Transport Committee
Oral evidence: Rail Franchising, HC 66
Monday 10 October 2016
Ordered by the House of Commons to be published on 10 October 2016.
Members present: Mrs Louise Ellman (Chair); Robert Flello; Karl McCartney; Mark Menzies; Will Quince; Iain Stewart; Graham Stringer; Martin Vickers
Questions 70 - 144
Witnesses
I: Mike Hewitson, Head of Policy and Issues, Transport Focus, Stephen Joseph OBE, Chief Executive, Campaign for Better Transport, and Stephen Locke, Chair, London TravelWatch.
II: Gareth Powell, Director of Strategy and Contracted Services, Surface Transport, Transport for London, Richard McClean, Managing Director, Grand Central, Elizabeth de Jong, Director of Policy, The Rail Delivery Group, and Charlie Hodgson, Managing Director, Rail Development, Go-Ahead.
Written evidence from witnesses:
– Campaign for Better Transport
Mike Hewitson, Stephen Joseph, and Stephen Locke.
Q70 Chair: Good afternoon, and welcome to the Transport Select Committee. Could you give us your name and organisation, please?
Stephen Locke: My name is Stephen Locke. I am chair of London TravelWatch, which is the organisation that represents the interests of the travelling public in and around the capital. In relation to trains we cover the London railway area, which is the Greater London Authority area plus a number of commuting areas in the surrounding districts. I am also on the Board of Transport Focus as the member for London, so I work closely with Mike Hewitson on all these issues too.
Stephen Joseph: I am Stephen Joseph, the chief executive of the Campaign for Better Transport.
Mike Hewitson: I am Mike Hewitson, head of policy at Transport Focus.
Q71 Chair: Thank you very much. The Government emphasised in their 2012 command paper that the railway should be all about the passenger, yet that does not seem to be the case. We have received many representations about the current state of the railways where it appears that franchises are all about cost and not much attention is being paid to the needs of the passenger. Do you have any views on that?
Mike Hewitson: Certainly since 2012 we have seen more emphasis on the passenger in the franchising process. The Department has put more weight on quality matters. We have certainly also seen it—I suppose this is the acid test—from the bidders when they talk to us. There is more interest in what we have to say. There is much more of a dialogue than there used to be about how you can add something different for passengers, and views on compensation or investment at stations. It is more inclusive in that sense. We do not see enough of the process to know quite how much impact that has on the final decision, but it certainly feels like there is more emphasis since 2012.
Stephen Joseph: We have seen some more focus on it, but our concern is that in practice the way in which franchises are let is still focused rather too much on the number in the bottom right-hand corner—the benefit-cost ratio. The intent by some people in the Department—Peter Wilkinson has certainly talked about this as head of rail franchising—to bring passenger experience more into the system has run up against the fact that some of these things do not have economic value. The value of having a nice clean station does not really fall into the conventional webTAG appraisal framework that the Department uses.
I also think, as we have said in our evidence to this and other rail inquiries that the Committee has been running, that there is a big focus on getting large premia out of the franchises. That will sometimes tend to be at the expense of passengers, not only in terms of increasing fares in practice but in not necessarily investing as much as is needed to deal with overcrowding and other issues that matter to passengers.
Q72 Chair: Mr Locke, in the evidence you sent us you talk about not being involved enough in franchises although they run across the area that you represent.
Stephen Locke: I think the process is improving.
Q73 Chair: It is improving, but what is it like now? Is the passenger voice really there?
Stephen Locke: The passenger voice participates, but the extent to which it is listened to and reflected in the final outcomes is often extremely difficult to gauge. As an organisation, London TravelWatch comments in detail on the draft invitations to tender. We also engage, very effectively I would say, with the bidders for each of the franchises. There are serious meetings and serious exchanges of ideas. Quite often the bidders come back to us for more and more detail, so the process is not bad. The problem is that we do not know where it goes. The ultimate creation of the franchise is effectively a black box. We eventually see the franchise agreements, some time after they are published, but there is a lot of detail that is missing.
It is very difficult to see how the processes at the front end of the franchise creation system end up influencing the final result. As Stephen and Mike have suggested, quite often money will be the ultimate decider, because it is so important in all these things. The weight given to passenger issues is improving, but it is not there yet.
Q74 Chair: Mr Hewitson, could you enlarge on what you said to us? We increasingly hear concerns expressed by passengers. Do you have any concept of the relative weight given to the views of passengers against the cost or financial gain to the Department?
Mike Hewitson: As Stephen said, we do not see the mechanics or the formula. We can certainly see what goes into the specification and the consultation. We can have a good opinion on the satisfaction targets that are now part of the franchise, and potentially even the penalties attached to failing to meet them, but, as Stephen said, we do not see the black box in terms of the calculation.
For all that it has got better, there are a number of areas that could be improved, not least transparency in terms of the outputs. A clear statement on the announcement of the winning bid as to precisely what has been promised, when it will be delivered and what the targets are, and then publication updates against that every six months, would help immensely in the process. It would give a real sense of how the feedback is being used and how it is turned into targets.
Q75 Chair: And that is not there at the moment.
Mike Hewitson: Not in the depth we would like. There is a customer report attached to a franchise now, and that will contain some promises and commitments, but we would like to see it much stronger and much more immediate—“This is what we have bought from the Government on your behalf. These are the targets. These are the dates. Hold us to account against it.”—so that we could get some public accountability in there as well as its being franchise management, which is quite often very opaque.
Stephen Joseph: Could I comment on one specific thing? As a result of the Brown review on rail franchising, the Government are using the national rail passenger survey that Transport Focus prepares to evaluate bids and subsequent franchise management. The problem with that is that, first, as people have said, it is a closed process, but, secondly, it is backward looking. It comments on past performance, and that is what it is designed to do. It might help with the immediate priorities for improvement but it does not shed light on what transformative improvements passengers may want to see and have the right to expect over a seven to 10-year franchise. As people have said, it is getting better, but because of the use of the NRPS, which looks backwards, it does not necessarily tell you what you want to do looking forwards.
Q76 Iain Stewart: I would be interested in the panel’s views on the process for reconciling differing views from passengers that may be in conflict with each other. To give you one example, current franchisees have been consulted on InterCity West Coast. The views of passengers from my constituency will be different from those in Mr Stringer’s and Mr Flello’s constituencies. Milton Keynes passengers will want many of the West Coast services to stop; but from Manchester, Stoke and elsewhere they will want the fastest journey times to London. What is the current process by which you understand those differing priorities will be reconciled; and is there scope for improvement?
Mike Hewitson: It is one of the most difficult issues we face as a group. We have to represent both sides for those passengers. How do you determine? You can take the greatest good for the greatest number view, or you can look at hardship for individuals. You just have to balance it through in that sense. From the public consultation you have to reach out to the people who are affected. You have to give them a sensible choice when they are consulting on those issues, and it is really difficult sometimes. If you are talking about increasing journey speeds, they will say, “Yes please,” but unless you put in the consequences—taking out stops here and here— it is really hard to get a proper balance. It has to be done through local consultation. How you then add the numbers up is again part of the black box issue. It is never that clear.
Stephen Locke: We face that as user groups too. Both Transport Focus and London TravelWatch embrace a very wide range of users with different interests. We have to recognise that to some extent it is a zero-sum game. You cannot have everybody winning from the process. There is, however, a lot that can be done in terms of focusing on the things that affect everybody—things like transparency, which we were talking about earlier, and the quality of information. There is a whole range of things that do not involve conflicts. When there are conflicts, you need to be as clear as possible about the costs and benefits of different options so that people can debate them sensibly. Ultimately, someone has to decide and it will not necessarily please everyone concerned.
Q77 Karl McCartney: That is very interesting from my point of view. My constituency is Lincoln and we are on the east coast line. Obviously the capacity issues and constraints are quite serious for all passengers all the way up and down the line, including some of my colleagues around the table. There is an easy option, if you like, but it is a very difficult one. If trains did not go further north than Edinburgh, stopped at Edinburgh and passengers were made to get on a different train which then returned, there would be an awful lot more services for people south of Edinburgh. How would you square that one?
Mike Hewitson: It is very difficult. We know from all our research that passengers like through trains. They do not like changing trains. As soon as you introduce that element you create some—
Q78 Karl McCartney: But where is the greater good there? Is that for passengers south or north?
