Transport Committee
Oral evidence: Rail Franchising, HC 66
Monday 7 November 2016
Ordered by the House of Commons to be published on 7 November 2016.
Members present: Mrs Louise Ellman (Chair); Clive Efford; Robert Flello; Karl McCartney; Huw Merriman; Will Quince; Graham Stringer; Martin Vickers
Questions 278 - 387
Witnesses
I: Roger Cobbe, Policy Director, Arriva UK Trains, Hugh Clancy, Commercial Director, First Rail, FirstGroup, Tim Shoveller, Managing Director, Stagecoach Rail, Stagecoach Group, and Jamie Burles, Managing Director, Greater Anglia.
II: Paul Maynard MP, Parliamentary Under-Secretary of State for Transport, and Peter Wilkinson, Managing Director, Passenger Services, Department for Transport.
Written evidence from witnesses:
Roger Cobbe, Hugh Clancy, Tim Shoveller and Jamie Burles.
Q278 Chair: Good afternoon and welcome to the Transport Select Committee. Could you give us your name and position in your organisation, please?
Tim Shoveller: My name is Tim Shoveller. I am managing director for Stagecoach Rail division.
Jamie Burles: My name is Jamie Burles and I am managing director for Greater Anglia.
Hugh Clancy: I am Hugh Clancy, commercial director for FirstGroup’s rail division.
Roger Cobbe: I am Roger Cobbe. I am policy director of Arriva Trains.
Q279 Chair: Thank you. Rail passengers are paying the highest fares in Europe. Passenger satisfaction is going down and the Government are getting a lot more money and premiums than before. This is not a very good picture overall for the passenger. Do you think it means that the franchising system has failed?
Who would like to have a go at that? Passengers are paying a lot more and they are a lot more dissatisfied. Mr Cobbe, tell us.
Roger Cobbe: It is very important to remember that the basic structure of fares is specified in the franchise agreements as let and as amended by Government from time to time. The broad structure of whether fares move at RPI, RPI plus 1 or RPI minus 1 is essentially a public policy decision that the train operators implement. I would say, though, that through the various changes in fares policy we have achieved very substantial growth. Passenger numbers have more than doubled since privatisation, so we have clearly introduced products that are more and more attuned to what customers want. While inevitably there are fluctuations in satisfaction, pan-European satisfaction surveys continue to show the UK pretty high on most measures.
Q280 Chair: But the figures we have on passenger satisfaction are going down in this country, so that does not paint a very optimistic picture. Would anybody else like to tell me why they think we have got into this position?
Tim Shoveller: Following Roger’s point about satisfaction and what might be coming next, and building on the benefits and the success that we have seen over the last 20 years or so, inevitably at the moment we understand that passenger satisfaction is falling. We can see that and it is something we are very conscious of. There are a number of different reasons. If we look at the steps that have been taken over the last couple of years to try to change that—if we go back to the start of the franchising model itself—the DFT has changed its approach to franchising. It has introduced quality as a very explicit and key part of the franchising process. That helps to make it easier when putting forward a bid to make sure that it is properly targeted at both delivering premiums for the Government, which is a point you made, and delivering enhanced quality for passengers. That is a trade-off and it has moved in favour of the passenger in the rounds of franchising we currently see being played out.
Q281 Chair: When you say it is a trade-off, what do you mean? Do you mean that paying more in premiums means that passengers’ needs are looked at less?
Tim Shoveller: I would not put it quite that acutely, but inevitably there are trade-offs between the amount of premium being paid and how much is being reinvested in the business. In a franchise that is let, some new rolling stock might be introduced, and in the short term that might increase the costs of that business, but in the long term it will provide much better customer service. That is the trade-off and that is what we look to the franchise specification to set out and value. We then do our bit to try to deliver a great service against the specification that has been issued.
Jamie Burles: Greater Anglia is the most recently let franchise and is a case in point, whereby quality, in terms of the evaluation from the DFT, was a larger element of the bid than previously. As a result, while we are going to pay a large premium back to the Government for the privilege of running the railway, we are seeing billions of pounds of investment that the region has needed for a long time. To take Tim’s point, that includes the biggest fleet replacement in the history of franchising. We are going to be introducing thousands of brand-new trains, which is at the top of the priority list for our customers. We are seeing large premiums being paid to the Government, but we are seeing large reinvestment of those premiums into the rail service.
