA processes greater than expected

Stations Costs of managing and maintaining Arrangements for managing stations need stations are greater than expected to be developed that fully consider risk mitigation against potential benefits

Business interruption Services cannot be operated as a result Risk shared between parties based on of ‘force majeure’ events contractual mechanisms that reflect which party has the strongest ownership of the risk

Management Costs WMR costs of managing the devolved Revise management approach and struc- franchise are greater than expected ture to reduce costs. Formal governance structure developed with appropriate risk sharing of additional benefits and shortfalls

Staffing Industrial action Operator has revenue risk. WMR will use its local knowledge to manage contractu- al, passenger and political implications in most appropriate manner depending on circumstances.

Franchise default – Costs of procuring another operator in the Performance bond is agreed as part of retender costs event of default, in excess of the level of franchise process any operator bond in place

Franchise default – Costs of procuring another operator in the Performance bond is agreed as part of operator of the last event of default, in excess of the level of franchise process resort any operator bond in place

Franchise default – Operator default evidence that original Ensuring effective competition for re-let Retender value tender values were unsustainable. On-go- and provision of good quality information ing higher costs of subsidy than originally to prevent pricing risk. envisaged

90

4.31 WMR and its partner authorities propose to put in place robust governance arrangements (see Management Case) to ensure that they are able to meet their financial obligations. With an initial WMRC being let on a net-cost basis the financial exposure to WMR authorities will be limited to those services and requirements incrementally specified by WMR. Over time as WMR responsibility increases any additional risks will need to be recognised and assessed. The phased approach to handing responsibility to WMR will in itself mitigate risks through WMR having time to develop its capability to effectively manage the contract.

4.32 In any subsequent contracts, potentially let on a gross-cost basis, WMR recognises the need to have adequate financial resilience to absorb any financial risks between the annual budget rounds. WMR would be increasingly exposed to revenue falling below expectations and therefore would propose to set up appropriate arrangements to manage fluctuations from the budget. The options to respond to a shortfall are:

• An increase in local funding (annual budget round); • An increase in passenger revenue (rail industry fares are changed three times per year); • A reduction in costs from reduced services (rail industry timetables change twice a year) delivered through an appropriate change mechanism with the operator; and • WMR would put in place a sufficient financial contingency to cover any shortfall during the time taken to implement changes. Conclusion

4.33 The Financial Case has identified the revenue and management costs associated with the proposal. The base level of funding has yet to be identified and agreed as part of a Devolved Financial Settlement with DfT.

4.34 The Financial Case demonstrates that WMR has a thorough understanding of the scale of the financial proposition and has considered (and developed mitigation for) the financial risks associated with it. It also demonstrates that the management costs associated with the proposed new arrangements are reasonable and affordable.

90 91

5. The Commercial Case Introduction

5.1 This commercial case sets out how WMR in partnership with DfT proposes to secure the services that will form the devolved franchise. The proposed procurement strategy is aligned with the DfT’s rail franchising programme. The commercial case also considers the proposed franchising frame work, the approach to developing the specification, and risk allocation.

Contractual Framework

5.2 WMR and the DfT will need to agree a contractual framework that allows for the phased transfer of responsibilities leading ultimately to WMR taking on full devolved responsibility for the subsequent franchise. Although the details of the agreements cannot be finalised until the new franchise specifications are developed, the proposed approach is as follows:

• WMR would enter into a Management/Collaboration Agreement with the DfT. • The Management/Collabaration Agreement would detail the responsibilities of both the DfT and WMR in letting and managing the franchise • Describe the progressive increase in scope of WMR responsibilities any associated funding, including arrangements for a mid-franchise review.

5.3 The exact commercial and contractual arrangements will need considerable development; however WMR will expect to have direct contract management responsibilities from Day 1 of the franchises under the agreed arrangements. WMR will continue to have discussions with the Department to develop the contractual framework which can best meet the needs of all parties in achieving the progressive transfer of responsibilities.

5.4 WMR would also enter into a Side Agreement with the DfT to cover the local services along the Birmingham to Northampton and Birmingham to Stafford corridors which will continue to be operated by the WCC franchise. This franchise will be specified, procured and managed by the DfT, and WMR propose to enter into an agreement with the DfT to enable joint specification of the service level and other outputs for local services along these corridors.

5.5 For the subsequent WMRC, WMR would have to put in place arrangements to ensure continued operation of services should the operator fail. WMR would seek to reach agreement with the DfT over future responsibilities in subsequent contracts, for example relating to Operator of Last Resort.

5.6 We expect that the details of these contracts will be developed in parallel during procurement to ensure consistency and clarity of the contractual terms between them.

92 Procurement

5.7 The Government has announced a franchising schedule that provides for a steady flow of competitions to the market. As the WMR proposition requires re-mapping of the London Midland franchise, and should the DfT decide to create a WCC franchise then the resulting two procurement programmes need to be run in parallel. The DfT already have experience of this. The procurement strategy also needs to be consistent with the DfT’s overall approach of providing greater transparency to the industry and ensuring that there is strong competition from potential bidders. Therefore, WMR agrees that the DfT should lead the procurement process for the new West Midlands Rail Contract and that the timing should follow the DfT’s published franchising programme.

5.8 With DfT leading the procurement, the OJEU notice and ITT will need to identify that the future West Midlands Rail Contract will take into account the progressive devolving of responsibilities from the DfT to WMR.

5.9 The proposed re-mapping of the current London Midland franchise means that longer distance services and those along the Birmingham – Northampton and Birmingham – Stafford corridors would form part of another franchise. It will be for the DfT to determine the best solution to franchise these services and the DfT will lead all elements of the procurement.

5.10 This approach would allow the DfT to take the proposed changes to the franchise map into consideration in the direct award for the current London Midland franchise from September 2015 to June 2017. WMR believes that this approach of preparing the franchise for re-mapping in advance of the competition will provide the greatest transparency of costs for bidders and achieve best value for money.

5.11 Whilst DfT would lead franchise procurement WMR would seek to be fully involved in the procurement process in line with the recommendation of the 2008 NAO report11. WMR will offer local expertise, for example, by making use of short term secondments. These secondees would provide local knowledge to support the Department’s evaluation of bids. WMR would expect to be involved in the programme, specification, and procurement phases of the franchise competition. While not the franchising authority for the WCC franchise, WMR would expect to be kept fully briefed as to the progress of this franchise in relation to services along the Birmingham – Northampton and Birmingham – Stafford corridors.