Mike Hewitson: If you went for the greater good you would look at the majority of people, but then I suppose you have to look at the impact on the minority. It is how you weigh out numbers against hardship. Again I suspect it washes itself out in the business case. Politics would come through quite strongly as well in that issue. I do not think it is a simple passenger one.
Stephen Joseph: I have two comments. First, as a group we have a concern with sustainable transport and therefore getting as many people as possible off the roads and on to trains and other modes of transport. One of the things we find is that neither the Department nor, to an extent, the rail industry actually look at the markets they are serving. How big are these places? What are the markets and types of journeys you are trying to serve? That is true generally, but it is particularly true for things like franchises, where there is a terrible tendency just to roll on what happens.
In the case of West Coast, it seems to me that that issue is going to be really important when it comes to HS2. Subject to the Bill finishing its passage through Parliament, all parties have said that they want to continue it. There is a really big increase in capacity along that corridor, and the question of what you do with the released capacity is opaque at the moment. It has not been very clear, but it is critical for your constituency and others in terms of how that works.
The second point I want to make is about consultation. In our evidence we list the total number of written responses to the DFT’s public consultations on franchises. The number of responses from individuals for Essex Thameside in 2013 was 17. We made the point that we do not think that just 17 people who used Thameside services had comments to make on them. As a group that is outward facing we get a lot of people saying, “What is this franchising stuff? How do we change things?” We wrote a guide to rail franchising for the Department simply in order to make it clearer to the public and the wider world how you do it. I was not quite sure that it was really our job to do that, but we volunteered and the Department paid us to do it. We feel that the process whereby people get involved in franchises and the discussions around them has been quite opaque, and very difficult.
When it comes to a discussion on the replacement of Pacers, you will notice from the table in our evidence that there were 21,516 responses to that, and to the Northern and the TPE, because there was a big campaign by us and others to get some proper responses on that. We have suggested some possibilities in our evidence for more direct stakeholder engagement and more local involvement in the franchising process, and actively seeking the views of people who currently do not use the railway at all as a means of getting more people involved.
Q79 Martin Vickers: Mr Joseph, you mentioned the bottom line. Do you think the present system is more advantageous to the Treasury than to the passengers?
Stephen Joseph: That is the trend. We had a piece of work done in the early part of this year by a consultancy called Credo, which said that if you take the premia as real—there are some real doubts about that, by the way, and Credo themselves have said they think it is not necessarily financially sustainable—by 2020 the Treasury will be netting £2 billion a year from franchises across England and Wales. That is, in effect, a tax on passengers.
There are some question marks about whether the current seeking of premia is sustainable, looking at the number of bidders and the cost of bidding. I am sure you will ask the following panel about that. What we are seeing is a move whereby the cost of the railways is increasingly going to passengers, yet, as we were just discussing, it is not clear that their views are necessarily taken into account.
Q80 Martin Vickers: Mr Hewitson mentioned a few minutes ago that passengers like through trains. That is certainly true. I have been campaigning for a through train from my Cleethorpes constituency to King’s Cross for a number of years. When the regulator gave their view on it two or three months ago, one of the reasons for turning it down was that it took market share from Virgin as the main operator. How would you overcome that situation?
Stephen Joseph: We have said that there is a need to revisit the way in which competition law is applied to public transport in general and to the railway in particular. In the same decision, the regulator also gave agreement to FirstGroup to run open access trains from Edinburgh to London. That was a clear move away from the previous model and is clearly going to have a revenue abstractive effect, whereas the previous model had been to allow, as you say, services to places not currently served like Hull, Sunderland and so on, on the basis that they could cross-subsidise them by taking a proportion of the revenue from, say, London to York.
There has clearly been a change in attitude. If you add to that the fact that Arriva have had to face a whole investigation by the Competition and Markets Authority into their acquisition of the Northern Rail franchise, on the basis that they also run some bus services and that somehow it would be against the public’s interests if the buses connected with trains, it seems to us that the way in which competition law is being applied to public transport has an absence of common sense about it. It certainly does not seem to work for places like Cleethorpes and for franchisees.
Mike Hewitson: In terms of open access and long distance, there is scope for more. We know from our satisfaction survey that Grand Central and Hull Trains do really well. Passengers like the services. They are purely commercial. If passengers do not like them, they will not stay in business, so there is an incentive. The ORR’s work also shows us that it has an impact on the franchise competitor in terms of price and quality and lifts the overall game. On long distance there is scope. In Sunderland as well it opens up new markets. If they take a chance on developing new markets, surprise, surprise, the business is there. There is definite scope on the longer distances. I am not wholly sure how you would work that on a high frequency commuter service, where I am sure people would probably trade off the ability to get on to the next train against having a sense of competition; but for parts of the market, yes, absolutely.
Q81 Iain Stewart: I want to follow on from Mr Vickers’s question and the earlier one I asked, where you may have different conflicts as to what passengers want. What is the optimal level of specification in a franchise to balance different and competing interests, and to allow the main franchise operator, and indeed any open access operator, the flexibility to respond to market conditions as they evolve? Is the level of specification we currently have about right? Is it too onerous? Is it too light? What would you like to see?
Mike Hewitson: Personally, I think it is a move away from a one-size-fits-all specification. If you have a captive commuter market where there is no competition and people cannot vote with their feet, you need a higher degree of specification. If you have a longer distance service, where there is more discretionary travel and there is actual competition on the route, you can move away from input specification and more towards output or outcomes. You are looking more at improved ticket retailing and improved stations rather than improving them by doing X, Y and Z. You can give more freedom where there is a bit more competition, but on some franchises you have to be quite tightly specified.
Stephen Locke: I would strongly endorse that. From the London perspective, we see enormous benefits in very tightly specified arrangements of the kind that Transport for London have managed with the London Overground and TfL Rail. The level of specification is extremely high, right down to stations and staffing at individual stations, quality of cleanliness and a whole range of things of that kind. That is because it suits the commuting market extremely well. Indeed, London Overground’s performance and its ratings from passengers have been extremely high as a result.
As you get further away from the commuting model, there is scope for a rather wider and perhaps more generalised set of measures. I do not think you should rely solely on passenger satisfaction, as others have suggested. Relying on a single measure would risk all the performance and all the management effort towards achieving that measure and possibly ignoring others, including things like access for intermediate stations or for people with disabilities. There is a whole range of things you would need to consider in constructing even the most competitive longer distance franchise.
Q82 Chair: Is everyone agreed on that point on measuring passenger satisfaction?
Mike Hewitson: There is most certainly a place for it. The more that franchises put that front and centre, the better. The best judge of a train company are the people who use it, so it should be there. I think it is a bit too blunt just to have a single overall satisfaction measure. If you look at Great Western, that is putting the Cornish branches into the same target as the Thames valley commuters and the long distance leisure trips to Cardiff. It seems a bit too blunt. There is space for a lot of disaggregation. You get the best use out of satisfaction if you use it as a diagnostic tool as well as a measure, so that it tells you where the problems are and with whom rather than just being a target and a score.
Q83 Chair: Mr Joseph, did you want to comment on this one?
Stephen Joseph: There is a tendency for the DFT to specify inputs rather than outputs and outcomes: for example, marketing, employee engagement and that kind of thing. I agree with Stephen. When we did some work on London Overground and Merseyrail we found that the way in which those have been specified and managed seems to work much better than the way in which the Department does it for those kinds of services. I agree with the others that we need to move away from one size fits all, because what you do on long distance and the things that people value on long distance services will be different from a rural branch line, and different again from longer distance commuter services such as to Milton Keynes. It will be different again from something like Merseyrail or London. I am not sure the Department has quite got that yet.
Q84 Chair: This Committee has recently been looking at the performance of Southern Railway. We have had great difficulty in establishing how and whether the Department is monitoring performance benchmarks. Is that something that comes as a surprise to you, from what you know?
Stephen Locke: London TravelWatch has had lots of discussions with the Department and indeed with other interested parties, as has Transport Focus. We found it very difficult to get to the bottom of that as well. The fact that we now have a taskforce with a £20 million budget in an attempt to sort out a lot of the network problems is a clear indication that something has gone wrong.
As I mentioned earlier, one of the problems with the kind of franchise we have there is that it is something of a black box. It is not really clear what has gone wrong inside the box. That is a big problem. It makes it more difficult to sort out. We hope that the taskforce will do it, but it is more difficult to sort out and it is more difficult for those concerned with the public interest, such as ourselves, to comment intelligently. It is also more difficult to learn sensible lessons for the future. We think it is very important that with Southern the lessons are properly learned and independently assessed so that this does not happen again.