Q282 Chair: We will be asking you some more questions about your particular franchises in a minute or two, but let me raise the whole question of competition, because that was always the basis of the franchising system. There isn’t so much competition around now, is there? In recent franchises, 75% since 2012 have been direct awards without competition. We have had other competitions, such as South West and West Midlands, where there have been only two bidders. Why do you think there is so little competition in the whole system?
Hugh Clancy: There is still very fierce competition for the franchises themselves among the bidders shortlisted for those franchises. They fight tooth and nail to come up with the best mix between value for the taxpayer and customer satisfaction and quality scores.
In terms of why there are only two bidders, there is a variety of reasons. Part of it is that there has been a transfer of risk from Government towards the franchisees, which are now very substantial businesses that have very large financial premiums that have to be paid, with a lot of parent company support behind them. You have to be very confident that you can deliver your bid and that it is the right franchise for you to go for.
Q283 Chair: Would more open access lead to more competition? Would that be the way to go?
Hugh Clancy: Our group runs an open access company—Hull Trains, which we have run for 15 years. We were recently awarded the rights for another company on the east coast. We believe that open access plays a very valuable part within the overall mix, particularly in developing underserved markets or taking advantage of underutilised bits of the network. That is something we think has a strong part to play in the right circumstances.
Q284 Chair: Do you think that more capacity should be allocated to open access as existing franchises expire?
Hugh Clancy: As an open access operator, yes. It took us 14 months to go through the process to get awarded the rights for just five trains in each direction between London and Edinburgh. That was a very long and involved process, which, when you are talking about small companies being set up on a purely commercial basis, is a large investment to make to deliver a new service.
Tim Shoveller: We understand the principles of open access, and as a principle I have no problem with it whatsoever. Our build on the current arrangements is that we cannot have our chicken and our egg. We have to make sure that we do one thing or the other. We have a mixed system at the moment where the franchise is specified and let, with an uncertain open access principle against it. I do not think that gives the best value overall to the taxpayer, because there is uncertainty in the market. In terms of structuring the proposal, if open access is the way forward—as the CMA and others have commented—as a principle it is absolutely fine, but we need one or the other.
Q285 Chair: Mr Cobbe, do you have a view on open access? Should we encourage more open access?
Roger Cobbe: Yes. Arriva is also an open access operator with Grand Central, and we have been awarded rights to run open access trains on west coast as well. As Hugh mentioned a moment ago, the downside at the moment is that you have to spend a considerable number of years, and work through a very complicated process, to seek those open access rights, with no certainty of success. We spent a very long time attempting to get rights to run on east coast but in the end our application was rejected, even though we felt it would have given very substantial benefits to customers. We would certainly like to see a move towards more open access for the longer distance and more commercial type of services. We feel that would create a healthier market for passengers and better value for the taxpayer in the long run, but I totally agree that the interface between open access and franchises needs to be handled carefully so that people know where they stand.
Q286 Chair: Mr Burles, do you want to comment?
Jamie Burles: In principle, we do not have a problem at all with open access, but very parochially in my region there is no capacity for open access. The GE main line and West Anglia main line are full. We would desperately like additional capacity ourselves, never mind for open access. It touches on a much wider debate with regard to the amount of capacity that can be created to accommodate further competition, as you say.
Q287 Will Quince: This question is specifically for Mr Burles. I should declare an interest, in that I am a regular Greater Anglia user. The good news is that this morning I got a seat, but the bad news is that the train was half an hour late, which was due to track abrasion. I am not sure whether that is down to you or Network Rail, but I am sure you will get an email from me later, I am sorry to say.
To set the scene for my question, when I was sitting on the train this morning, and there were plenty of other witnesses who can corroborate this, I heard a gentleman having a conversation with a lady he had just met. He said, “I can’t wait to leave Colchester because of this rail service. I’m going to move back to London.” That is really upsetting for somebody who represents a constituency on your rail line. Greater Anglia has been one of the worst performing franchises in recent years. Passenger satisfaction is somewhere in the region of 77%, which is very low. We have a new brand in Greater Anglia but exactly the same owner. How exactly is performance going to be different?