11 http://www.nao.org.uk/report/the-department-for-transport-letting-rail-franchises-2005-2007

92 93 5.12 It is proposed that the public consultation and the pre-procurement engagement on the West Midlands Rail Contract and specification are carried out jointly by DfT and WMR. While the DfT would lead consultation on the WCC franchise, WMR would expect to work closely with the DfT in relation to local services between Birmingham and Northampton/Stafford. By working alongside the DfT during these processes, WMR believes that it can add significant value to the process in the interests of both the bidders and the DfT. Specifically in the case of the West Midlands Rail Contract, a joint approach will give greater confidence to the public and bidders at an early stage as to the likely behaviour of WMR as a franchise manager.

5.13 WMR’s proposed governance structure during the procurement phase is described in the management plan. It is designed to ensure that the necessary approvals for the contractual agreements can be achieved within the timescales required by the DfT’s franchise competition process.

Approach to Developing an Output Specification

5.14 WMR has given initial consideration to the aspects of the franchise specification that will be necessary to secure agreement on devolution with the DfT and to realise the locally important economic benefits of devolution. Detailed specifications have not been developed for the franchise at this stage and issues such as service specification, rolling stock strategy, fares and ticketing strategy, stations strategy are all important and will form subsequent work streams. The following paragraphs set out WMR’s initial view on a number of key specification opportunities.

Baseline Specification

5.15 It is important to define clearly the contract baseline, i.e. what the DfT will fund the West Midlands Rail Contract to deliver. WMR would seek to develop specific business cases to secure additional funding in order to enhance the specification beyond this baseline. WMR expects that the baseline outputs in a DfT specified franchise would reflect existing government policy or commitments and include:

• An initial level of service equivalent to that specified in the December 2017 timetable; • Service development and enhanced connectivity delivered as part of committed enhancements for Control Period 5 (including electrification); • Additional capacity to meet demand as set out in the High Level Output Specification; • Existing arrangements for operating stations and leasing rolling stock would continue; • Legislative and industry standards; • Government policy commitments to introduce smart ticketing to all rail franchises; and • Third party funded enhancements where funding and risk management agreements are in place.

94 5.16 WMR would look to require bidders to not only price the baseline specification but also provide costs for incremental (or decremental) options. WMR would like to explore the possibility that bidders would be required to commit to options at unit costs (cost per vehicle mile etc.) which are the same as or similar to those in the baseline specification. This approach would allow WMR to defer any decision to change the specification until it can be more certain of the actual revenue position and still benefit from a cost that has been obtained through competitive tendering. WMR would also require bidders to price options such as quality and additional services so that they can be tested for value for money before inclusion into the final franchise agreement.

5.17 WMR would seek to work closely with the DfT to develop incentive arrangements for the franchises that ensure that the operators are properly incentivised to deliver high quality services. On WMRC the requirement for subsidy reduces some of the commercial incentives on the operator and creates an onus on WMR to ensure that value is received for the taxpayer support to the franchise. The incentives to ensure the on-time delivery of franchise commitments will also be considered.

Franchise Term

5.18 WMR’s preferred option is that the next West Midlands Rail Contract term should cover the period up to the introduction of HS2 at which point there will be major timetable changes. Following discussion with the DfT this would suggest a franchise term starting in June 2017 and running to about 24 months before HS2 is due to start operation in 2026. WMR would wish to adopt a similar end date to that for the WCC franchise and so the precise contractual end date and any provision for contract extensions should be discussed with DfT. This proposal is consistent with the recommended franchise length suggested by the Brown Review. The expected franchise term is therefore 2017 to 2024 with the option to extend if necessary.

Geographic Scope

5.19 The WCC franchise will continue to operate services on the West Coast Main Line and the Birmingham - Liverpool services. Local services in the Birmingham – Northampton corridor will also be operated by the WCC franchise with WMR entering into an agreement with DfT to jointly specify these services.

5.20 The West Midlands Rail Contract will operate all other services that are currently operated by London Midland franchise in the West Midlands. A full list of services and summary facts about the WMRC and WCC franchises are shown in Appendix C.

94 95 Stations

5.21 WMR is currently considering its position in relation to station provision as there are a number of options that could be pursued, recognising that DfT policy is also emerging on this issue. The base position may be that there is no immediate change to the management of stations by the franchisees. Over the medium/long term however, WMR are looking to develop a new approach to station management, and some of this thinking may be deliverable in 2017.

5.22 WMR would like to move to a position whereby it can play a central role in the specification and management of all stations within the West Midlands travel to work area. WMR is seeking to ensure that stations better reflect local circumstances and play a central role in the integration of rail services into wider transport networks. WMR recognises that there are various options of how best this can be achieved including:

• Continuing the current arrangements (Network Rail as Landlord, train operator as Station Facility Owner (SFO) • Train Operator as SFO and WMR as landlord (long term lease from Network Rail) • WMR as SFO and Landlord (long term lease from Network Rail) outside of the franchising process.

5.23 The current franchise operates 147 stations as SFO of which 112 are likely to be in new West Midlands Rail Contract. This will include a number of stations where the WMRC operator (or WMR) would be the SFO, but would not provide any train services. A full list of the stations planned to come under the WMRC are listed in Appendix D.

5.24 WMR is looking to undertake further work with both DfT and Network Rail to develop a preferred approach to station delivery, including looking at options such that WMR could be SFO for all of the stations within the devolved area and manage the ticket retailing activities at Birmingham New Street. This would ensure a consistent service proposition and quality across all stations in the West Midlands and further enable WMR to deliver better integrated transport. It would also secure efficiencies in station management and maintenance activities. However, it is recognised that this may only be achievable in the longer term.

Rolling Stock

5.25 High quality trains will continue to be required for the West Midlands to meet passenger expectations of quality and accessibility, and to attract and stimulate patronage growth.

5.26 WMR will seek to work closely with DfT and the operator to support the development of a rolling stock strategy to meet the capacity and quality requirements of the West Midlands that delivers improving value for money. For example, urgent investment will be needed to ensure that the fleet complies with accessibility standards by the end of 2019.

96 5.27 Working with the DfT and the operator, WMR would seek to support the development of a Rolling Stock Strategy, which would be owned by the operator, designed to determine:

• A defined fleet of WMR trains • A depot, stabling and maintenance plan • A cascade plan for rolling stock released by regional or national electrification schemes • A plan for catering for growth • A plan for resourcing service development proposals

Fares

5.28 Remapping the London Midland franchise services would require revision of the regulated fares baskets and lead operator responsibilities. WMR would seek to influence the fares and ticketing arrangements for flows where the service is primarily provided by the WMR franchise and for local journeys between Northampton and Birmingham, ensuring that fares are promoted as part of a wider integrated transport system.

Timetable

5.29 WMR would look to include in the specification (over and above the baseline specification, and for which WMR would need to identify additional funding) the following service enhancements:

• Improved Sunday service frequencies; • Improved evening service frequencies; • Improved services on the Birmingham to Rugeley route following electrification; and • Improved services on the Coventry – Kenilworth – Leamington and Coventry to Nuneaton lines following electrification.