Q85 Chair: What are your general views on the Department’s ability to monitor the performance benchmarks it has established?
Stephen Locke: My colleagues can comment as well, but the Department has a lot of resource there. Some of them are not actually that experienced, and there have been areas where those of us who have been involved in this particular sector for rather longer have had to help with some of the history. There are some very good people there and I do not deny that for a minute—
Q86 Chair: But are they doing it right? They might be good people, but are they performing properly?
Stephen Locke: They are doing quite well so far, but there is a long way to go and the hurdles are extremely high, not least in terms of the number of upcoming franchises. I think there are six coming up over the next couple of years. The resource demands, both in terms of time and energy and in expertise, are going to be enormous. I would add that the resource demands on the stakeholders, including ourselves, are going to be enormous too. There is a real question as to whether the stakeholders, who are intimately involved in quite a lot of these issues, will have the resource to do what is necessary to make sure the public interest is promoted.
Q87 Chair: Mr Hewitson, what is your view, based on your knowledge of the network, as to how well or badly the Department monitors the benchmarks that it has set?
Mike Hewitson: It is certainly monitoring, because the likes of the GTR remedial plan must have come out of monitoring. The big gap is in transparency—public transparency of the targets in the first place, the actual performance against those targets and then any changes to the contract. We will eventually see a franchise agreement that will go into the public domain in the franchise pages of the DFT website. There will be lots of bits blacked out and redacted in terms of money and such, and it can take a while before it is there. The franchise starts and the only real public knowledge of what is in there is in the press release.
Q88 Chair: Have you ever challenged the parts that are redacted, and asked for more information in the public interest?
Mike Hewitson: Absolutely, yes. We think that open data, when it comes to a franchise, is a tremendously good thing. It allows me as an individual to hold a train company to account. It must be useable data, which is performance data on my train, personalised data. These days if you put that into the public domain there are enough clever people out there with apps and such who can turn it into something I can use. We know from our research that passengers want that sort of data, because they know that it is transparent; anyone can shine a light on a particular issue and it drives behaviours and performance. There is a real desire for that.
Q89 Chair: Would you say that in your experience your inability to get the data you need impedes your ability to monitor the effectiveness of services?
Mike Hewitson: Where it impedes is in getting the data in the same form against which the franchise is monitored. You have public access to performance data, but that is Network Rail and train company delays mashed into one. What we do not have is franchise data, which would be what the particular contract is being measured against, and would be delays caused by the train company as opposed to Network Rail, or, in the case of GTR, force majeure on industrial relations and the targets in relation to that. There is a lot of data; it just does not map against the actual contractual targets.
Q90 Chair: Mr Joseph, what is your view on access to relevant information?
Stephen Joseph: First, it is quite difficult to find, as Mr Hewitson said, what people are being monitored against. If you take the Southern issue, we have been doing a lot of work with some of the Southern commuter groups. They have found that they are being told by different people that the problems on Southern are to do with strike action; or that some are to do with restricted network capacity, so it is partly Network Rail, or staff absence. It is not clear. How do you find which of those is playing which role? It becomes a level of assertion. We have argued that we need a passenger assembly that has everybody in front of it, so that passengers can ask questions about this kind of thing. There isn’t transparency about it and there is a low level of accountability for performance targets. That is apparently about to be trialled on South West Trains in 2017, and it will be the first time that any operator will have a level of accountability for poor punctuality and cancellations.
Q91 Chair: On GTR, the Department actually amended the performance benchmarks without making it public that they were doing that. Do you think that is an acceptable way to operate in the public interest?
Stephen Joseph: The franchise is between the Government and the train operator. The Government need to hold the train operator to account on behalf of passengers rather than letting them off the hook. As I said, given that there are lots of different stories about what the problem is, just letting GTR off the hook by amending their franchise requirements sends entirely the wrong signal about whose side the Department is really on.
Q92 Karl McCartney: We can obviously ask the Ministers when they come in the same sort of questions, but from your point of view what is the process or protocol for a stakeholder consultation? I will phrase my question by giving you some extra information. I worked for the Strategic Rail Authority back in 2004-05 when Connex were kicked off the Kent franchise. There was lots of fun and frolic in getting people involved in the second process. In the first process, not many people got involved at all. I was brought in to do some crisis management, because in the end 16,000 people responded, which is a phenomenal number for any franchise. There were obviously some big changes being mooted at that point in time. I then spent the next 12 months writing a protocol for stakeholder consultations for the Strategic Rail Authority. In your view, what is in place now with the Department for Transport, if anything, and is it made public or should it be?
Mike Hewitson: It is public now. That is one of the improvements we have seen. We will see the Department issue a consultation document. We will see the Department take a roadshow out, mainly to stakeholders, rail user groups and such. There is some public consultation. As Stephen said, the number of responses could be higher in some instances, but the process is there. The next step is probably public awareness that it exists and the opportunity to comment. We can also get a lot of the public view through research in advance, particularly if you go out to an area and say, “What is important to you?” You can feed that into the process. It is best to have that up front before they start writing things.
Q93 Karl McCartney: But is the Department doing enough, do you think, or is it being left to people like yourself and your colleagues to get that public involvement?
Mike Hewitson: Being a passenger group I would always say that we could do more, but that is the nature of passenger groups to some degree. It is certainly better than it was; it could be better.
Stephen Locke: There may be further opportunities given the growth of social media and digital interaction. There are lots of ways in which people can participate in consultations. It is still a fairly straitlaced, old-fashioned process, and there is scope to modernise that. I also think there is scope to disaggregate it in a way that is more user-friendly. If you send someone a giant 70-page document and ask them to weed out the bits that are relevant, many of them just won’t bother. If on the other hand you say, “These are the bits that are going to influence the line that you regularly use and this is what is going to happen to your service,” you can generate a lot more interest. There are ways of developing public consultation in other sectors that could be brought across.
Q94 Karl McCartney: Indeed. Six more franchises are coming up in the next few years. Has the Department come to you at all and asked whether you are happy with the consultation process and protocols that are in place now, and asked if you can see any benefit to any positive proactive changes before we get to those next franchise processes? Have they done that at all?
Mike Hewitson: We have certainly had conversations with them about how we can boost awareness, and that we can email people on our contact list to say, “This is coming so get ready.” Seventy pages is quite a lot, so the more notice you can give to a local rail user group to say, “In July, this is coming through”—
Q95 Karl McCartney: They are the statutory stakeholders, but what about the individuals?
Mike Hewitson: Quite often the representative groups at local level—rail user groups at local level—are not statutory in that sense. They are people who use trains and have an interest. You really should target people who are active. The gap are commuters; they are really hard to engage beyond, “Just make it turn it up and give me a seat”. We can probably do that better through research, complaints and social media than we can through forums. If you were to hold a forum on GTR at the moment, I think you could pretty accurately predict what you would get told. That is not to say you should not do it, but there are other mechanisms.
Stephen Joseph: I completely agree about social media. That is one of the things that has changed since you wrote that guide for the Strategic Rail Authority. Certainly it has been one of the big features we have noticed in the Southern issue. We have been working with the Association of British Commuters, which is a new type of user group, entirely generated through social media. It is run off a couple of people’s kitchen tables and it has been able to channel lots of concern about this stuff. I do not see the railway at the moment finding ways of capturing that and working it into how it develops the railway in the future. There are also some approaches and models from other industries that have found ways of involving people in this kind of thing, in service delivery and so on, which need to be picked up on by the Department and the railway industry.
Stephen Locke: I very strongly endorse all of that. If your service is bad enough, you probably can generate quite a lot of interest. I am a regular passenger on GTR, and my local user group has no problem getting 100 people into a hall on a Saturday afternoon.
Q96 Chair: We believe what you say. The Department has a dual function, doesn’t it? It has a commercial interest in the franchises and an enforcement role. Do you think that those are in conflict, and that perhaps some organisation or somebody outside the Department should look at enforcement? Does anyone have any views on that?
