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11.12.15

DfT admits past rail franchising contracts ‘overly rigid’

The Department for Transport (DfT) has admitted that rail franchising contracts in the past have been “overly rigid”, but says that is now changing. 

During a Public Accounts Committee evidence session, Peter Wilkinson, managing director for passenger services at the DfT’s Rail Executive, said the Department’s entire franchising agreement has been put into a review to address concerns. 

“That will enable them to show us the areas in which they feel rigidity is preventing them from innovating in franchise life, and that is the process we are going through now,” said Wilkinson. 

The evidence session came after the National Audit Office (NAO) produced a report saying that uncertainty, delays and cost increases on major infrastructure works pose risks to value for money in rail franchising. 

Stephen Phillips, Conservative MP for Sleaford and North Hykham, highlighted from the NAO report that transport owning groups said that the DfT’s “capability to manage franchise contracts has not yet noticeably improved”. 

In response, Wilkinson said it “is a fair reflection”. 

“I am not sitting here trying to pretend that we have changed the world overnight. We started the franchising programme again in 2013, and the first job that we had to do was rebuild trust in relation to the market and get a franchising programme back on its feet again. That was the first job, along with creating a schedule that was sustainable, and we have achieved those things,” he noted. 

“The next job – the NAO has been clear on this, and I support its conclusion – is to grow our capability in the area of in-life contract management and to improve how those relationships are managed during the term of the franchise.” 

Rolling stock 

MPs were also told that in the future the Department will move away from specifying the rolling stock it expects franchisors to use. 

Wilkinson added that the DfT does not specify the technology of the train. Instead, it tells the market everything it knows about the infrastructure, the changes that are intended to that infrastructure, the programme of work associated with that infrastructure and the timelines. 

“We ask the market, at a point in time, to bid on the premise of that information,” he said. “That is what we do; it is for them to develop their rolling stock strategies.” 

Philip Rutnam, permanent secretary at the DfT, reiterated the Department’s “policy orientation” towards allowing the market to make decisions about investment in rolling stock. 

However, he would not rule out circumstances arising in which the DfT decide that the taxpayer or government needs to play a bigger role.

“Who knows what will happen? We have decisions in relation to HS2 coming up, for example,” said Rutnam. “There will be a large need for rolling stock investment in that case. I think the mixed economy is an analogy and our general approach is to try to get the greatest possible value for taxpayers and passengers from rolling stock.” 

In-franchise changes 

Meg Hillier MP, chair of the PAC, noted that there are three different franchise models: the full competition, the in-franchise change and the direct award. She asked: “On the in-franchise change, do you know what the cost is at the beginning, or how do you work out the cost?

Wilkinson conceded that this was an important question, because there are a number of franchises coming up. 

“With the massive scale of investment by this government that is going into the infrastructure, very few parts of our railway system are not being touched by significant infrastructure change,” he said. 

“Therefore, managing change during franchise life is going to become a more regular way of doing things. What we have to do, therefore, is this. In the same way as we do with direct awards and with franchise competitions, we have to baseline our expectations of how the costs will change, so that we ensure that the market, in responding to those changes, is giving us a value proposition.” 

Clever management 

Bernadette Kelly, the recently appointed director general of the Rail Executive, taking over from Claire Moriarty, noted that one area for which the DfT will have particular responsibility is in how the relationships between infrastructure and franchising and between HS2 development, infrastructure and franchising are managed. 

“We are doing that. We already have in place a number of mechanisms – some pretty robust mechanisms – to manage those, I think, on High Speed 2,” she said. 

“Now that we have a re-plan for infrastructure enhancements and investment, we will be putting in place much more robust governance, working both with the train operating companies and Mr Wilkinson and Network Rail to make sure that we are managing those interdependencies and taking really informed judgments about what is the appropriate use of in-year changes to contracts, et cetera, to manage the uncertainty that may still exist.” 

Rutnam added that the biggest challenge, as mentioned in the NAO report, is ensuring the relationship between the significant investment programmes happening in infrastructure and franchising itself are cleverly managed. 

“We need to ensure that we keep the terms of the commercial offer that we are putting to the market under review to ensure that it strikes the right balance between taxpayer, us acting on the behalf of the taxpayer and passenger, and the private sector, not only to sustain private sector interest, but to drive outcomes that really are in the long-term interests of passengers and taxpayers,” he said. “There is a range of things to be done within the context of franchising, but I think the programme is in a hugely better place overall.”

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