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No European country has embraced rail franchising as Britain has. For over two decades, it has been the method of choosing who runs what and (to some extent) how. The current person in charge of the process at the Department for Transport is Peter Wilkinson, Managing Director Passenger Services. He doesn’t like the term ‘franchisee’ - he prefers Service Delivery Partners, to emphasise the need for a partnership approach to delivering a railway fit for purpose.
Whether the process of choosing those partners is itself fit for purpose is a question that has been repeatedly asked since it began. So has the question as to whether franchising is the best way to provide train services.
A SHORT HISTORY
The central belief behind privatisation was that market competition would improve services and transfer some financial risk from the public to the private sector. The flipside to this was that franchises have been almost invariably awarded to the bidder wanting the lowest subsidy or offering the highest premium.
The first franchise was let in 1995, and within just two years the Office of Passenger Rail Franchising had let 25 franchises. This was achievable because they stipulated minimum train service levels and little else, at a time when growth in passenger numbers was not anticipated.
Franchises’ susceptibility to the performance of the wider economy became apparent as the economic downturn in 2001 compounded industry woes, in the wake of the Hatfield derailment and the collapse of Railtrack. Responsibility was transferred from the Franchising Director to the Strategic Rail Authority (SRA, created in shadow form in 1999 and formally from February 2001), which had to agree revisions to franchise support or premia to stave off insolvencies.
The ‘cap and collar’ mechanism applicable after year four became the means to address the exogenous risk and allow the Government to share in success, although additional revenue support has been more common than windfalls. Incentive payments were intended to reward long-term investment and performance. Post-2003 franchises were criticised for increasingly prescriptive specifications - although this was a response to criticism of early franchisees’ performance, it was seen as limiting their commercial freedom.
With the abolition of the SRA in 2006, franchising powers for England were transferred to the Secretary of State for Transport/DfT, and Transport Scotland was created with powers to determine the country’s franchise. It is planned that the Welsh Government will receive similar powers, possibly as early as 2017.
A 2011 DfT review of franchising in England and Wales ended ‘cap and collar’, and proposed a less prescriptive approach while addressing qualitative issues such as overcrowding.
The failure of the West Coast competition in October 2012 was a turning point. The Invitation to Tender (ITT) reflected reforms to franchising policy announced in January 2011 - its two main changes were an increase in the West Coast franchise duration to 13 years and 4 months, and the application of a model named GDP Resilience to measure and compensate for fluctuations in GDP (it had 500 economic scenarios and played its part in the collapse of the competition).
Another element in the failure were flaws and lack of transparency in the ‘sizing process’ to calculate the subordinated loan facility (SLF) required from a potential franchisee’s owning group - the purpose of the SLF was to minimise the risk of financial failure and premature termination of the franchise.
The December 2012 Laidlaw Report into the West Coast competition laid the blame for the technical and administrative failings on insufficient time, inadequate resources and organisational shortcomings. Nonetheless, the wider Brown Review of the rail franchising programme a month later decided that there was “no credible case for major structural change”, despite “the complexity of rail franchising” allowing “the possibility for endless tinkering”.