Mike Hewitson: It is not unusual, in some senses, that, if you let a franchise, you also monitor the terms of that franchise. I would go back again to the public transparency angle. If enough data is out there so that I, as an individual consumer, can hold the company to account, and I know enough—probably not as much as the Department, but enough—to say, “This is not working,” you can probably have some confidence that for the people who are letting and monitoring the franchise there is transparency and accountability in the process. I suspect that it is when it feels like a closed shop that those questions come through. The more light that is shone on it, the less it looks like a closed shop.
Stephen Locke: If you have a clear statement, “This is what we are committed to and this is how we are going to deal with things when they go wrong,” you can get your stakeholders to do quite a lot of your enforcement, because they will pick things up, report them and make a noise about things. They will go to the local press and all that kind of thing. It is not that difficult. The problem, as Mike said, is that we are actually missing the link between what goes into the franchise and how the mechanisms work within the black box.
Stephen Joseph: As we have said, since devolved franchise letters and concession letters like Transport for London, Transport Scotland and Merseytravel seem to manage to do this, I am not sure there is a case for separating it. I think it is a matter of getting the Department for Transport to do the monitoring and enforcement better than they have been doing it up to now.
Q97 Chair: Why do you think that the devolved organisations seem to be better at doing it than the central organisation?
Stephen Joseph: There is a mix of actual accountability. There is a direct link. Merseytravel, of course, is a coalition of authorities, but even there councillors feel they are answerable for the service. In London, the Mayor feels answerable. The same goes for the Scottish Government and so on. When we did some research in 2013 on London Overground and Merseyrail, somebody from Merseyrail said to us, “When it snows, the people who manage our franchise know it’s snowing and they want to get home.” Translated, that means that basically the people managing it care about whether they produce a good service, whereas if you are in Great Minster House and a train in Cleethorpes does not run, you are less concerned than even if you are Rail North and certainly than if you are the
Teeside combined authority or whatever.
Stephen Locke: I very strongly endorse that in relation to London. We talked earlier about the fact that the arrangements for TfL are concessions and not franchises as such, because they are much more tightly drawn. The revenue stream and where it ends up is also different. The fact is that with Transport for London you have an organisation that is very high profile. It has very high public recognition and high branding, and the whole question of interconnection in a complex network with different modes is absolutely critical. If one bit of it does not work, other bits start to suffer. The incentive on Transport for London is absolute, I would say, and incredibly positive in terms of how it delivers for passengers.
Stephen Joseph: In terms of where that takes us, we very much want to see more devolved rail. We have been strong supporters of Rail North and its creation. We are strong supporters of the devolution of more suburban railway lines in London to London Overground, and of the concept of West Midlands rail and so on, having done the research and looking at the national rail passenger survey. At the National Rail Awards the other week, a lot of the awards went to railway and tram operations run by devolved authorities. The Passenger Operator of the Year was London Overground. Merseyrail has won it in recent years. It seems that devolution works for a lot of these services, particularly for local services. We think there is a case for doing more of it. Of course, there is the opportunity coming up with the Southeastern franchise. There is a decision to be made about whether to separate the inner Southeastern services and give them to Transport for London. We think on the basis of the track record that there is a strong case for doing so.
Q98 Chair: One of the key reasons given for the franchising system was the transfer of risk to the private sector. Would you say that has been achieved?
Mike Hewitson: Yes, some of it has. I do not want to keep harping on about GTR, but we saw the particular circumstances there. Given the level of disruption with London Bridge, the Government took the risk on that one, because the price from the industry would be too high. We have seen other franchises where a great deal of investment comes through the franchise cycle. It is clustered at the start of a franchise but you will see new trains and lots of money coming through at that point. That puts a bit more of the risk back on to the private sector.
The difficult angle sometimes is how you factor in macroeconomic changes. It is quite hard to forecast on the railway at the moment. The growth just keeps growing. I am never wholly sure that anyone really knows why or can accurately forecast it, but it is growing. How do you build that degree of uncertainty into a 10, 15 or 20-year franchise? It is quite difficult. That is the difficulty: how do you bring in the macroeconomic? For which bits do you not let the franchise off the hook but make them understand that, if things have changed in the entire economy, the franchise will have changed as well and that needs to be re-negotiated, versus, “You signed it, you pay”? It is difficult to get that particular balance.
Q99 Chair: Are there any other views on whether transfer of risk to the private sector has occurred?
Stephen Joseph: If we had more penalties for poor performance, where operators had to do more compensation, there might be more transfer of risk—more automatic delay repay; that kind of thing. The Government have just applied the Consumer Rights Act to railways and we will want to see how that plays out. The risk ought to include the risk of what happens if there is poor performance.
My other comment is that it is simply horses for courses. The risks with long distance are very different from longer distance commuting and different again on rural branch lines or in suburban rail services. You need to reflect those differently.
Stephen Locke: In relation to suburban services, it is entirely reasonable and to be expected that the risk will be borne ultimately by the public sector. We are looking at a public service that is highly integrated and is vital to the economy of particular areas of the country. It is essential for people getting to work and running their lives. That is quite close to a utility, to be honest. With longer distance services, the issues are very different. The reason why a degree of commercial risk is probably acceptable and a good thing is that it allows innovation and passenger-friendly changes, including heavy discounts on tickets or services to new destinations. The element of risk and return can clearly apply where there is a service that has a greater element of discretion built into it, where people are making choices and where there is—at least in theory—a degree of competition. At the urban end of the spectrum, it is another story.
Q100 Chair: Transport for London has had a lot of success on the overground. Do you think it could do more? What is the reason for the success? Is it because of local accountability?
Stephen Locke: I certainly agree that success has been there. It has not just been in terms of performance but also in terms of ridership. People have voted with their feet, in some cases to a much greater extent than was expected. Fundamentally, it is because the performance management has been very tight. There has been very detailed specification and there have been very clearly set incentives on all the suppliers, including Network Rail, to perform to a high level. I am sure you will be able to ask the TfL spokesman about that afterwards.
It has also promoted integration within the London area. Of course, integration comes naturally through Oyster, travelcards and contactless means of payment with smartcards and the like. It begins to feel like a single network rather than lots of separate ones. It has also been successful because it has enabled the release and use of levels of capacity in the network that were either idle or not available before. There has been a whole string of things.
What I think is very important though is that this is a passenger-facing issue and not ultimately a political one. It is very important that we see it purely in terms of passenger benefit and not in terms of who controls what or who has what degree of political answerability. The proof lies in what is being delivered for passengers; mostly it has been very commendable.
As Stephen Joseph mentioned, we very strongly endorse the extension to the inner Southeastern services, which are the next ones in line. We hope there will also be opportunities in the future, building on the concordat which was drawn up between Transport for London and the Department for Transport back in January.
Q101 Chair: Are there any other comments on Transport for London?
Stephen Joseph: Some of it is simply about giving some attention and investment to inner suburban railways that have had very little of that, such as staffing stations from the first to the last train so that you get some revenue in. If you compare the Wimbledon loop, which seems to be unstaffed after about 7 o’clock at night on Thameslink, to the London Overground, you get a lot of revenue in and people feel safer. They are just putting a lick of paint on stations that have had no attention for years. Longer term, TfL have talked about metro-isation—in other words, running higher frequency services. They point to Brixton station on the Victoria line with 36 trains an hour, whereas Streatham Hill down the road has four trains an hour. There is the opportunity for investing in higher frequency services, and doing that in a way that benefits the whole south of London rail network and not just the bits inside the Greater London boundary. There is a very strong argument there. Some of it is simply that nobody has really looked at those networks for many years. Just as happened on the north London line, which was run at the edge of other franchises, you can do transformational things and get lots of ridership.
Mike Hewitson: Investment and good management is a very powerful combination, and passengers reflect that in satisfaction. London Overground does very well. When we have been out and asked passengers questions in terms of ownership and models, it invariably comes back to, “Whoever will make it run, turn up on time and give me a seat. I will take that, please.” As Stephen said, it is back on that offer to passengers. If you make a compelling enough offer to passengers they will say, “Yes please.”
Our research points to one caveat to that: it is still part of a network and not a mini republic. “I still want to travel outside London or the north or wherever as well as within.” We do not want to lose the sense of cohesiveness that we have. With that caveat, passengers vote on the offer.
Stephen Locke: London TravelWatch very strongly agrees with that. We recognise that at the time when the last batch of devolution measures was considered, back in 2013, London TravelWatch drafted a set of passenger safeguards with Transport Focus to ensure that devolution was fair and that it did not disadvantage people who travelled on routes that went outside the London area simply by colonising all the train paths. We have a perfectly sensible and workable compromise. There has been a reasonable amount of experience of the sharing of tracks between overground and longer distance services. Most of that has been quite positive, but it is obviously important to build on it.