Jamie Burles: I touched on this earlier. With the new franchises, we have the billions of pounds-worth of investment that our region has been crying out for, not for just one or two years but many years. I said that rolling stock was our No. 1 priority. We have been campaigning to make sure that the invitation to tender from the Government for the new franchise contained as ambitious a spec as it possibly could. Thankfully, there was a good quality angle to the spec, and thankfully we are going to be providing thousands of new trains. We will go from having one of the oldest fleets in the entire country to the newest fleet in the entire country within the space of an introduction programme of just over a year.
The new trains will provide a step change in reliability. Although the numbers of train faults are already reducing year on year, and have been doing so for the last two years, they will step change reduce further. The work that Network Rail is doing on renewing the overhead lines and track relaying, and other infrastructure works, means that there is a whole combination of works and billions of pounds of investment which will ensure that performance improves measurably over the coming years.
Q288 Will Quince: One of the biggest criticisms during the past franchise was that it was very difficult for Abellio Greater Anglia to be held to account, in particular for the rail passenger experience. I am interested to see how that is going to be different as part of this franchise.
Jamie Burles: One thing we very much supported from the DFT is that they have backed us to the tune of billions to invest in the customer experience. They have also put plenty of teeth into the contract, for want of a better phrase. On the customer experience and performance statistics, three weeks ago, before the end of the last franchise, the consequences for not hitting your performance or customer experience targets were reputational, which of course was bad enough, but now there is a very significant financial penalty in the contract, to the tune of many millions of pounds. That is the Government saying, “We’ve backed you but you must deliver, and if you don’t there are significant financial penalties accordingly.”
Q289 Will Quince: You mentioned the rolling stock, which is very much welcomed. We are still sitting on 40-plus-year-old trains that throw human excrement out on to the ground in some places, so the trains had to be replaced and we very much welcome that. It is an incredibly ambitious rolling stock roll-out. Are you aware that any kind of roll-out of this size and nature has ever been introduced on this kind of timetable before, and what do you foresee as the risks?
Jamie Burles: It is a very ambitious delivery. That is why a huge amount of focus and effort has gone into planning it. Of course, as part of the evaluation by the DFT, some very clever people have been poring over our very intricate plans. They gave those plans the green light and now we are assembling a team—it is mostly assembled already—to approach this project like no other project we have ever done before. It is on an unprecedented scale. We have a team of around 26 people, mostly assembled now, to bring in the new trains, the infrastructure works needed, the depot works needed and the introduction of the actual physical trains. We are approaching this with every bit of seriousness and responsibility that we need.
Is it deliverable? Yes. Is it ambitious? Yes. We are mobilising Network Rail colleagues to be on the right page for delivery. We have gone as far as embedding Network Rail specialists in our own teams so that they can shortcut or fast-track certain approvals to make sure we can hit the timescales. The risks are just around the magnitude of the number of vehicles, but we have all the mitigations needed in place, and the right amount of resource and buy-in from the infrastructure owner, Network Rail.
Q290 Will Quince: Following on directly from that point, one of my main concerns is in fact with Network Rail. We have this new franchise, and we will have our new rolling stock starting to come on board in three years’ time. Even if we take on board all the points you have just mentioned, how confident are you that Network Rail can even cope with the existing capacity demands, let alone the 20% growth that we are expecting to see by 2023? Quite frankly, I do not have all that much faith in them.
Jamie Burles: The capacity requirements, as you are probably aware, are largely being dealt with through the rolling stock. If you think about the West Anglia main line and the GE, a lot of the new trains we are introducing, and the additional trains, are to strengthen trains. To cater for that growth is largely being seen as a rolling stock solution that we are now signed up to deliver.
Network Rail have their own challenges, but they are investing a huge sum of money to improve reliability. I firmly believe that the combination of that and the rolling stock will result in the performance improvement we need.
Q291 Chair: You say that Network Rail have their own challenges, but unless they have the funding actually to make those infrastructure improvements happen your plans are going to come to nothing, aren’t they?