5.30 Other potential service enhancements would also be explored with WMR partners to understand the business case for seeking their inclusion within any ITT as priced options.

96 97 Revenue Risk Allocation

5.31 WMR agrees with the principles set out in the Brown Review that train operating companies should be responsible for the risks that they can manage. The risk sharing mechanism needs to be tailored to the nature of the new West Midlands Rail Contract. As with most urban rail networks, the re-mapped franchise is likely to have a continuing need for public subsidy. This imbalance between costs and revenue can act as a disincentive for the operator to invest in new capacity or promote peak travel. WMR is aware that the Department favours a net-cost approach and therefore, WMR believes that this is the best approach for the new franchise. During the franchise term WMR will evaluate whether there is a case to move progressively to a position where WMR takes some or all of the revenue risk. The benefits of this could be:

• Making the service changes necessary to deliver economic benefits will be easier, quicker and better value for the taxpayer as negotiations with the operator will only be about costs and not revenues; • Managing overall contract risks will be easier as balancing both costs and revenues will be possible when taking decisions; • There will be much greater flexibility to make changes to fare levels and structures and roll out improved ticketing technology; • Revenue growth above budget would create an income stream available to deliver passenger benefits; • Public sector investment in improved facilities and services will directly generate a revenue stream for the public sector; • Operator bidding risk is reduced especially when revenues are uncertain following the introduction of HS2, resulting in better value bids for the taxpayer; and • Avoids the need to develop arrangements to protect the operator from revenue fluctuations resulting from economic changes within the West Midlands travel to work area.

Conclusion

5.32 The commercial case has set out a procurement strategy designed to get the best value for a devolved West Midlands Rail Contract. The approach minimises the risks to the DfT’s overall rail franchising schedule and WMR believe will be attractive to bidders.

5.33 The commercial case also demonstrates how WMR propose to develop an outline specification for the franchise that meets the objectives set out in the strategic case and will deliver the benefits identified in the economic case.

98

6. The Management Case

6.1 The Management Case demonstrates that the appropriate governance structure, project planning, risk management, communications and assurance processes will be in place to ensure that the benefits of devolution are realised. In advance of roles and responsibilities being transferred from the DfT, WMR will set up clear governance arrangements. These arrangements will provide for democratic accountability that will satisfy the DfT’s requirement for robust and effective decision making and sound management of public funds. WMR will develop the management capabilities to undertake its expanding role as the scope of devolution increases.

Governance

6.2 The proposed governance arrangements set out how the West Midlands Authorities will make decisions in a manner which balances democratic accountability, inclusivity and focussed financial decision making, with the capacity to manage and bear risk. These arrangements will need to be operational by the end of 2015 and WMR proposes to activate the arrangements in shadow form during 2015.

6.3 The proposed governance structure is straightforward. There will be a Leaders Rail Group which will include the Leaders or other senior members of the following authorities as members:

Metropolitan Authorities Shire and Unitary Authorities Birmingham City Council Herefordshire Council Coventry City Council Northamptonshire County Council Dudley Metropolitan Borough Council Shropshire Council Sandwell Metropolitan Borough Council Staffordshire County Council Solihull Metropolitan Borough Council Telford and Wrekin Council Walsall Metropolitan Borough Council Warwickshire County Council Wolverhampton City Council Worcestershire County Council

98 99 6.4 The Leaders Rail Group will take policy decisions and set up West Midlands Rail Ltd to develop and manage both the WMRC and WCC franchise operators under the relevant Management/ Collaborations agreements with the DfT. West Midlands Rail Ltd will comprise a Board of Directors, appointed by and reporting to the Leaders Rail Group, and a delivery team with the necessary technical skills to manage the franchise. In developing these governance arrangements the following principles have been adopted:

• Effective, inclusive and transparent decision making between partner authorities • Democratic accountability • Robust financial management and capacity to manage and bear risk. • Agility to respond to unexpected events affecting the delivery of the contract • Respect for individual partner requirements against a minimum baseline for contracted services • Flexibility to enable individual authorities to enter into direct agreements with the delivery body • Ensuring integration and coordination with other transport modes, other rail franchises and innovative initiatives • Active integrated investment with Local Enterprise Partnerships and the private sector

6.5 Following extensive discussions with both members and officers from partner authorities which considered a number of possible models, the chosen approach is to establish West Midlands Rail Ltd as a company limited by guarantee. This new organisation would be the delivery body, with direct oversight by the Leaders Rail Group made up of senior elected members from each participating authority. The benefit of this approach over other models based on existing local authority structures is that it is an independent, inclusive body for both Metropolitan and Shire/ Unitary local authorities.

6.6 WMR would be a limited company operating under the Companies Act 2006 with a Articles of Association and a Members Agreement setting out its objectives, the responsibilities of directors and how the Leaders Rail Group exerts control over the board of directors. WMR will act as the delivery body for rail services and funding (initially on behalf of government), subject to DfT agreement.

6.7 The Leaders Rail Group would be the policy making body, which would be responsible for appointing a Board of Directors who would need to hold relevant experience and knowledge. It could also be strengthened by private sector expertise regarding commercial aspects. The Board of Directors (in consultation with DfT) would prepare a business plan to manage the operation and finances of the WM franchise.

6.8 The outline governance structures for the West Midlands Rail Contract and West Coast Connect Franchises are shown below in Figures 6.1 and 6.2

100 Leaders Rail Group Policy

West Midlands Rail Ltd WMR/DfT Agreement DfT

WMRC Contract Management

DfT Funding West Midlands Rail Contract

West Midlands Rail Contract Operator

Figure 6.1 – WMRC Governance Structure

100 101 Leaders Rail Group Policy

West Midlands Rail Ltd WCC Side Agreement DfT WCC Franchise WCC

WMR Operational Oversight

West Coast Connect Franchise Operator

Figure 6.2 – West Coast Connect Governance Structure 102 6.9 The Leaders Rail Group meetings would constitute general meetings under the articles and would normally meet in public. It would set the strategy for the Board of Directors and have a monitoring role. A WMR Members Agreement would regulate details of governance, decision making and funding arrangements between WMR (as the delivery body) and member authorities.

6.10 The Leaders Rail Group would comprise the Leader (or other senior elected member nominated by the Leader) of each authority in the contract area together with non-voting DfT representation. The Leaders Rail Group would take the strategic policy and funding decisions (on a basis agreed with Government on finance and funding matters). Each authority will have a voice at the Leaders Rail Group.

6.11 The WMR Board of Directors will oversee the management of the contracts by a delivery team based upon appropriate Articles of Association which will set out the decisions that require the approval of the Leaders Rail Group thus ensuring that the policy requirements of the authorities continue to be met.