Chair: Thank you very much.
Gareth Powell, Richard McClean, Elizabeth de Jong and Charlie Hodgson.
Q102 Chair: Good afternoon and welcome to the Transport Select Committee. Would you give your name and organisation, please?
Richard McClean: My name is Richard McClean. I am the managing director of Grand Central, a small company that operates services in the north-east and the West Riding of Yorkshire.
Elizabeth de Jong: I am Elizabeth de Jong, the director of policy at the Rail Delivery Group.
Charlie Hodgson: I am Charlie Hodgson, the managing director of rail development at the Go-Ahead Group.
Gareth Powell: I am Gareth Powell, director of strategy and contracted services for Transport for London.
Q103 Chair: Thank you very much. Franchise premiums paid to Government have gone up substantially in the past four years. Passengers are paying some of the highest rail fares in Europe and passenger dissatisfaction rates seem to be increasing. What has gone wrong? Who would like to tell me? Ms de Jong, do you have a view on that from the Rail Development Group?
Elizabeth de Jong: There are also some good indicators that the franchising system has in fact done well. One of the ones we often think about is the enormous growth in passengers that we have experienced over the last 20 years. We have seen passenger numbers double, with an average growth of 3.9% per annum, versus about 0.6% per annum over the preceding 18 years. We have also seen journey growth at more than double GDP growth. We have seen an increase in train vehicles, so there are a number of indicators that would show that there has been success since the franchising system was introduced.
Q104 Chair: But fares have gone up and up, and dissatisfaction rates are also going up, so what is wrong?
Elizabeth de Jong: Fares have gone up.
Q105 Chair: What you say is correct. Passenger numbers have increased in a very big way, but at the same time people are paying more than elsewhere in Europe, it appears.
Elizabeth de Jong: Fares have gone up by about 6% in real terms. We know that about a third of passengers are now travelling on discounted fares. We have talked about the national rail passenger survey. Over the period, there has been an increase in satisfaction rates under that from 76% to 80%, so there have been some indicators there. Clearly we would like more value for money and better fares in the future as well.
Q106 Chair: Mr Hodgson, the services that you are responsible for are right at the bottom of the pile. They are in the bottom few rail companies. How do you account for that?
Charlie Hodgson: Not all of them.
Chair: Enough of them.
Charlie Hodgson: First, can I say that everybody at the Go-Ahead Group would like to say how extremely sorry we are for the current performance on Southern. We realise that it is not good enough and the team there is working night and day to improve things. I am not responsible for the day-to-day operational issues there, so I will comment at a strategic level rather than on anything of a detailed nature.
Q107 Chair: But we want to know what is going wrong. You cannot just escape from your responsibilities by saying that you do not want to talk about it. Services that you are responsible for—not just Southern but others as well—are right at the bottom. Why is that? Aren’t you failing passengers?
Charlie Hodgson: I fully acknowledge that the performance at Southern at the moment is not good enough. We are also responsible for London Midland, and that currently has the highest customer satisfaction it has ever had.
Q108 Chair: Southeastern?
Charlie Hodgson: Southeastern has some very specific issues at the moment, particularly associated with the changes at London Bridge, which make it quite difficult to operate that franchise. We would again acknowledge that it does not have the best NRPS score it has ever had, but it is still better than it was when we took over the franchise nine years ago. We have a range of measures in place at Southeastern to give customers what they want as part of our direct award contract. We are seeing a significant increase in staffing at stations and investment at stations.
Q109 Chair: But the passenger ratings are very low. What are you going to do about it?
Charlie Hodgson: They are, and, as I say, we have a targeted investment programme at Southeastern at the moment. On Southern, and in wider GTR, we are in the middle of a huge transformation. By 2018 we will have completely rebuilt the railway at London Bridge and will have introduced nearly 1,400 additional rail carriages. That will deliver huge benefits to customers. Unfortunately, getting there is presenting quite a lot of challenges and problems at the moment.
Q110 Chair: Do you think you should be awarded any more franchises while there is such an appalling performance?
Charlie Hodgson: Franchise award decisions are for the Department for Transport to take. Their current evaluation criteria set out how they assess current and past performance.
Q111 Chair: I am asking you. You are in charge of delivering rail services to the public. There is an abysmal performance. Do you feel that your company should be awarded any more franchises in the public interest, in terms of performance? Do you think they should have confidence in your company?
Charlie Hodgson: I think we can demonstrate that we have delivered excellent performance in certain areas of the network with London Midland, Southeastern high speed and previously when we operated Southern, which we have done for 11 years. It previously achieved in the mid-‘90s, so it is wrong to say that everything we do is bad. We fully acknowledge that there are problems.
Q112 Chair: The mid-‘90s is a long time ago, isn’t it?
Charlie Hodgson: I meant mid-‘90s in terms of trains on time. We are currently significantly below that, and we acknowledge it is not good enough, but we feel that we are a strong operator and we have had many successes in contracts we have delivered for Government. We believe we can continue to do so.
Q113 Chair: I don’t think the people currently using your services would agree with that. Mr McClean, did you want to talk about general performance?
Richard McClean: Yes, I have some observations on what has been driving the very high premiums that have been achieved, particularly from the intercity operators. They are fundamentally driven by attracting a lot more people to travel on rail over the years, defying the normal trends of economic cycles. That passenger growth has been able to underpin premium levels. In terms of fares, as Elizabeth said, a lot of fares in the industry are highly regulated. In the intercity sector most fares are advance purchase and they are very heavily discounted, good value fares.
What drives satisfaction seems to change across different sectors and different types of operation. They have different characteristics that are important to passengers. In the commuter markets, it is absolutely clear that day-to-day performance is fundamental. If you are totally dependent for your day-to-day life on your railway, you need good operational performance on a consistent basis. In the intercity sector, choice seems to be a big factor, where passengers have the opportunity to choose the time they travel, the type of fare they purchase and the operator they travel with. They want to be able to take a train from their local station or take a train from a larger hub. That degree of choice seems to drive passenger satisfaction levels.
Q114 Iain Stewart: Reflecting on some of the comments that have been made, there is a difference when we look at passenger satisfaction indices for which you as operators are responsible—the cleanliness of the trains, the availability of drivers and the friendliness of staff. You are directly responsible for all those issues. Other issues that upset passengers and disrupt their journeys are arguably not 100% in your control. You referred to the work at London Bridge, and some of the other upgrade work inevitably causes delays and alterations to journeys. How best can we capture those satisfaction and performance levels so that you are properly accountable for what you are responsible for, and other parts of the rail industry are responsible for their part? Do we do that well at the moment or do we need to refine the data?
Richard McClean: First of all, if you have sold somebody a product, you own their satisfaction, whatever the root cause; it may not be your problem but it is your responsibility to stand up and be counted. The complexity of what goes on behind the scenes of the factory is something we have to manage for passengers and not expose them to that any further than is needed.
Charlie Hodgson: To build on what Richard said—I completely agree with the premise of your question—overall, all the data suggests that operational performance and punctuality dominate customer satisfaction scores. If your punctuality is not very good, you will get poor scores on other factors as well. Customer perception is not the perfect tool but it is very important. The industry data is quite good at breaking down causation and allocation of delay to root cause. The DFT’s contract structure holds operators to account for the delays for which they are responsible. That is the way the contracts currently work and I think it works reasonably successfully.
Gareth Powell: Our contracts at TfL are structured on a different basis from those that the DFT typically lets. The way that we set up our contracts is to ensure that the operator is very tightly focused on performance, but that overall TfL takes responsibility for the customer’s service in totality. That is regardless of whether the performance failure is down to a Network Rail infrastructure issue or the performance of our operator or contractor. Because it is our brand on the side of the trains, because the revenue paid comes to us and because they are our customer service standards, we take the role of integrator on behalf of the customer very seriously. We have structured our contracts so that the ethos we have is reflected on its way down through the incentives and penalties structure. We therefore encourage our train operators to uprate their management of Network Rail so that the interface at the point of delivery is very tightly managed.
Q115 Chair: It is true that London Overground, c2c and Grand Central are successes. I am trying to work out what it is that makes them different. Mr Powell, you suggested that in your case you are talking about overall responsibility. Is that what you think the reason is?