Jamie Burles: It is a good question. Within our bid, in terms of driving the journey time benefits and the frequency improvements, we had to bid on the basis that it was utilising the existing infrastructure. You could not plan for an enhancement that was not funded or in Network Rail’s confirmed plans. We had to bid on the basis of the current infrastructure and the known and funded infrastructure that was going to be delivered. In terms of our plans we can, and we will, deliver those, because they are not dependent on unfunded schemes that may be at some point in the future—
Q292 Chair: Are you saying that all your plans are based on confirmed funding from Network Rail?
Jamie Burles: Yes, that’s right.
Q293 Chair: Are you certain about that?
Jamie Burles: Yes.
Q294 Chair: It is 100% confirmed.
Jamie Burles: Yes.
Q295 Clive Efford: What proportion of delays, such as the one described by Mr Quince, is down to Network Rail on average over the period of the previous franchise?
Jamie Burles: The long-run split is around 60% Network Rail, 30% our company and 10% other operators.
Q296 Clive Efford: There is a big investment in rolling stock to solve this problem, but a large proportion of the problem is with Network Rail. It seems a very complex package that you have put together. You do not finance or buy the trains; you lease them.
Jamie Burles: That’s right.
Q297 Clive Efford: To get someone like Angel Trains to forward-plan and to be part of a bid for a franchise such as yours, which involves over 1,000 new carriages, must add to the complexities of putting together your franchise in order to bid. Does that make it a more difficult franchise to put together in comparison with other bids that we have seen recently, where other rail operators have bid for lines?
Jamie Burles: I do not really know. Effectively, as I said, the invitation to tender from the Government obviously gave scope for driving significant change in rolling stock. Then, through a combination of financing rates being so attractive at the moment due to interest rates being so low, we hit a sweet spot at a specific moment in time. I do not know that that will be recreated at any point in the future.
Q298 Clive Efford: Passengers can count themselves lucky.
Jamie Burles: Economic circumstances meant that buying new trains, in some cases, was more beneficial than leasing old trains. That was a sweet spot and a moment in time that has led to the largest fleet replacement in history.
Q299 Clive Efford: How much is what happens to the old rolling stock a factor? Is it being scrapped or sold on? Is it part of the financial package?
Jamie Burles: That remains to be seen. Certain elements of our rolling stock, such as the class 379s on the Stansted Express, are not very old. They are around five years old. I fully imagine that they would be cascaded elsewhere within the industry. I imagine that some of the really old trains we operate will be scrapped.
Q300 Chair: You are all major operators. How do you work with Network Rail? Do you find that you are able to deliver your performance targets with Network Rail’s co-operation, or are you assuming that they will be able to do certain works that then get delayed, or simply do not happen? Is that an issue for you?
Roger Cobbe: There is no doubt at the moment that industry performance overall is not where it should be. The trajectory was set out for control period 5; currently trading performance is a little below that and is slowly falling on the present trend.
Q301 Chair: But are you working with Network Rail or are you assuming that they are going to be able to go ahead with certain improvements?
Roger Cobbe: We are working with Network Rail. Our desire is that they find ways of returning to the level of performance they promised for the present regulatory period. That is something our local management teams work on with the local Network Rail teams continually to review why we are falling short and what one party can do on its own or what the parties can do working together.
Q302 Chair: You say that you want co-operation to happen. Does that mean that the planning is not done together; it is just something that may happen?
Roger Cobbe: Clearly the outcome is not what we want yet. Until the outcome is what we want, we will continue to strive to find ways of turning this declining performance back into the sort of improvement we were seeing a few years ago. We saw a very satisfactory improving trend for a number of years, but it has started going backwards over the last few years. The reasons are quite difficult to pull out on an overall national scale, even by TOCs. There appear to be quite a number of factors, and we are working with Network Rail, both as the Arriva business and through industry bodies like the National Task Force, to try to make sure that, if there are underlying factors, they are identified and brought before the relevant parties who can put them right.
Q303 Chair: Mr Clancy, do you work with Network Rail? How does that operate?
Hugh Clancy: Yes. Some of our train operating companies work very closely with Network Rail. There is an annual performance improvement plan, which is developed by both parties working together. There is a lot of challenge to make sure that we are happy that Network Rail are doing everything we think they need to do. They review and challenge our plans. If they or we are behind target during the course of the year, there will be further reviews and we will continue to press for further improvements to try to recover the position.