Process for establishing shadow arrangements

6.12 WMR proposes to work collaboratively with Government to specify the West Midlands franchises for commencement in June 2017 governance structures (including voting arrangements) will need to be in place by the end of 2015 in order to ensure the necessary democratic accountability is in place for the specification of the new rail franchises.

6.13 The Leaders Rail Group was constituted in shadow form on 25 September 2014 in order that decisions can be made in relation to formally constituting West Midlands Rail Ltd and the conduct of the franchise process including partner and stakeholder engagement. Matters such as quorum and voting rights will be addressed as part of the Terms of Reference for the Group. The Leaders Rail Group will meet quarterly (or more frequently if required) to set up the WMR Ltd.

Managing the Franchises

6.14 Through its discussions with the DfT, WMR recognises that it is appropriate to move towards fully devolved rail services in a gradual approach to minimise risk for all parties, generate early benefits and secure best value for money. For the WMRC, WMR proposes two phases with an intermediate review as part of the first phase. The first phase would see the DfT having lead responsibility until a review point mid-way through the franchise. Following the review and dependent on its outcome, the remainder of the franchise would see WMR taking over lead responsibility in preparation for the next phase. In the second phase WMR would have fully devolved responsibility for specifying, procuring and managing the next West Midlands Rail Contract which would be expected to start during 2024.

102 103 6.15 At each stage the WMR Directors and delivery team need to have the appropriate skills and resources in order to protect local authorities and DfT from risk, monitor the proposed service performance regimes and deliver changes to the franchise specification. WMR intends to develop this strong local franchise management capability as it progressively takes on more responsibility.

6.16 The day to day management of the contracts would be undertaken by a small core team of WMR officers as shown in table 6.1. This team would be supplemented through the use of shared services provided by the partner authorities. This will keep incremental costs to a minimum and would draw on the experience and capability that exists within the partner authorities. Table 6.1 Proposed WMR ‘core team’ headcount

Staff Numbers Up to 2017 2017 to 2024 Post 2024

Franchise Specification 3 1 1

Franchise Procurement 2 0 0

Franchise Management 0 4 6

Franchise Funding 0 0 1

Total 5 5 8

104 Prior to the new Franchises in 2017

6.17 Prior to the start of the WMRC and WCC franchises in June 2017, WMR will be established and will work in partnership with the DfT to jointly specify and procure the new franchises.

6.18 During this period WMR will develop its capability so that it can take on the responsibilities expected during the new franchise and would develop the necessary policies and procedures required including:

• A detailed agreement with the DfT covering the joint franchise management processes, including monitoring arrangements and triggers for intervention; • A risk management strategy; • Communications and Stakeholder strategy; • Quality assurance processes; and, • The detailed governance arrangements that will enable WMR to take on franchise management responsibilities.

The West Midlands Rail Contract 2017 to 2024

6.19 At the start of the 2017 WMRC, overall responsibility for the franchise would remain with the DfT. WMR would undertake the day to day management responsibilities of the franchising authority. The objective being at the start of the franchise to build a level of trust with Government, Local Authorities and the market that WMR has the right capabilities for a franchise manager and that all parties are comfortable with the level and management of risks.

6.20 The detailed split and scope of responsibilities will need to be discussed further with the DfT as the franchise specification is developed. Initially, WMR would propose taking responsibility for the following areas:

• Ensuring that the franchise has local accountability for quality and service; • Monitoring train operator compliance with the customer satisfaction and performance regimes; • Management of operator delivery; • Input to franchise Change projects, and; • Management of any specific franchise funds such as the Innovation Fund and the Customer and Communities Improvement Fund.

104 105 6.21 Initially formal legal powers for enforcement action and overall financial liability would remain with the DfT.

Mid Franchise Review

6.22 During the initial period of the franchise WMR will increase its capability and detailed knowledge of franchise management in preparation for taking on greater responsibility.

6.23 Once the franchise has been in operation and WMR has demonstrated it has the resilience and capability to manage the contract, WMR proposes that the DfT and WMR jointly undertake a mid-franchise review. The purpose of the review will be to assess the benefits that devolving responsibility has generated and review the split of risks and responsibilities. If successful, the review would significantly broaden the scope of responsibilities of WMR moving to a position where full devolution would be in place for the following franchise. WMR wishes to continue to discuss with the Department in more detail how this can be achieved during the franchise term addressing issues such as how legal powers for enforcement action can be transferred. WMR will develop the processes to put in place the necessary plans and strategies to lead the procurement of a new fully devolved franchise.

6.24 WMR believes that this flexible approach to progressively expanding the scope of devolution will allow both WMR and the DfT to adapt to any potential changes to the needs of the West Midlands region and ensure that the devolution objectives are met cost effectively.

The Franchise Post 2024

6.25 The next franchise which would potentially start in 2024 would see WMR take full responsibility for the local rail services in the West Midlands. Funding for the Franchise will be through a combination of farebox revenues and DfT grant. If higher than assumed revenues are achieved then surplus grant could be reserved against future shortfalls or invested in improved rail services. In the event of a deficit arising, the Board of Directors will be required to propose a Deficit Reduction Plan which would set out how the finances of West Midlands Rail Ltd. can be brought back into balance. Such measures could include adjusting fares, altering the timetable and capacity and increasing marketing activity. The plan may also set out how each risk taking authority could be required to fund its share of the deficit if required, based on risk proportions.

Conclusion

6.26 This Management Case demonstrates that WMR is developing robust governance structure and protocols. This will allow effective and efficient management of the various contracts that form part of this devolution proposition. It will also support the objectives of rail devolution by supporting economic growth and allowing greater local accountability with regard to rail service provision.

106 WMR Capability and Experience

WMR authorities have significant experience in managing rail contracts and projects. Some examples are shown below:

Centro:

• Operated Section 20 contract with up to 1997 • Developed Central Trains franchise with OPRAF, including detailed incentive regimes and service specifications. • Managed the Central Trains franchise in the West Midlands from 1997 to 2007 • Took revenue risk and specified fares. For five years Centro put up fares at above the regulated levels and used the excess funding to implement service improvements negotiated with the operator • Worked closely with DfT during the letting of the London Midland franchise • Has funded service enhancements and capital projects around the network • Directly operates rail station car parks at 38 station as part of its wider portfolio of managing public transport infrastructure • Works closely within the rail industry on policy and planning matters including sitting on a number of national bodies such as Rail Industry Planning Group

Warwickshire County Council:

• Built new stations at Warwick Parkway, Coleshill Parkway and Stratford-upon-Avon Parkway • Invested in station improvements at many stations • Funded service enhancements

Staffordshire County Council:

• Funded service enhancements • Funded station improvements

As can be seen from the above examples, WMR authorities possess considerable skills and expertise with dealing with the rail industry including direct franchise management experience. WMR would look to build on this experience as it implements its proposed management arrangements for the new franchise.

