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'Scrap inter-city franchising and let us bid for train paths', say TOCs

Stagecoach Group and Virgin are pressing for a new system of licensing rail operators by allowing them to compete directly on inter-city routes, which the companies claim would enhance competition and provide better value for money.

In the operators’ joint submission to the consultation by the Competition and Markets Authority (CMA), they call for a new approach to be piloted on the East Coast, West Coast or Great Western routes.

The proposed reform would be implemented after 2023, scrapping the current franchising system on inter-city routes.

It would also replace the existing “confused and damaging” open access regime, where the government competitively lets rail franchises but allows other operators to selectively run competing services on some routes without paying the same charges or meeting the same specification (subject to a number of ‘tests’ by the regulator). These open access operators often achieve higher performance and satisfaction figures than the franchised operators.

The two companies, which jointly own and run the Virgin Trains franchises  on the West Coast and East Coast routes, claim the current approach “singularly fails to maximise the benefits of competition for rail passengers and taxpayers”.

Their alternative plan would allow bundles of train paths to be openly auctioned by a letting agency based on a nationally-agreed capacity statement.

The operators argue this would allow for several operators to compete on a single route on a level playing field – helping decrease fares and improve services and making the most efficient use of squeezed network capacity.

The response submission said: “The improvements would significantly enhance the value for the taxpayer from its significant investment in the rail network and deliver more quickly and effectively the improvements demanded by customers, Transport Focus and the government.”

They suggested that the Department for Transport, Office of Rail and Road or an independent government body could sit as the letting agency and define appropriate conditions to safeguard operational performance, network benefits like integrating ticketing, and rolling stock allocation.

The system would also necessitate a more efficient and appropriate track access charging structure.

But they claim that franchising would still be best for all other routes – such as south east commuter networks with no open access arrangements – because operational capacity and commercial constraints render full ‘in market’ competition unviable. They also argue that this model remains economically effective throughout the rest of the network, delivering benefits of up to £7bn in 2013.

In their joint response, the operators said: “We are pleased that the CMA itself recognises in its consultation document the benefits achievable on parts of the rail network from competition ‘in the market’ rather than from competition ‘for the market’ through franchising.

“Stagecoach also believes that the stunning success of commercial bus networks in the UK provides clear evidence of the value of ‘in market’ competition to customers and taxpayers.

“There is strong evidence that competition can deliver benefits to passengers through lower fares, better service quality and innovation. It can increase rail’s modal share from the private car, its biggest competitor. Taxpayers benefit too through improved efficiency and reduced costs of delivering the country’s national rail network.

“The current confused and damaging mix of both open access services and franchised networks does not provide a level playing field, with biased track access and ticketing regimes.

“This hybrid ‘cherry-picking’ arrangement offers poor value for money and taxpayers, is an inefficient use of network capacity and, at worst, risks franchise failure.”

To support this, the operators cited the fact that the East Coast franchise has reaped significantly less revenue growth compared to other inter-city franchises over the last 15 years due to open access abstracting revenue and blocking timetable optimisation.

CMA investigation

In January, the CMA launched an examination to scope for increasing TOC competition in passenger rail services to improve service quality and value for money.

Seven months later, it published a consultation document inviting responses on four options for possible reform:

• Option 1 – retaining the existing market structure, but with significantly increased open access operations
• Option 2 – two franchisees for each franchise
• Option 3 – more overlapping franchises
• Option 4 – licensing multiple operators, subject to conditions (including public service obligations)

Last week, leaders from the Rail Delivery Group called on the CMA to reassess whether the four options it put forth to radically form the franchising system actually promote efficiency and benefit local communities.

In their response to the consultation, the group asked the competition watchdog to test all options against how effective and practical they would be, questioning how each option would deliver wider benefits to communities and their economies.

It claimed the CMA should also take into account a number of potentially significant reviews occurring in the industry currently and, in light of these, should consider adding other options to respond more flexibly to passenger needs.

These new options, according to the group’s submission, would include changing franchise contracts and improving the access process and charging structure between Network Rail and train operators.