Q304 Chair: What about the bidding stage of franchising? Are you putting in your bid working with Network Rail and knowing what they are able to deliver?
Hugh Clancy: Network Rail review our plans. They will look at our timetable changes and our plans to introduce new rolling stock, or any changes to the infrastructure that we propose. They will review our performance-monitoring plans and how we want to work with them. We normally try to bid in alliance with them, to say how we are going to work with them in quite some detail in specific areas, and performance would definitely be part of that. We work with them, but it is our bid and they are also part of the evaluation on the DFT side, so they do not work with us exclusively; they work with all the other bidders as well. The local route would be involved and would listen to what we want to do and comment on whether they could work with us on that, but they will not tell us what the other bidders are trying to do. Network Rail centrally will be part of the evaluation team. It is not like any other supplier, where you can develop plans and be ready to sign a contract with them at the end of the process. They are part of the industry mechanism that leads to the evaluation and award of the franchise.
Q305 Chair: Mr Shoveller, what can you tell us about how you do or do not work with Network Rail at the bidding stage of the franchise?
Tim Shoveller: I support the comments that have been made by my colleagues. Network Rail takes a proactive approach during the bidding stage. You had evidence from Jo Kaye recently, which I have read, and support and endorse. It is a constructive discussion.
If you take a step a little further back, there is a question about how the bid development stage is consistent with Network Rail’s own control period planning process, which is set by the regulator. That is probably an area where we need to look, going further. It is one thing, as you have heard from the train operators, to develop their ideas about what to do with the track; how we develop the track, the signalling, the electrification and the power for more trains, for example, requires a very joined-up industry approach, which is delivered through the Rail Delivery Group for CP5.
Q306 Chair: Does that happen? Is that an aspiration or does it happen?
Tim Shoveller: It does. One of the challenges is that sometimes the timescales are misaligned. The franchise timescale might not fit with the timescale that Network Rail are working to in terms of their control periods.
Q307 Chair: That can be very important. If the timescales are wrong, you will not be able to deliver what you have promised.
Tim Shoveller: Absolutely. One of the positive things we have seen in recent years is greater flexibility from Network Rail, from the Department for Transport and from the train operators. An example is the redevelopment taking place at Waterloo. It is an £800 million scheme to deliver a badly needed capacity project and happens in the last year of a franchise. That level and scale of change taking place towards the back end of a franchise is something that we have not seen previously, and it was enabled because the scheme was critically needed. To delay it for the industry’s own governance reasons would have been the wrong thing to do. As an industry, we have joined together and we are delivering the scheme, and we will be able to bring those benefits to passengers sooner than if we had just stuck to a timetable. There is innovation and evidence of change.
Q308 Will Quince: I want to link Network Rail with delay repay. I very much welcome Abellio rolling out automatic delay repay to season ticket holders, although I would like to hear from all of you about the potential of rolling it out to non-season ticket holders as well. I know some of you do not offer delay repay automatically, but in relation to Network Rail and schedule 8 payments, is it actually in your interest to put huge amounts of pressure on Network Rail to address these issues when you are making far more money from schedule 8 payments than you are paying out to your customers in delay repay?
Jamie Burles: There will be automated delay repay; at the start of next year we go automated and the money will drop into people’s bank accounts. That will be a big thing for season ticket holders. We are also doing that for advance purchase ticket holders. It is not just season ticket holders. Those passengers will benefit from that as well.
In terms of the pressures with regard to Network Rail and schedule 8 payments, schedule 8 is not linked to delay repay. They are two separate schemes. One is the compensation regime agreed with the Government, and the other is compensation to the train operator for the impact of delays. It is designed to take into account a medium-term impact of the delay, not just the daily impact. I was looking at some of our numbers. Last year, we received just under £4 million net from Network Rail on schedule 8 for the entire year. In our current franchise, the fines payable for poor performance dwarf that amount, so there is the opposite incentive. Why do we want good performance? Reputationally, you want good performance for customer service. We are here to run trains on time and there is every financial disincentive to run trains not on time.
Q309 Will Quince: That is part of the new franchise but not necessarily part of the old one.