Gareth Powell: One of the observations I would make is that those operations are very successful in the market for customer services and rail passenger services that they serve. They are very different markets. The long distance services on the rail network are very different, as the previous panel suggested, from services that are wholly about commuting in a very dense urban environment such as London. Therefore, the mechanism by which we specify and procure services in those environments needs to reflect the markets and the needs of the customers who use those services.
In the London Overground case, it is true that it is in a very densely operated city. It is a monopoly service in that sense. It is all about commuters. We specify the things we know that commuters very much want for a local stopping service. That is quite different from how long distance services, where there truly is competition between different modes of transport, might well operate. In our opinion, what you are observing there is that the form of contract and the way the service is managed is very appropriate for the type of customers that it serves. That is quite important.
Richard McClean: At the extreme end, with a small operator like Grand Central, we only have one contract, and that is with the passenger who bought the ticket. I manage all the back-office disaggregation of whys and wherefores. There is a huge focus on our staff looking after passengers when things go wrong, regardless of what the root cause is. I have to make sure that it does not happen again, through my management processes behind the scenes.
Q116 Chair: Ms de Jong, do you have a view on what the ingredients are for success?
Elizabeth de Jong: We have had a look at a number of comparisons, and it is hard comparing franchises. The geography is different and the operational circumstances are different feeding into the network. The age of train fleets is quite different, and there are different markets as well. We know that commuters are generally less satisfied than other passengers. There is no doubt that the ambition of the client is also very important in the amount of satisfaction with a franchise. In the recent competitions we have seen that there are new train fleets for East Anglia, East Coast, Northern and TPE, so the ambition of the specifying authority is important. There is focus as well. The franchising system is quite a broad system with different mechanisms and different clients that specify it. Matching the proposition with the market is something that it is really important to think through well.
Q117 Chair: Let me turn to the question of cost. The cost of running the railway has increased by 25% since privatisation. That is not what was anticipated. Why do you think costs have increased? We have heard about similar systems in other countries where costs have not increased, but they have here. What is the reason?
Elizabeth de Jong: There are a number of costs we can look at. Some costs have reduced. The cost per passenger mile has reduced by 26% since the franchising system started. Network Rail’s running costs have reduced by 46% since Network Rail was established. The cost to Government has reduced by 45% per journey.
Some costs have indeed increased. The amount of money spent on enhancements has increased by about 15%. We have ambition to grow; we are growing and the network needs to expand for that. Another area that has grown is staff costs. The number of staff has increased by 31%. The earnings of staff have increased as well. When I was bringing evidence on costs together for you today, another area was pensions. They have gone up, as people are living longer and there are returns from investment funds. There are areas that have increased for good reason. We have seen areas that have come down, but, yes, we will always strive to provide an efficient service that is best value for money. That is one of the reasons we are here: to improve all the time.
Q118 Chair: Would anybody else like to add to or disagree with that in terms of the reason for the increase in costs?
Gareth Powell: As an authority that specifies services, the one thing we are keen to do is keep competition in the market for the provision of those services. The more competition we have, the more innovation we have in the bids that we receive and therefore the overall lower cost of the services in the medium term that we think we will get. We are very keen to promote additional competition to make sure that the competitive nature of the contracts is there, so that we keep costs down overall.
Q119 Robert Flello: On the back of your point, Mr Powell, if you are keen to keep the costs down in terms of competition, and yet we have just heard from Ms de Jong that the two main elements of cost are staff wages and pensions—the two biggest ones—surely, therefore, the only way of driving that cost down is by reducing staffing levels or making sure they have smaller pensions.
Gareth Powell: Not entirely, in the sense that in the sort of contracts that we put to market we specify the outputs and the outcomes. The way in which the operators roster staff, for example, and deploy them is for them to work through.
The second thing is that we have specified, as I think your previous panel highlighted, first to last staffing in our contracts. That means that when a train is running at a station there will always be a member of staff there. We have found that, although that increases the number of staff across the railway, it has very real benefits both for customers in terms of their sense of safety and security but also of course in terms of revenue protection and the amount of revenue that is captured at those stations, through gating and so on, that goes along with that. The net upshot of all that is that more people are using those railways, particularly at times of day when the railway itself is not already absolutely jam-packed with customers. We cannot just single out staffing costs and say that they should be reduced. We found the opposite; having a well-staffed railway has led to higher levels of customer satisfaction, higher levels of journey and higher levels of revenue accordingly.
Q120 Robert Flello: I notice that Mr McClean is nodding.
Richard McClean: It is about focusing on cost-effectiveness and outcomes and then getting the most efficient delivery mechanism.
Q121 Robert Flello: How does having a heavily unionised labour force have an effect on that issue, in terms of the capacity of the railway in the UK to achieve efficiencies?
Chair: Does anybody want to express a view? Does Mr Hodgson want to comment?
Richard McClean: As a public service business, with a very strong element of that service being human interaction between members of staff and the travelling public, you have to work very closely with your staff and keep them connected to the nature of the business, the business plan and the developments you want to make. Staff organising themselves is a necessary and inevitable consequence of that type of engagement. Working with trade unions is not a problem. It is a means by which we can achieve results.
Q122 Robert Flello: On the back of that, I think we know where my next question is going to land. Mr Hodgson, in terms of the benefits of organised workforces and their interactions, it is working really well in Southern, isn’t it?
Charlie Hodgson: We are comfortable working with trade unions. It is a natural part of our job and we do it all the time. Coming to the specifics of the current strike and the industrial relations problems in Southern, we would call on the RMT to recognise that the time has now come to draw a line under this. The time for strikes is effectively over. They wrote to their members on Friday asking them to accept the job offers that have now been made and become on-board supervisors. We see that as them now acknowledging that these changes will happen. I would plead with them to call off tomorrow’s strike and the other 10 days of strike that they have already called.
Q123 Robert Flello: I would like you to comment in terms of the comments that have been made over recent weeks and months against the RMT by people associated with Southern.
Charlie Hodgson: Let me be clear in terms of the offer we have made to our staff, because it is quite important. We have guaranteed everybody who has a job today a job in the future. We have guaranteed the pay and the overtime that they will get. They will get an above-inflation pay rise for two years. We are making these changes, partly because they were in the specification from the DFT and partly because they are the right thing to do. We are making these changes so that we can make our staff more efficient by being there to give the customers the service that they want, to be on board trains to give information and advice and to assist passengers. It is about time that the RMT accepted that the world has moved on. Technology has moved on and the new trains that the Government have specified and bought for this route are clearly designed to be operated by the driver.
Q124 Robert Flello: From what you have just said there is a theme running all the way through suggesting that it is the DFT pushing your company to do this.
Charlie Hodgson: If you go back to 2013 when the contract was let, the invitation to tender required bidders to extend the operation of driver-only trains to cover all of the Thameslink route, which is what we are doing.
Q125 Robert Flello: So the action of Southern has been really as a buffer, if you will pardon the pun, between DFT and the RMT. You have been set up to take on the unions.
Charlie Hodgson: No. They are our staff and the unions are their representatives. We seek to have as constructive a relationship as we can with our staff’s representatives. We would have much preferred to make these changes through a negotiated process. Unfortunately, the RMT chose not to talk to us for a very long time. They believed that they would be able to stop us—
Q126 Robert Flello: But that is not answering the actual question I just asked. What you said a few moments back suggests to me that what Southern is doing is acting as the sharp end of the DFT to take on the unions.
Charlie Hodgson: The DFT is our client franchising authority. The franchise agreement is quite clear—
Q127 Chair: We all know there is a difficult situation and we all want it to be resolved. We do not want to exacerbate any problems in the current situation, but is it correct that in the actions you have taken you have been in some kind of agreement with the DFT on what you have done or have not done in relation to industrial relations?
Charlie Hodgson: The overall specification in the contract is clear that we have to do the things we are doing. The management team at Southern and GTR are responsible for the day-to-day relationships with the unions.
Q128 Chair: In exercising that responsibility, have you discussed your actions with the DFT?
Charlie Hodgson: We talk to the Department on a near daily basis, so yes.
Robert Flello: That says it all really.
Q129 Mark Menzies: This is a question for Mr Hodgson. I am sorry to put you in the spotlight again. Looking at the whole franchise arrangement and the agreements that you reached with the Department for Transport, what would you like to see done differently that, with the benefit of hindsight, could ensure that your current franchise would have run much more smoothly? What are the big stumbling blocks in relation to the franchise that have created problems that we now see in a poor service?