106 107 Appendix A LOCAL TRANSPORT PLAN OBJECTIVES

108 Summary of Local Transport Plan Objectives / Goals Local Transport of Summary Appendix A 2015) Herefordshire (2013 – Wolverhampton Solihull, Walsall and, Dudley, Sandwell, Coventry,Birmingham, Representing: (2011 – 2026) Centro (WMITA) Period Local Authority / LTP reducing congestion Herefordshire by growth within economic Support services coordination of through greater passenger transport of Increase efficiency technologies and low carbon increased employment population growth, development and forsupport housing in the region, including economic regeneration led growth and Underpin private sector Economic Growth noise CO2, air quality and traffic particularly of environmental impacts Reduce the climate change. system to the transport ensure the resilience of gas emissions and reduction in greenhouse a through achieving climate change tackling Contribute towards Change Climate to a private car for those without access available especially all travelof options increasing awareness within Herefordshire by and connectivity Maximise accessibility Metropolitan Area adjacent to the destinations within and other desired and access to services inclusion, by improved and social opportunity enhancing equality of and worklessness, so Tackle deprivation Equality journey experience provides a positive efficient and that that is safe and network a transport with their use. Provide safety risks associated bychoices reducing the sustainable travel residents. Encourage Herefordshire’s wellbeing of improve the health and physical activity to everydaySupport Metropolitan Area travelling in the people safety of personal security and Improve the health, Health Safety, Security and townscapes landscapes and quality, heritage biodiversity, water on transport Minimise the impact of travel behaviour sustainable support to choices transport providing practical Herefordshire by journeys within distance car short Reduce the number of environment the local the quality of Metropolitan Area and people in the life for the quality of Enhance wellbeing and Environment and Life Quality of

108 109 2026) (2011- Shropshire (2012) Northampton Period Local Authority / LTP behaviour sustainable travel encourage more employment areas new housing and growthSupport and ensure unforeseen delays reliability and reduce Improve journey time modes sustainable transport byaccess, particularly Improve connectivity and growth for population and business and successfully provides a thriving local economy growth, regeneration and economic that supports system Creating a transport benefits for the County successfully providing growth,of whilst plans for the future impacts encourages growth and and that supports system Creating a transport Economic Growth emissions related carbon Reduce transport environment built, natural and historic travelthe effect of on the wherever possible reduces system that minimises and To deliver a transport Change Climate services and facilities services easily access a range of excluded people to more disabled and other Enable older, younger, make journeyfor that they each transport the best form of them to be able choose the options available to have the information and Northamptonshire people of Ensuring that the Equality communities from traffic in their travelling and protected secure when Help people feel safe and accidents or injury due to transport Reduce death the risk of communities create safe system help to maintain and Through the transport Health Safety, Security and foot and cycle travel by active modes of Encourage more communities environment and on our local transport Minimise the impacts of they live shaping the places where are actively involved in where people communities cohesive and sustainable create successful, strong, system help to maintain and Through the transport Environment and Life Quality of

110 2026) Warwickshire (2011 – (2011 – 2026) Telford and Wrekin (2011) Staffordshire Period Local Authority / LTP efficient transport networks efficient transport by delivering reliable and petitiveness and growth, To economic com support regeneration growthand support and and efficient, to attract jobs Making travel more reliable without causing congestion Enable economic growth workforce suppliers, markets and a Help businesses access training and education residents to access jobs, Provide for opportunities Economic Growth - change climate tackling outcome of gases, with the desired and other greenhouse carbon dioxideemissions of To reduce transport’s climate change help tackle Reduce carbon emissions to future climatic conditions Respond to current and Change Climate fairer society a achieving outcome of all citizens, with the desired for opportunity equality of To promote greater shops, and leisure jobs, education, healthcare, Allow everyone to access and facilities employment sites, services new housing and consideration when planning Make ‘access for all’ a key faced by residents Reduce social exclusion Equality are beneficial to health promoting travel modes that and bytransport, illness arising from death, injury or the risk of expectancy by reducing and longer life safety, security and health To contribute to better people to be healthier encourage which choices and promote active travel network on the transport Improve safety and security related Objectives are all highway Health Safety, Security and environment promote a healthy natural users,non-transport and to for users and transport To improve life quality of environment people and the local on transport impacts of noise, air quality and other by reducing the visual, Improve life the quality of on the environmenttransport Minimise the impact of life quality of contribute towards people’s for to positively transport Maximise opportunities Encourage active travel Environment and Life Quality of

110 111 – 2026) Worcestershire (2011 Period Local Authority / LTP Economic Growth efficient transport network efficient transport delivering a reliable and and growth through economic competitiveness To Worcestershire’s support transport on public health transport and reducing the impacts of climate change tackling of with the desired outcomes other greenhouse gases, carbon dioxideof and emissions transport-related by reducing noise and on the local environment, in Worcestershiretransport To reduce the impacts of Change Climate creating a fairer society with the desired outcome of Worcestershire’s citizens foropportunity all of To optimise equality of Equality healthy modes of travelhealthy modes of and promotingtransport illness arising from death, injury or the risk of Worcestershire, by reducing longer life expectancy in safety, security, health and To contribute towards better Health Safety, Security and assets our heritage and preserving historic built environment our environment, conserving healthy, natural residents by promoting a life for Worcestershire’s To enhance the quality of Environment and Life Quality of

112 LTP Rail Objectives

Local Authority / LTP Rail Objectives Period

Centro (WMITA) A rail and rapid transit network ‘backbone for development’ - Development of a Rail and (2011 – 2026) Rapid Transit Network is an ambitious approach, matching the deep economic and Representing: environmental challenges faced by the UK’s second largest urban area. Birmingham, Coventry, Dudley, Sandwell, Solihull, Walsall and, Wolverhampton

Herefordshire Support the DfT and train operating companies in improving the frequency, quality, (2013 – 2015) reliability, comfort and affordability of rail services within Herefordshire. Particularly supporting joint working on the franchises due for renewal

Northamptonshire The strategic connectivity offered by rail is important in making Northamptonshire an attractive (2012) place for growth to take place. Investment is also required to give more capacity appropriate to larger populations.

The strategy will help to provide community leadership on rail issues.

Making rail travel more appealing will give people more choice about how they choose to travel. An Improved rail service in Northants will make the county more attractive to business looking to invest in the area.

Increasing the proportion of passenger and freight movements by rail will reduce vehicle emissions that are harmful to the environment, as will more electrification.

