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Growing cost of franchise bidding a ‘deterrent’ to new entrants, says RDG

Bidding for new franchises is growing increasingly costly and time-consuming and risks discouraging new bidders from entering the market, the Rail Delivery Group (RDG) has warned.

In written evidence submitted to the Transport Select Committee inquiry into rail franchising, the RDG said that owning groups estimate that the cost of submitting a bid to the DfT is now £5 to £10m.

This is partly because the Franchise Agreement has grown increasingly long and complicated.

The RDG’s evidence says: “The cost of bidding for Department-led competitions has progressively increased and is now a deterrent to both existing train operators and new entrants.”

It warns that in addition, companies are now allowing for the cost of a potential investigation by the Competition and Markets Authority (CMA) at an additional £0.5 to £2m. For example, the CMA is currently investigating Arriva’s integration with Northern.

The department also requires the successful bidder to submit a Parent Company Guarantee, but it makes this process harder by not sharing its methodology.

Parent Company support for the TransPennine franchise ended up costing £200m, while it cost £140m for the c2c franchise and £232m for the East Coast franchise.

The RDG said that a strategic overview of the Franchise Agreement was required to see how the additional costs have accumulated.

The franchise process is also changing as power is transferred to devolved bodies such as Transport for London, Transport for the North and the Scottish and Welsh governments. The RDG is working with them to adapt the franchise process for their requirements.

Peter Wilkinson, managing director for passenger services at the Department for Transport Rail Executive, told the Public Accounts Committee last year that the DfT is working to make franchising agreements less 'rigid'.

Despite this, the RDG said that overall, the British rail industry is undergoing a “renaissance”, with more services, more routes and one of the best safety records in Europe.

It added that it expected the ongoing investment planned in the railways “will ensure that passengers continue to benefit from improved services”.

In its own submission to the inquiry, the Institute for Transport Studies argued that the current franchise length in Britain is too short.

It said this makes the procurement of rolling stock by TOCs less effective and innovative because they are forced to take a “short term and risk averse” approach.

It recommended that either franchises be made longer, supported by more open access competition, or the government appoint an arms-length body to procure rolling stock.

(Image c. Alvey and Towers)

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