Jamie Burles: As part of the new franchise, yes. It is very stark. You must deliver trains on time to achieve so many metrics, and there are so many penalties. In the old franchise, which finished only three weeks ago, there was every financial disincentive as well to run trains not on time. Effectively, the revenue impact of running trains not on time means you are not hitting your growth profiles in terms of passenger growth and bringing new people to the railway. That far dwarfs any compensation you will receive from Network Rail. It is in none of our interests whatsoever at any time or any point to not run trains on time.
Q310 Will Quince: May I ask a follow-up question before the rest come in? Whenever I am delayed on a train it always seems to be 28 or 29 minutes, or 58 or 59 minutes—just under the delay repay thresholds. Do you intentionally hold back trains and let others overtake to try to avoid having to pay out to customers?
Chair: Is it just coincidence that it is always one minute early?
Will Quince: I have a lot of coincidences, Chair, if that is the case.
Jamie Burles: I will give a one-word answer: never.
Q311 Chair: There is the answer. It always just happens to be one minute less than would lead to penalties.
Jamie Burles: In terms of the split of delays, the vast majority are between nought and 10 minutes or nought and 15 minutes. Then you start ramping down. I can only refer to my previous answer. We never do that.
Q312 Graham Stringer: On this point, can you take any perverse incentives out of the system where there is less financial penalty if you cancel a train rather than its being delayed? We have had evidence in previous sessions that that has been the case.
Jamie Burles: There is a significant financial penalty for cancelling a train and a significant financial penalty for a train being delayed. All of it is bad news.
Q313 Graham Stringer: Which is the bigger financial penalty?
Jamie Burles: It depends on the level of delay.
Q314 Graham Stringer: Tell us when it crosses over.
Jamie Burles: Effectively, the rule of thumb on a cancellation is around £3,000 to cancel a train. Then of course you have all the consequent compensation—the letter writing and the cheques being sent out to customers. On delay minutes, it would depend on how long that delay is. Typically, depending on the line, the equivalent cost might be a 50-minute delay or something like that. That might equate to the cancellation charge. All of that is extremely punitive and results in disgruntled passengers and knock-on delays. It is in absolutely nobody’s interest ever to have a delayed or cancelled train.
Q315 Chair: Suppose you blame Network Rail for the delays; do they then pay?
Jamie Burles: We never blame Network Rail for the delay, the reason being that we are a railway system and we have to make that railway system work. If I was a customer, the last thing I would want to hear from Greater Anglia is that we were blaming Network Rail for the 60% of delays.
Q316 Chair: That is what the customer might want to think, but I am looking at what you might see as being in your interests. If you get paid for the delay by Network Rail, you are not going to be very worried, are you?
Tim Shoveller: Building on what Jamie said, in my 25 years of running railways, especially during the last 10 years or so, there is absolutely no doubt that the focus of the people who run our trains for us on a daily basis—the people in the control centres, the drivers, the guards and the station staff—and who are making these decisions in real time is driven by the best thing we can do for the industry. As Jamie said, we never intentionally cancel a train that did not need to be cancelled. We want to run trains on time. We do not delay trains.
I understand that sometimes, in the way we recover the service, a train might be cancelled rather than run late, to allow the train service to recover faster. I have heard it said that that is done for financial reasons, but, as Jamie explained, that is not the case. The overall challenge for us is to get the service back to full delivery as quickly as possible so that we can keep as many passengers as possible happy and, in turn, earn the revenue that we are expecting to earn as part of our bids. It is really important to us that we have happy passengers, because we want more passengers to travel with us. All of the challenging situations we are talking about—whether a late train, cancelled train or any scenario like that—are our driver, and the best financial impact is always to recover the service as quickly as possible.
Q317 Chair: But there are circumstances when you can claim compensation from Network Rail. Isn’t that a disincentive?
Tim Shoveller: Not at all. That is the schedule 8 regime that Jamie has just been talking about. First of all, there is a process. You cannot claim unless that is the root cause of the problem. That is the financial algorithm that allows the schedule 8 moneys to flow. In principle, that is compensation for the fact that passengers may not have travelled, or will not be able to travel, because there is a cause of disruption. In the way we approach our businesses, though, we are there to run trains on time, so the ability to blame another party, contractually or otherwise, does not get anyone off the hook. It does not mean you go home satisfied for doing a good day’s work. We are here to run a punctual railway, and anything other than that is a disappointment to us.
