Rail franchising has improved but could do better
The National Audit Office (NAO) says the DfT has improved the management of rail passenger franchises following the collapse of the InterCity West Coast (ICWC) franchise in 2012, but much work remains to be done. The NAO is concerned about the uncertainty, delays and cost increases caused by major infrastructure projects, and worried that there might not be enough competition for future passenger franchises.
The discovery of errors in the procurement process brought about termination of the ICWC franchise, provisionally awarded to First Group in October 2012. A number of inquiries followed – in which the whole franchising process was reviewed – and a more robust regime was introduced in March 2013.
“Since the restart of the franchising programme in 2013 the DfT has awarded three franchises through competition and made 10 ‘direct awards’ (i.e. to extend the franchises of incumbent operators without resort to competition). Overall, for the three completed franchise competitions, operators are contracted to pay the Department higher returns than the Department’s estimate of what would have been paid under the terms of the previous franchises,” it says.
Overall, the three franchises are contracted to pay DfT premiums 82% higher than what had been previously estimated under the pre-2013 arrangements: Essex Thameside/c2c is expected to pay £2.0bn (instead of £740m); Thameslink, Southern & Great Northern will pay £3.5bn (instead of £2.1bn); and InterCity East Coast will pay £3.3bn (instead of £2.0bn). The 10 franchises extended under the ‘direct award’ system will also collectively contribute 32% more to DfT coffers than under the previous system.
The NAO is concerned that market interest might not be sustainable: There were three bidders for each of the three above named franchises. This compared with an average of 4 bids per franchise for 10 franchises before 2013. The NAO says that three bidders per franchise is the minimum number required to achieve value for money. Too few companies are bidding.
A number of reasons are offered for this: Nine of the 15 franchises managed by the DfT are provided by transport groups who now have the opportunity to invest in deregulated European markets (where barriers to market entry tend to be less stringent than in the UK). Some of the groups also operate bus services, which generally offer a more profitable investment option – unlike the rail franchising bidding process which is a costly business.
To encourage more bidders and reduce bidding costs in the franchising process, the DfT introduced the PQQ (pre-qualification questionnaire) passport in September 2015. This is aimed at streamlining and speeding up the admin, allowing bidders with proven managerial competence and a good track to apply for franchises without having to ‘sit a pre-qualification test’ for each individual franchise application.
Another point, NAO fears DfT resources could be ‘stretched’ when competitions start for the South West, InterCity West Coast, West Midlands and East Midlands franchises. They have been compressed into an eight month period and all four should be awarded between February and November 2017. The SW franchise was brought forward two years and the ICWC franchise was set back 10 months, thus undermining DfT’s original plan of phasing things in and not overburdening the market.