HS2

Infrastructure delays pose revenue risk for franchises – NAO

Uncertainty, delays and cost increases on major infrastructure works pose risks to value for money in rail franchising, according to the National Audit Office (NAO). 

It says the DfT may need to delay franchise competitions where infrastructure upgrades are late or uncertain, issue management contracts on the most-affected routes instead of franchises to “protect the operators”, or alter contracts during while they are active. 

In its ‘Reform of the rail franchising programme’ report, the watchdog says the DfT has improved management of its rail franchising programme, and is better-placed to deliver value for money than it was in 2012, following the collapse of the InterCity West Coast Competition. But the “scale and complexity” of planned infrastructure work has presented challenges for the franchising programme. And, as reported by RTM recently, Network Rail’s infrastructure improvement programme is costing more and taking longer than planned. 

Last week, in response to a Public Accounts Committee’s report into Network Rail’s investment programme for CP5, the infrastructure owner stated that its “understanding of how best to plan and deliver major new electrification schemes was not good enough”. 

The NAO has suggested the Department must decide between a range of responses and judge how to protect value for money while keeping train services running. 

The idea of delaying franchise competitions until there is more certainty on infrastructure plans could mean it has to extend contracts, issue direct awards or appoint the government-owned Directly Operated Railways (DOR) to run the franchise temporarily without the benefit of competition. 

According to the watchdog, this is particularly the case with the InterCity West Coast franchise. This month, for instance, the Department decided to push back the competition for the franchise by a further six months to June 2016, in order to align the InterCity West Coast franchise with HS2.  But now the DfT has used up its contractual options to extend the current direct award. 

Amyas Morse, head of the NAO, said: “Since the collapse of the West Coast Main Line franchise competition, the Department has improved its management of rail franchising. Results of early franchise competitions indicate that returns to taxpayers could be higher than in the past. 

“However, important risks remain. There is considerable uncertainty and volatility around the rail infrastructure improvement programme. And there are risks to effective competition should market interest decline. The Department recognises these challenges and is taking steps to address them.” 

Since the restart of the franchising programme in 2013, the Department has awarded three franchises through competition and made 10 ‘direct awards’. The NAO said the DfT’s decision to let ‘direct awards’ to incumbent operators was a sensible temporary measure, but it “may have missed opportunities to maximise value for money in the early direct awards because the benchmark used was too low and not designed for the purpose”. 

The watchdog recommended the DfT should capture the costs and benefits from the different approaches it has taken to managing uncertainty around, for example, the Thameslink, Southern and Great Northern, InterCity West Coast and Great Western franchises. 

“It should use this to inform decision-making on franchises where there are challenging interdependencies with infrastructure improvement and the introduction of new rolling stock,” said the report. 

Managing change during the life of a contract was also suggested by the watchdog. It stated that the Department is doing this on the direct award for the Great Western franchise, where there is significant uncertainty about the timing of infrastructure work. Only last month, Network Rail boss Mark Carne revealed costs estimates for the electrification project had nearly trebled since 2012. 

It was also noted that the DfT should assess the maturity of the rail franchising programme, including its procurement and commercial capability, to establish whether it is ready to take a more flexible approach to managing franchises. 

The Brown Review recommended that the Department and operators establish a contractual relationship based on partnership, but the DfT has not yet started to do this. 

In a statement sent to RTM, a DfT spokesperson said: “We welcome the NAO’s findings that we are delivering improvements for passengers, increasing value for money for taxpayers and improving the confidence of the rail industry in franchising. 

“We are clear that franchising provides the best way to run rail services. Since privatisation, the rail industry has been transformed from an industry once in decline to a real success story, with passenger journeys more than doubling over the past 20 years. 

“However we are not complacent. We listen to passengers and recognise there are challenges to overcome. We continue working hard to address them.” 

A spokesman for the Rail Delivery Group said the NAO’s report sets out how the DfT has risen to the challenges of getting the franchising programme back on track.