Q318 Huw Merriman: We were just trying to work out some of the terminology. Do any of you have a franchise that has a requirement from Government to modernise your practices or rolling stock to the extent that it could impact your industrial relations? Are you required to bring in driver-only operated trains, for example? Is there no requirement from Government to try to modernise so that fares are cut because practices are not as expensive? Is that just a particular issue for Southern Rail?
Roger Cobbe: Every franchise introduces change and improvement. As we mentioned earlier, the tremendous achievement of rail franchising over the last 20 years is that, each time something comes to market, two, three or four very expert and clever teams try to find the best solution for a particular group of train services within the context of the competition that the Government have defined. There is always an invitation to tender that will produce some absolute requirements from Government.
As has been said already, in recent years, I think to great advantage, these have started to introduce some benefit for quality improvement, as well as providing what was in the contract at the best price. Teams are focusing on the need to improve our railways, to carry more people, achieve higher performance levels and adapt to the absolutely enormous changes in lifestyle and technology that have come about in recent years. Inevitably, that will lead to people’s workplace situation being altered, but the right thing is to do it in a methodical manner, working in consultation with trades unions and our employees. I do not think you can say that something specifically causes something else; what we are about is modernising services to the benefit of customer service, our passengers, the future passengers we hope to carry, the economy in the areas we serve, and of course the taxpayer, who has to fund the net cost of the industry as a whole.
Q319 Huw Merriman: I am trying to find the origins of the force majeure contract, which I think is pretty standard in most new franchise agreements. It does not seem to be in older franchise agreements. That clause, as you all well know, gives the opportunity for the train operator to have a penalty holiday in the event that industrial action is going on. I was trying to find out exactly when it first came in, and why.
Hugh Clancy: As far as I am aware, force majeure has always been part of the franchise agreement, as it is in most large contracts. It is needed for events that are outside the reasonable control of the operator. When the sea wall at Dawlish was blown away, or dropped away, and Great Western, one of our companies, could not run services into Devon or Cornwall for several weeks, it was outside our reasonable control and—
Q320 Huw Merriman: Of course, Mr Clancy, and I would regard that as force majeure. Force majeure in its strict sense would be an earthquake or some act of God, but it would not necessarily include strikes. You say that it has always been in the contracts, but I certainly know that there is no such clause in the precursor to the Southern contract. I was trying to get to the bottom of exactly why they came in. It also seems to be the case that the clause just allows us to go round in circles. As long as the train operator can show that it has done everything it can to try to settle the strike, it will end up with a payment holiday. If you were a conspiracy theorist—I am sure you are not—you could almost suggest that you engineer a strike in order to ensure that your otherwise failing network will not be penalised.
Hugh Clancy: I just cannot see that ever happening, for the reasons you have just heard. It is far better for us to run a good and punctual service. That has an impact not just on our current businesses but on our ability to win future franchises. If you get a reputation for not being able to deliver a service, you are not going to be highly regarded by the DFT when you come the next time; also, you are not going to start off with a good reputation with stakeholders or customers if they see that you have not delivered elsewhere. I cannot see why anybody would try to have a conspiracy as you suggested.
Q321 Huw Merriman: I want to ask a question about the future trend of franchise agreements. We have seen the problems on Southern, but one of the saving graces for GTR is the fact that the risk and the reward stays with the Department for Transport. Effectively, the taxpayer ends up with the cost. On the basis that there could have been very serious penalties for GTR, do you think that your companies are more likely to ask for those same forms of management contract in the future, or do you prefer the model that sees you take the risk and the reward?
Hugh Clancy: I much prefer where we are under revenue risk and have the incentive of the revenue to really make sure that our whole business is focused on delivering the best possible service for the customers; you try to attract people to travel on your trains, and that is the route to your success. A management contract can be made to work. I understand the reasons why it was appropriate for GTR, but you then need lots of other contractual mechanisms to make up for the absence of the revenue incentive.
Q322 Huw Merriman: Is that the case for each of the other organisations?