Charlie Hodgson: I think that 20:20 hindsight is a wonderful thing, so please take these comments with that in mind. The procurement process that the Department followed to buy the GTR franchise—let us remember it was paused for nearly 18 months because of the problems that happened with the West Coast franchise—meant that the ownership of the operation changed over at a period of time only three months prior to the significant timetable changes at London Bridge in January 2014. That was a very difficult time to take over.
In addition, the impact of those changes at London Bridge was significantly more serious than anybody realised at the time of putting the bids together or writing the specification. The performance forecasts provided to bidders by Network Rail and the Department showed a fairly minor impact on performance. We all know that turned out not to be quite right. Building on that, at the time of putting the bid together, we were not entirely aware of the concordat that ASLEF and the RMT would sign to make the implementation of driver-only operation more difficult. Again, 20:20 hindsight is a wonderful thing. The level and pace of change and the timing of that change made what was already a very difficult job even harder.
Q130 Mark Menzies: When you took on the franchise, did you feel that throughout that whole initial period you were getting support from Government, be that officials or Ministers, that made the agreements smooth and seamless, or were you finding your way in the dark?
Charlie Hodgson: Generally, we have a professional relationship with the Department. They are the buying authority and we are their supplier. They treat us in a very professional and robust manner. Did we get support? Yes, at times, but there are times when it is not appropriate for the Department to offer us support, because they have a role to play in enforcing the contract. We are a large multinational organisation. We signed up to that contract and the onus is on us to get on and deliver it.
Q131 Mark Menzies: This is my final question. If you were working as a high-powered consultant employed by yourself, what advice would you give in order to ensure that similar mistakes, displayed particularly by your Southern rail franchise, were not repeated? What would be the two or three killer points you would advise on?
Charlie Hodgson: The biggest single point—we are actually doing this—is about how you manage major infrastructure change at a London station. We are also one of the main operators at Euston, which is about to be significantly reconstructed as part of the HS2 programme.
Mark Menzies: Be careful, because that is the station I use.
Charlie Hodgson: We are working hard to make sure that the planning assumptions on which that station construction work are based are founded in reality. Unfortunately, those at London Bridge were not. The timetable that was proposed by the Department and Network Rail worked on paper but was never going to work in reality. Because we can talk from experience, we have found that people are much more willing and interested to listen to us and have made significant changes to the way in which the construction work is being planned at Euston. Instead of doing it as quickly and cheaply as possible, it is being done in the best interests of the 100,000-plus people who use the station every day.
Elizabeth de Jong: Could I broaden a couple of points very slightly? The industrial relations risk in terms of customer service, reputation, performance and often revenue lies with the operator. Train operators, for the reasons we have already discussed, want their operations to be more efficient, more customer focused and safer. There will always be future changes to working practices as we innovate and introduce new technology to give customers, taxpayers and funders the changes in service that will be part of an ongoing climate of change in the future—re-skilling people for new jobs and change. It has been a growth industry, so it needs more and more staff. There has been a 20% increase in staff. It is not that jobs are at risk in this growth industry; it is just doing things differently.
Q132 Chair: Should the current franchising system change to introduce more competition? In quite a number of recent franchises there has been very little competition. In some, in fact, there have been direct awards and no competition at all. Do you think there should be any changes in the current system?
Gareth Powell: Certainly in Transport for London we think that there should be. We think that having a greater number of smaller, more focused franchises is going to be positive for customers, for competition and overall for the industry. The greater levels of devolution that have been talked about allow for individual local authorities to specify the services that their area’s customers use and that will then provide in itself greater diversity of contracts across the industry and greater diversity of clients, and therefore improve competition and focus on the needs of the individual customers in those areas. We think that that can happen under the devolution model that has been set out previously.
Q133 Chair: But would that increase the cost of submitting bids in the franchising system?
Gareth Powell: We do not think so. In the case of Transport for London concessions, of course, because we retain the macroeconomic risk—that was talked about by your previous panel—we do not ask any of the bidders to price that. They do not have to look at individual models that might try to predict that; we take all those risks. We focus in our model very tightly on the performance that the train service can give customers, and indeed the station performance. That simplifies the bidding process and the overall cost of bidding. When it comes to the management of those contracts, of course the management teams are focused solely on the performance of the railway service itself. We have observed, because of that, additional ridership on our systems in the London Overground which has more than outweighed any one-off small levels of cost you might get by splitting one franchise into two. We have seen that it has been very positive from a cost perspective as well as from a customer satisfaction perspective.
Q134 Chair: Ms de Jong, it is not the same outside London, is it? How would you see the franchising system changing, or would you want it to change, to introduce more competition? That is what it was all meant to be about.
Elizabeth de Jong: Yes, indeed. The franchising system is a very flexible model and always evolving, but it is of concern to many of those involved, and to the Department, I am certain, that there has been a decline in bidders for recent competitions. When asking for feedback from our members of why that might be, they talk about a change in the risk and reward profile for franchises as they are getting larger through growth. The cost and revenue risk is large. There have also been some new mechanisms recently for the exogenous risk of GDP and the economy that Gareth has been talking about, which are not yet proven. Some of the most recent franchises do not have any support at all—Northern and TransPennine.
There have been changes in the profit share mechanism. The risk and reward balance has changed over time. People sometimes talk about the cost of bidding. You will have heard that it is £5 million to £10 million per bid. People choose how many to bid for, as it is quite costly to do so. The amount of risk capital that some of the owning groups need to give as reassurance is around £200 million.
There are also some good reasons why there are fewer bidders. There is a more predictable schedule of franchise bids. In the past, it used to be feast and famine. When a competition came along, all the bidders would go for it, but now there is a more predictable pattern. Some of the bidders choose which ones fit their profile better. There are more opportunities to bid elsewhere, as European markets liberalise. Many operators in this country also bid elsewhere, so there is more choice.
Q135 Chair: Is that not going to result in fewer bids to run services here?
Elizabeth de Jong: Not necessarily, because there are other things that can be done with the risk and reward profiles that I spoke about so that the opportunities to bid in the UK are attractive, and competition for the market is restored.
Richard McClean: The observation that no one size fits all is certainly the case in such a diverse sector as rail service provision. We have seen different client models. We have seen different operating models. Choosing the size of a franchise that makes operational sense on the ground to customers is clearly important, as is getting good alignment with the client requirement and the socio-economic benefit in the region.
Of course, you can provide good public service on the rail network without having a contract with a Government agency if you focus directly on the immediate needs of your customers, as we do at Grand Central. We identify communities that the franchising system has actively chosen not to serve, historically and consistently. We innovate by looking for capacity on the network to try to reach those communities and link them. As a result, when we are successful we are able to create new markets, provide new types of service and open up operations in other parts of the country.
Q136 Chair: Would encouragement of more open access operators risk reducing the number of private sector operators willing to put in a franchise bid, if they felt that some of their routes might be taken away from them and the basis of their tenders undermined?
Richard McClean: The existing open access operators are small. We operate in communities that have previously been poorly served by rail. We are not allowed to be active in the main markets—the main intercity flows between the big cities. However, even with our small scale we have shown that over time, having taken a lot of risk in starting the businesses, we can become operationally and commercially viable, and deliver good customer service at the same time.
At our current scale, we are really not on the same page as the large intercity operators. We run 18 trains a day. There are five trains at York and four at Doncaster that interact directly with the main intercity franchise. The intercity flows are now of such scale and they have grown so much that they are almost certainly commercially viable in their own right. An alternative model, a development of how we operate intercity trains today, could allow additional open access services to run on the core intercity flows while at the same time returning the premium that was forgone to the Government through the institution of some form of levy or a reform to the track access charging arrangements.
Q137 Chair: Ms de Jong, is that feasible?
Elizabeth de Jong: Yes. You are correct that, in order to increase the amount of open access, it was set up to run on very marginal capacity under a different charging structure. For it to be introduced and expanded in a sustainable way for the taxpayer and for other businesses, and for open access operators themselves to thrive, there would need to be a change in the mechanisms and the charges around operating trains. We understand that the Department is going to consult on some proposals for that in December. In fact, back at the Rail Delivery Group there is a meeting about that at the moment with the Department, ORR and operators.