We will seek to encourage the rail industry to make appropriate value for money investment in Northamptonshire’s rail infrastructure and services, and will consider making a financial contribution to schemes where appropriate and affordable.

Shropshire One of the key opportunities would be for a larger proportion of business trips and long dis- (2011-2026) tance commuting to be undertaken by rail. To encourage this use there is a need to improve rail infrastructure in order to increase the speed of rail travel. Station improvements would also help to improve the attractiveness of travel by rail.

Staffordshire (2011) Seek to improve and integrate ‘other’ transport services.

Telford and Wrekin There is a policy to work with partners to improve surface access to (2011 – 2026) international gateways and key economic hubs both by road and rail.

112 113 Local Authority / LTP Rail Objectives Period

Warwickshire An affordable, accessible, safe, convenient, environmentally friendly and (2011 – 2026) integrated network of rail services, capable of attracting an increasing market share for rail thereby contributing to the achievement of the objectives in the Warwickshire’s Local Transport Plan 2011

Worcestershire The overarching vision of the Worcestershire Integrated Passenger Transport (2011 – 2026) Policy is to provide “an affordable, safe, convenient, environmentally sustainable and integrated passenger transport network that is accessible to all and capable of attracting and increasing market share for passenger transport thereby contributing to the achievement of the objectives in the LTP3 compendium”

Specifically there is a policy to work in partnership to deliver an integrated passenger transport network.

114 Appendix B DEVOLUTION CASE STUDIES

114 115 A Merseyrail

A1 Merseyrail is the urban network of the Liverpool City Region, operating on the Wirral and Northern Lines within Merseyside and extending to Chester and to Ormskirk in Lancashire. Merseyrail is one of the most intensively used networks in the UK, running on 75 route miles of track operating nearly 800 trains and carrying over 100,000 passengers daily. There are 66 stations on the network, five of which are underground and four in Liverpool city centre, giving easy access to work, study, shopping and leisure. It is one of the most punctual and reliable railway networks in the UK, with consistently high scores for performance and customer satisfaction.

A2 Merseytravel is the organisation that provides professional, strategic and operational transport advice to the Liverpool City Region Combined Authority. It is also the delivery arm, overseeing the public transport network and is responsible for co-ordinating bus and rail services, maintaining transport infrastructure, providing public transport information and operating the Mersey road tunnels, the Mersey Ferries and their associated visitor attractions.

A3 Merseyrail services were privatised in 1997, with the initial franchised operations being let by the Office of Passenger Rail Franchising (OPRAF), and subsequently by the Strategic Rail Authority (SRA). Although Merseytravel, through the Merseyside Passenger Transport Executive, was a co-signatory to the franchise agreements, took revenue risk and input into franchise specification, responsibility for running the franchise on a day to day basis was managed by OPRAF/ SRA from London.

A4 During this period of time service quality was poor compared to the national average, with Public Performance Measure (PPM) falling from a pre-privatisation level of 92% to 82% in 2002 and overall passenger satisfaction (derived from National Rail Passenger Surveys - NRPS) dropping to 79% in the spring of the same year. Despite having little influence over the running of the franchise, Merseytravel was often perceived as being responsible for the poor level of performance of the franchisee.

A5 As a result of this poor performance Merseytravel requested that central government transfer responsibility for the letting and management of the franchise from the SRA to the PTE. The Government and the SRA agreed and on 20 July 2003 a new Merseyrail Concession was let by the Executive using new powers conferred upon them by the Merseyrail Electrics Network Order 2002.

A6 The development of the Concession incorporated the outputs from significant investment in consultation with local communities (current users and non-users) to ensure that there was a full understanding of their needs, aspirations and expectations.

A7 This new Concession is operated by a joint venture between Serco and Abellio. It is a 25-year contract with performance reviews leading to a 7+5+5+5+3 arrangement. The reviews consider performance against PPM targets and NRPS benchmarks, the financial viability of the operator, the delivery of Concession obligations to date and the ability of the operator to deliver its obligations and commitments for the remainder of the contract term.

116 A8 One of the key features of the new franchise agreement is a profit sharing mechanism; the benefit share, under which bidders are expected to share with Merseytravel any additional operating profit above a predetermined level. This has allowed Merseytravel to approach the running of the Concession with a clear, mutually beneficial partnership approach.

A9 Merseyrail has achieved a step change in operational performance and customer satisfaction, both immediately prior to and during the current Concession. This was achieved by Merseyrail funding a significant joint investment programme, which bidders for the Concession were required to support.

A10 In terms of service quality, devolution allows for more locally focussed initiatives to be developed with closer input from the Transport Authority. For example, since the commencement of the contract, a key objective of a locally led investment programme has been to improve station security in order to increase off-peak patronage. This includes a specific requirement for the operator to be part of the Merseytravel TravelSafe Partnership. The result has contributed to an increase in NRPS scores for station security from 51% in 2003 to 81% in 2014.

A11 This has been part of a wider improvement. Since 2003, overall satisfaction has increased from 83% to 93%. This compares to a movement of 79% to 86% for the overall regional sector over the same period.

A12 In terms of performance, Serco-Abellio has delivered a further, albeit more steady, improvement with TOC-on-self delay minutes falling by 30% from 2004 to 2009. PPM has consistently been above the sector average. Whilst Merseyrail is a relatively self-contained network, the current Concession performance is vastly superior to that achieved from 1998 - 2003 when PPM performance declined to a low of 81%. By contrast latest recent PPM for Merseyrail is typically above 95%.

A13 Merseyrail currently operates the oldest fleet in mainland Britain. There will be a requirement over the next 10 years to replace the current rolling stock with a modern fleet. Responsibility for this procurement and the challenge of securing the funding of this £350 million plus investment will rest with Merseytravel.

A14 This requirement for project funding on such a scale has required Merseytravel to start their planning process much earlier than it might if it could call upon central government funding. As a result, the planning process is identifying and evaluating potentially new sources of internal and external funding, which might not ordinarily have been considered. These include:

• Prudential borrowing; • Using existing revenue streams from other Merseytravel assets; and • Use of existing benefit share.

116 117 A15 The benefits of devolution to Merseytravel and Merseyside which have allowed the delivery of a step change in performance in conjunction with the operator as being:

• Better decision making and working relationship between a local operator and contract manager who has local resource in place; • Genuine partnership with the Concession operator, with a contract which incentivises both parties to maximise outcomes; • Better co-operation in seeking sources of third-party funding; • More pro-active approach to seeking funding for specific projects rather than passive dependence on the Department for Transport; and • A local solution for local people.

118 B LOROL (London Overground)

B1 TfL was formed in 2000, with the first Mayor’s Transport strategy being published in 2003. At that time, national rail was outside the responsibility of TfL; it was felt by many that national rail services within London were the neglected part of overall transport provision in London.

