TF’s Smith agrees the concession model works well for dense urban networks: “The way TfL has set up the concession has been very good. Is it transferable to other urban areas? I think London only teaches you about London because it is such a different place. The money behind it is considerable - TfL is quite well funded, and it has population density on its side.
“I have a lot of sympathy with devolved authorities which want to gain control of franchising, fares and information as a pre-requisite of a unified system. Otherwise it’s confusing and suboptimal. You need the benefit of a whole system that is simple and easy to use, partly through contactless cards. That could be transferred.”
Transport Scotland’s Reeve believes that one of the difficulties of awarding franchises is that “it is hard to get right in the context of EU procurement law”, explaining: “You have to anticipate what bids you are going to get and devise evaluation criteria that will cope with a wide range of bid scenarios, while still delivering key objectives. You have to award whoever won strictly on the published criteria, irrespective of any further information or considerations which may arise after publication of the ITT.
“EU procurement law is focused on promoting a single market. In the trade-off between creating a single market and securing efficient value for client, there is a big emphasis on the single market. Without very careful consideration and preparation, it could be hard to turn down a bid you suspect to be over-ambitious or exaggerated in its claims, without creating the risk of a legal challenge.
“But you need tough laws to guard against improper process where public money is being spent. Government clients don’t get to choose who wins - they choose the criteria by which the bidders will be judged. A value of procurement law is probity. If we didn’t have European procurement law, we would need something like it.”
In trying to make an informed judgement between train operating structures, Smith says: “If you try to find a clue to optimum structures from 14 years of passenger data, they don’t give any clue at all. Concessions, long or short franchises - all can be successful. It’s much more to do with the quality of the contract, management, history, geography and the economy rather than structure.
“Virgin has been innovative and does very well in surveys with no rail competition, but so do they with East Coast, where they have. What do you conclude from that? Nothing! Would East Coast be as good if Grand Central and Hull Trains didn’t exist? Don’t know. Assessing the impact of that competition on the East Coast is well nigh impossible. East Coast has adjusted fares which have benefited some passengers and disbenefited others.
“One generalisation is that companies that have a longer stake in the industry tend to be doing better. Chiltern, SWT, c2c and Virgin have consistently good scores. East Coast scores have done well despite all the changes in ownership, because the underlying product hasn’t changed that much.”
BREXIT FEARS
Even before the vote for Brexit there was already concern at the low number of potential bidders, so anything that might reduce that pool still further is a cause for anxiety. Eleven companies currently hold DfT Pre-Qualification Questionnaire Passports (PQQs), although this includes Trenitalia which has never mounted a bid. And roughly three-quarters of franchises are held by foreign entities. Retaining their interest is vital.
There were just two bidders for the South Western franchise. PAC Chairman Meg Hillier said: “This hardly inspires confidence, and highlights the urgent need for the Department to develop new approaches it can draw on when there is a risk that competition will not deliver the result rail users and the wider public deserve.”
A higher number of smaller franchises might attract new entrants and please existing franchises by spreading their financial risk - since large franchises increase it through higher contract values, especially when coupled with significant increases in passenger numbers and revenue. It might also help to even out the peaks and troughs of new train orders, albeit at the expense of volume and lower unit costs.
More entrants might also be tempted by the prospect of good returns. As it is, the margins are often wafer-thin (pace the constant accusations of the rail unions). Only two TOCs with available accounts show margins higher than 3.3%, despite healthy growth rates, and the loss made by East Coast must be ringing familiar alarm bells.
As Philip Haigh said in RAIL: “If Government is to continue to attract decent bids for its franchises, I reckon it needs to crack the money valve a wee bit more in favour of those running its railway.”
The costs of bidding, now anything between £5m and £10m, have become significant, and the Brown review urged a simplification of bidding requirements and documentation. The DfT is trying to both encourage new entrants to the market and maintain interest from existing operating companies, by simplifying the pre-qualification process and reviewing the number and size of franchises in the network.
ON-LINE COMPETITION AND THE CMA REPORT
The idea of competition between passenger train operators has long been viewed as a Holy Grail guaranteed to generate significant improvements for passengers. It was a tenet of 19th-century governments in encouraging route duplication, and an article of faith most recently demonstrated by the Competition and Markets Authority (CMA) report published in March 2016.
Despite the efforts of the Victorians, there has never been realistic choice on more than a handful of corridors, such as London to Birmingham, Manchester, Glasgow, Edinburgh and Exeter/Plymouth. Even before the First World War, the Caledonian and North British railways came to operating agreements to moderate competition on certain routes, because growing bus and tram competition was crippling their balance sheets. Competition is currently ‘for the market’ rather than ‘in the market’.
From the beginning of privatisation, there has been intermittent hankering for more on-rail competition. The CMA report looks at four main options for the West and East Coast routes and the main Great Western routes between London and the South West/South Wales:
- 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).