Q138 Martin Vickers: Mr McClean, you talk about a different model that would allow open access operators to serve the other communities that you speak about. I am still not clear whether your operation is commercially viable if there are additional access charges or some other sort of levy put on your company.
Richard McClean: It would be very challenging for the type of operation or business that we are at the moment if you applied the same charging regimes as you would on an operator that is able to operate on the big flows. The two are very different types of business and would need different commercial and economic treatment. Don’t worry, we will go on pressing to find innovative ways to reach new markets. We will use our resources in the most efficient way to find new opportunities, including in north Lincolnshire.
What we are talking about is how those benefits of choice to customers or passengers could be unlocked in a cost-effective way on some of the larger flows. As Elizabeth says, if we are going to develop that thinking in this area we certainly have to find a mechanism to return the potential loss premium to Government, because that money is needed to support the public service operations elsewhere in the country. We would have to set up mechanisms that keep incentivising growth and driving customer service improvement, and are predictable, transparent and simple to manage. We do not want to create a new bureaucracy around that.
We heard discussion in the previous session about how the intercity market in particular is significantly different from regional operations or commuter operations. It is exposed to a very significant degree of external impact, such as GDP and other economic factors in the general economy. Any new mechanisms would have to be flexible to take account of the changing circumstances that operators would face. Above all else, if you are providing choice for passengers, the operators involved in providing differentiated services would need to be confident that they would have a level playing field between themselves so that they could operate with some certainty.
Q139 Martin Vickers: Are you satisfied that the DFT are supportive of you, in the sense that as long as you do not take too much revenue away from the main franchise holders they will in principle support opening up those new markets and that a feasible, commercially viable system could evolve?
Richard McClean: There is certainly recognition—I hear it regularly—that the existing open access operators have done something that the franchise system chose not to do, and did it in a way that is cost-effective for the taxpayer, but our scale is an important element of that—the fact that we are not in the main markets. We are serving new communities for the rail network, and that is an important part of the overall mix.
I see the Department being open-minded to alternative approaches. Certainly as an operator, and in the work I do with RDG, I want to help the Department explore that opportunity and test whether it is viable. We have to be very careful. This is a large industry and it is of huge, economic importance for the country as a whole. It is not something to fiddle around with without due care and consideration. We have to think in particular of the impact on customers. We have got used to a particular way of the industry working and we have to make sure that any changes that are introduced maintain customer benefits and the network benefits they enjoy today. We must make sure that people are looked after properly regardless of which operator they may have bought a ticket from.
Q140 Iain Stewart: You have already partly answered the question I was going to ask, which is about looking at enhancing open access, not as competition to existing main franchise operators but developing new markets. If I understand it correctly, one of the reasons behind the FirstGroup bid to have an open access service from Edinburgh to London was not to take passengers away from Virgin East Coast but to take passengers away from Ryanair and easyJet and grow the rail market. That leads to the question of whether there is joined-up thinking within DFT. Is the aviation part of DFT saying, “Hang on, we don’t want to diminish the market between Scotland and London in air if we are able to grow the rail market?” Is there that joined-up thinking within the DFT?
Richard McClean: Certainly a number of different operators identified the opportunity that was available on the east coast to run open access services to Edinburgh and in both cases to attract more passengers on to rail, predominantly away from long distance coach, air and road, by providing a different service from that specified by the Department for Transport.
The evidence, in the small way that it exists, is that where passengers are given direct choice between two operators on the same flow we see faster growth in rail travel than is the case across the broader scope where no choice is available. We see at the same time that fares rise more slowly than in the rest of the network. The net balance is showing a faster increase in industry revenue in total at those locations. That is at the heart of what the propositions were for Edinburgh.
Having sat through the hearings with the regulator deciding whether a fast service or a discounted service was the best use of the remaining capacity, I certainly heard nobody say that it was a good idea to leave those passengers in aeroplanes. Everybody was agreeing that rail was a good way of serving that market need.
Elizabeth de Jong: But it has been difficult for the Department under the current arrangements to encourage more open access. Their investment cases for delivering more capacity have relied on money coming back through the franchise system, so that is why it needs to change.
Q141 Chair: It is thought that the cost of submitting a franchise is between £5 million and £10 million. Is that inhibiting potential operators? How could we reduce the amount? Mr Hodgson, do you think that is something that inhibits entrants to the market?
Charlie Hodgson: Those are certainly numbers I would recognise, having owned budgets for bidding contracts. It is difficult for me to comment on new entrants who have not arrived yet, but if I was looking in from the outside it would certainly be something that would concern me. Some of the issues that Elizabeth highlighted earlier around the capital structure are probably larger inhibitors to new entrants, particularly smaller new entrants. If you are required to put up £200 million of contingent capital, only the very largest organisations are going to be able to afford to do that. Yes, clearly bid complexity as much as bid cost can cause a barrier to entry, but I think the capital structure is probably as large a barrier, if not a larger barrier, to entry.
Q142 Chair: Are there any other views on how we could encourage more people to enter the market?
Richard McClean: I have an observation, building on Charlie’s points. Resources are a constraint as well—the scale of the bids. There is a limited population of folk who can actively participate in such processes, as we heard in the earlier session with the passenger representatives.
Gareth Powell: In both of the recent bid processes that TfL has run for the London Overground we have had new entrants to the UK market in both cases—one successful, MTR, and one unsuccessful in the latest round. As Mr Hodgson pointed out, there are elements of the franchising process in terms of capital structure and so on that simply do not apply to the management concession model that TfL has, which encourages new entrants to the market as a way of coming in and applying their knowledge to a metro-style situation and the frequent services that we operate.
Q143 Chair: The management model has produced different results in different circumstances. You have spoken about success in relation to GTR, where the Government decided to take the revenue risk. It has had a disastrous consequence. What is the difference?
Gareth Powell: I do not know the incentives or otherwise in the Department for Transport’s contract with GTR. What I can say in the case of our contracts is that there is a combination of very tightly specified bonuses for over-benchmark performance and penalties for under-benchmark performance, both in terms of punctuality and reliability of the service and of customer satisfaction, cleanliness and revenue protection. Those are the simple elements that go into our contracts. There is not really anything else in there. We are very clear on the benchmarks that we set and the mechanism by which we manage those contracts. That is clear to all the bidders when they approach one of our contracts, and it is clear in the way we then manage the contract going forward.
The other thing that has been a factor for our organisation is that, of course, TfL doesn’t only specify the contract; it is not only our revenue but our brand and we are very accountable locally to the communities that we serve. We are also an operator. We operate London underground services, so we understand both the infrastructure issues that Network Rail encounters and the operator issues that an operator might encounter. We seek to bring all those things together, very much as the integrator, and stand accountable for the ultimate customer service that our services provide. As an organisation, we are able to draw on all the expertise and all of the experiences we have to integrate services between, say, bus, rail and so on in the local communities they serve and then to be able to manage very tightly the specification and ultimate delivery of the passenger services element of the contract.
In our case, we procure the rolling stock separately. TfL does that directly. We also procure all the fare and revenue collection systems. We do some of the timetabling. It is a different model from the one that the DFT has for the GTR contract, perhaps even in terms of revenue share, but I do not know the details of it.
Q144 Chair: Mr Hodgson, you will not be surprised if I point out to you that the Department taking the revenue risk in the GTR contract has not had the same result. Why is that? Is it to do with the circumstances in which you are operating or the size of the franchise itself?
Charlie Hodgson: I come back to the reason why the Department created the GTR franchise, which was as an agent to make very substantial operational changes and investments in the network, to manage the introduction of a completely new fleet of trains and to work with Network Rail to oversee a complete rebuilding of the central London infrastructure. They took a decision that it would be better not to transfer revenue risk in that environment. They did that for two reasons. First, they thought the market would price that risk quite highly. That is always going to be without counterfactuals; we will never be able to test it because they did not do it. Secondly, it was to make it easier to manage in-life changes in the contract. The specification for the infrastructure was still emerging at the time we submitted our bids. It is clear, and it is described in the contract, how and when we will work with the DFT to determine exactly what timetable we operate in 2018. We are out to public consultation at the moment, where we are making quite substantial changes to that service model for 2018; for example, four of the trains per hour that come from Thameslink core will go into Kent, which was not previously proposed. The contract needs to be capable of managing that level of flexibility, and by DFT retaining revenue risk it makes those changes easier to manage and discuss.
Chair: Thank you very much.