B2 The 2004 Rail Review that led to the 2005 Railways Act and abolition of the Strategic Rail Authority provided the opportunity for TfL to make its case for rail devolution in London. The SRA refranchising programme presented opportunities to address the deficiencies of “London’s Forgotten Railway”, the Metro services within the then London Lines portfolio of franchises.

B3 TfL secured the transfer from DfT control of Silverlink Metro through discussions with DfT and the 2006 Deed of Transfer, under which DfT included in the TfL grant the amount of funding that it would have continued to provide as subsidy for a “business as usual” Silverlink Metro franchise.

B4 TfL ran a competition resulting in the award of a concession to operate the devolved services and on 7th November 2007, LOROL (London Overground Rail Operations Limited) came into being. LOROL was awarded a seven year concession for the London in 2007 by TfL, with the possibility of extending to 2016.In addition to the , , Euston - Watford DC and Gospel Oak - Barking diesel services, the concession included the . TfL takes revenue risk on LOROL, although a contractual Ticketless Travel Regime penalises or rewards LOROL dependant on performance against a set of benchmarks for levels of ticketless travel. Further there is a revenue incentive mechanism in the concession agreement that also acts to incentivise revenue protection.

B5 The most recent Passenger Focus survey shows that the London Overground has 91% customer satisfaction, among the best in the industry, up from 57% when taking over the concession. Passenger journeys each day have quadrupled from 90,000 in 2007 to 370,000 today. This follows significant investment in track and signalling upgrades (East London Line and North London Line) as well as a new fleet of trains and refurbishment of stations.

B6 The award of the 2012 Olympic and Paralympic Games to London in July 2006 resulted in an endowment from the Olympic Delivery Authority that contributed to TfL’s ability to secure investment in additional network capacity and new trains.

B7 The 2012 DfT consultation on Decentralisation provided a further opportunity for TfL to pursue its wider objectives for devolution. TfL has focussed on opportunities to transfer control of inner suburban services in South East London, currently within the South Eastern franchise and North East London, currently within the Greater Anglia franchise.

B8 TfL worked closely with DfT as well as with the two Train Operators in shaping its Devolution proposition. Cases were made to DfT for transfer of control based on the benefits realised by LOROL and specific business cases for the Anglia and South Eastern inner suburban services. DfT produced a “counterfactual” case for each against which it assessed the TfL cases. The main benefits identified by TfL relate to the impact on margins of TfL taking revenue risk, the benefit of improved revenue protection under a concession and improved performance and driving up revenue through increased demand. TfL investment in enhancements to services would provide further Devolution benefits. 118 119 B9 Due to political opposition in Kent, the South Eastern Devolution proposition will not be taken forward. West Anglia services, if devolved, could be added into the new TOC (CTOC) or into the existing LOROL concession.

B10 TfL would meet the incremental costs associated with Devolution. It would also add to a transfer of funding in perpetuity from DfT in order to secure enhanced outputs on Devolved services, as was the case with LOROL.

B11 The financial dynamics of devolution for TfL are such that national rail finances form a relatively small proportion of the overall budget (in the region of £8.5billion pa for all TfL activities). The transfer of £25million pa in perpetuity for LOROL is not a significant financial risk in that context.

120 C Arriva Train Wales (Wales & Borders)

C1 Subsequent to the first round of UK franchising, in 2003 the SRA let a long-term contract for the regional Wales & Borders franchise of 15 years with performance-related ‘break points’. The break points occur at five yearly intervals in the contract, leading to a 5+5+5 arrangement. The franchise is operated by Arriva as Arriva Trains Wales (ATW).

C2 At each break point, an “efficient operator” test considers the PPM, cancellations, TOC-on-Self delay minutes and average NRPS scores of the operator. In the case of NRPS, the operator is required to exceed sector benchmarks for a subset of questions and achieve a prescribed score in certain station-related categories.

C3 In 2006 day to day responsibility for franchise management was passed to the Welsh Assembly Government.

C4 Legislation allowing rail devolution was introduced as part of the 2006 Government of Wales Act, which reformed the National Assembly for Wales and conferred further powers upon the Welsh Ministers. Under the Act the Welsh Government is able to:

• develop and fund infrastructure enhancement schemes; • develop new rail passenger services; • invest in improving the journey experience for rail users; and • fund rail freight improvement schemes through Freight Facility Grant (FFG).

C5 However investment in rail infrastructure is non-devolved and the Department for Transport has statutory responsibility for funding Network Rail’s activities in Wales for the operation, maintenance and renewal of the railway infrastructure.

C6 The Welsh Government and the four Regional Transport Consortia work with the Department for Transport and with Network Rail to identify and develop enhancement projects in Wales.

C7 Day to day responsibility for management of the franchise, and compliance monitoring now lies with the Welsh Government. The subsidy for the franchise is provided by the Welsh Government with the exception of 3% of the support which funds services operating exclusively in .

C8 In terms of investment, it is considered that whatever has been delivered has primarily been driven by the Franchising Authority and not by the operator or central government. This has been demonstrated through the better integration with wider EU funding streams which have allowed increased leverage of funding for rail projects through third party sources. An example of this is the Ebbw Valley Railway Line which reopened in 2008.

C9 The cost of the project was circa £30 million and funding was provided by Welsh Government, Corus Regeneration Grant and the European Objective One Programme.

C10 It is widely believed that without devolved powers afforded to the Welsh Government, then this project would not have succeeded.

120 121 C11 In recent years the Wales and Borders franchise has outperformed the regional sector in terms of punctuality and passenger satisfaction levels. It is felt that these improvements are the direct result of devolution which has brought about a closer working relationship between the operator and the letting authority and significant investment led - and funded - by third parties. The original franchise was let at a time of significant SRA budgetary pressure and as such relatively little was specified in terms of TOC investment. Many of the improvements that have subsequently been delivered on these operations have been sponsored by the devolved Welsh Government.

C12 Both customer satisfaction and punctuality were either flat or deteriorated in the first two years of the franchise prior to devolution. The five year performance break is perceived to have played a central role, both by DfT and Welsh Government Franchise Managers, in stimulating this improvement.

C13 Whilst PPM was relatively static between 2004 and 2006, significant improvements in 2007 and 2008 brought the TOC above the sector trend. Franchise management has attributed this to a combination of investment impacts (many of which were not TOC-led) and ATW focusing on ensuring that extension performance criteria were met. Current PPM performance is at 93%, compared to the sector average of 91%, increased from around 80.8% at the start of the franchise.

C14 The NRPS customer satisfaction results show only a marginal improvement for the franchise from spring 2004 to autumn 2006 with the TOC consistently below the sector average. Subsequently, satisfaction has improved and the results in autumn 2008 and spring 2009 were broadly in line with the sector as a whole. Since then, the most recent NRPS survey from spring 2014 puts customer satisfaction at 83%. This is consistent with the trend in TOC-on-self delay minutes and PPM.

C15 The Welsh Government consider that the devolved powers they hold over rail have allowed them to deliver:

• Local control of services to meet transport priorities; • Develop a closer working relationship with the operator; • Increased level of investments in development and regeneration projects; and • Lever in additional funding from the EU more effectively.

122 D ScotRail

D1 The ScotRail franchise encompasses one of the most diverse railway networks in the UK. It includes a number of express long distance operations linking Glasgow, Edinburgh, Inverness and Aberdeen together with and a number of low frequency rural routes and a high density commuter and interurban network in the central belt of Scotland. The latter element of the operation is not too dissimilar to those in the West Midlands. For example the rail network around Glasgow provides one of the densest and most comprehensive rail services outside of London.

D2 In 2005 the Scottish Executive (through its agency Transport Scotland) took responsibility for specification, management and funding of the ScotRail franchise. At the same time the Scottish Executive also took on responsibility for the High Level Output Specification (HLOS) in Scotland, giving it responsibility for setting industry outputs and funding major enhancements from its devolved budget. Although funding and specification is devolved, the Secretary of State for Transport retains responsibility for safety legislation and compliance with European directives.

D3 From 2008 Transport Scotland started rebranding all First ScotRail trains, including those previously operated on behalf of the Strathclyde Partnership for Transport, into a non-corporate ScotRail livery, which largely removed the First Group branding.

D4 The latest franchise has delivered a number of improvements since the start date in 2004. PPM has been improved from 83% during the early months of the current franchise to a high of 93% in 2013, although it has recently reduced to around 91.5%. PPM did drop during the early part of the 2011, although it subsequently recovered, possibly as a result of the introduction of new rolling stock.

D5 Passenger satisfaction has fluctuated during the course of the franchise. From a starting point of 87% satisfaction in 2004 satisfaction reached a high of around 91% in 2010. It fell to around 85% during 2011 but has since increased to 90%. Again this dip in performance may have been associated with the introduction of rolling stock.

122 123 Appendix C Services to be Operated by WMRC and WCC

124 WMRC would include passenger services on the following routes:

• Shrewsbury - Telford - Birmingham New Street • Wolverhampton - Birmingham New Street - Walsall - Rugeley Trent Valley • Birmingham New Street - Birmingham International • Nuneaton - Coventry (plus Coventry - Kenilworth - Leamington Spa from December 2016) • Redditch - Bromsgrove - Birmingham New Street - Lichfield Trent Valley • Hereford - Worcester - Birmingham New Street • Great Malvern - Worcester - Birmingham Snow Hill - Leamington Spa- Stratford-u-Avon • Stourbridge Junction - Stourbridge Town

WCC would include services on the following routes within the West Midlands:

• Birmingham New Street - Coventry - Rugby - Northampton - London Euston • Birmingham New Street - Stafford - Liverpool • Stafford - Nuneaton – Rugby

West Midlands Rail Contract West Coast Connect Franchise

Would: Would: • Provide services to 13 out of 14 • Provide services to 9 out of 14 WMR authorities WMR authorities • Operate 112 stations, serving a • Operate 37 stations, serving a further 15 further 34 • Run over 650 trains per day • Provide approx. 13% of all (excl. Stourbridge Town branch) services into Birmingham • Provide approx. 50% of all • Operate a fleet of approximately services into Birmingham 300 carriages • Operate a fleet of approximately • Circa 28 Million Passenger 250 carriages Journeys • Circa 30 Million Passenger • £190M operations cost Journeys • £170M passenger revenue • £160M operations cost • £30M other revenue • £56M passenger revenue • Run from 2017 to 2024 • £37M other revenue (ready for HS2) • Run from 2017 to 2024 (ready for HS2)

124 125 Appendix D Proposed Stations to be Operated by WMRC

126 WMRC Stations

1 Acocks Green 37 Earlswood (West Midlands) 2 Adderley Park 38 Erdington 3 Albrighton 39 Five Ways 4 Alvechurch 40 Four Oaks 5 Aston 41 Gravelly Hill 6 Barnt Green 42 Great Malvern 7 Bearley 43 Hagley 8 Bedworth 44 Hall Green 9 Berkswell 45 Hampton-In-Arden 10 Bermuda Park (to open 2015) 46 Hamstead 11 Bescot Stadium 47 Hartlebury 12 Bilbrook 48 Hednesford 13 Birmingham Bordesley 49 Henley-In-Arden 14 Birmingham Snow Hill 50 Jewellery Quarter 15 Blake Street 51 Kenilworth (to open 2016) 16 Blakedown 52 Kidderminster 17 Bloxwich 53 Kings Norton 18 Bloxwich North 54 Landywood 19 Bournville 55 Langley Green 20 Bromsgrove 56 Lea Hall 21 Butlers Lane 57 Ledbury 22 Canley 58 Lichfield City 23 Cannock 59 Lichfield Trent Valley 24 Chester Road 60 Longbridge 25 Claverdon 61 Lye 26 Codsall 62 Malvern Link 27 Coleshill Parkway 63 Marston Green 28 Colwall 64 Northfield 29 Coseley 65 Oakengates 30 Cosford 66 Old Hill 31 Coventry Arena (to open 2015) 67 Olton 32 Cradley Heath 68 Penkridge 33 Danzey 69 Perry Barr 34 Droitwich Spa 70 Redditch 35 Duddeston 71 Rowley Regis 36 Dudley Port 72 Rugeley Town

126 127 WMRC Stations

73 Rugeley Trent Valley 74 Sandwell & Dudley 75 Selly Oak 76 Shenstone 77 Shifnal 78 Shirley 79 Small Heath 80 Smethwick Galton Bridge 81 Smethwick Rolfe Street 82 Spring Road 83 Stechford 84 Stourbridge Junction 85 Stourbridge Town 86 Stratford-Upon-Avon 87 Stratford-Upon-Avon Parkway 88 Sutton Coldfield 89 Tame Bridge Parkway 90 Tamworth Low Level 91 Telford Central 92 The Hawthorns 93 The Lakes 94 Tile Hill 95 Tipton 96 Tyseley 97 University 98 Walsall 99 Water Orton 100 Wellington 101 Whitlock’s End 102 Widney Manor 103 Wilmcote 104 Wilnecote 105 Witton 106 Wood End 107 Wootton Wawen 108 Worcester Foregate Street 109 Worcester Shrub Hill 110 Wylde Green 111 Wythall 112 Yardley Wood

128 128 129