Tim Shoveller: I completely agree. The revenue risk is part of the alignment with the customer, as we talked about earlier. I think that is a very important part of it. It is a key part of the thing that has driven innovation over 20 years. It is one of the reasons why the UK has a growing railway and many of our competitors in Europe do not. That structure, that incentive and that need to grow revenue to encourage more passengers to travel and to enjoy their service is at the core of what we do. My only caveat is about making sure that the risks are balanced. We agree with the principles of the Brown report on franchising. There are some factors, such as macroeconomic risk, that probably need to be shared, because they are not entirely within the gift of the train operator. Should I be on the hook for delivering the things that I promised to do? Absolutely. In fact, that would give me the opportunity to deliver more, and that is the environment we want to be in.
Q323 Chair: It has been reported that the next franchise holder for the west coast main line will also have the opportunity to run High Speed 2. Is that a good decision?
Tim Shoveller: We currently run the west coast main line in our partnership with colleagues from Virgin.
Q324 Chair: You think it is a very good decision.
Tim Shoveller: We only know what was announced on Friday. DFT are responding to the feedback they had during the development of the process from all the people who may bid for that franchise. Personally, I think there can be no doubt that in the period of time when HS2 is being built and commissioned, and in the early days of service development, it is almost certainly in the passengers’ interest for those two businesses to be aligned.
Q325 Chair: Does everyone else agree with that? Does anyone want to venture a different view? Mr Cobbe, you do not look so sure.
Roger Cobbe: There are several ways of looking at it. We would say that on balance it is a good move, because many people in the railway industry have been concerned that HS2 was being developed as a wholly independent railway unrelated to the rest of the network. I think this is a useful step towards better integration, which will ensure greater benefits to passengers and better value for the taxpayer as a whole. It is only one of the elements of HS2 that needs to be better integrated. Looking at the balancing point, what is being created is potentially a very large single franchise. We ought to ask whether there is scope to introduce more competition in the structure in the future. It is an interesting move to help the development phase, but is a progression towards there being more than one operator clearly laid out, so that people can see the way to the position in the future, where there isn’t a single one?
Q326 Chair: Does everybody have the same views? Does anyone want to venture any different view? Mr Burles, do you have an opinion on this?
Jamie Burles: I don’t have a very strong view on this one.
Hugh Clancy: We do not know the full details; we only know what was announced. It is starting to allow us to see how HS2 is going to be integrated with the rest of the west coast. It will allow decisions to be made without too much partiality protecting existing interests, in terms of a west coast operator not being incentivised to try to make sure that HS2 does not have an impact on its business in the future. To take that element out of it, and to allow plans to be developed that take in the overall interest of all the communities that are served along the lines, must be a better way of doing it.
Q327 Graham Stringer: I am sure Owen Smith is revolving in his grave at this very moment. Isn’t it doubly anti-competitive? You are not letting anybody compete for the first franchise on HS2. Secondly, where there is an obvious basis for competition on the current west coast main line, you are not allowing immediate competition there. It is all very cosy, particularly given that the current franchisee got an extension because the Department for Transport made a mess of the original franchise and FirstGroup were kept out of it. This is shocking, in competitive terms, isn’t it?
Tim Shoveller: The key point, to answer your question, is that this is going to be a competitively bigger franchise. As we understand the process that was announced on Friday, the Department will through due notice invite anyone who wants to bid for that. Some might speculate that perhaps a greater breadth of people may apply on the back of HS2 being involved.
Q328 Graham Stringer: It is not an extension of the current franchise into HS2.
Tim Shoveller: Absolutely not, no.
Graham Stringer: I misunderstood that point.
Tim Shoveller: What DFT are suggesting is that from 2019 the intention is to have a new franchise in place that is competitively tendered.
Q329 Chair: There are reports that the south-western franchise changeover is likely to overlap with infrastructure works due at Waterloo. Are you concerned that that could produce another situation like GTR and Southern Rail?
Hugh Clancy: Some of us are the bidders, and Mr Shoveller has already mentioned the necessity for the works to take place. They are very important works, but the blockade of some services into Waterloo is being constrained to a three-week period, which happens right at the start of the new franchise. Compared with other projects, such as the redevelopment of Reading station or others we have been involved with at Farringdon or Blackfriars, I do not see why it should be anywhere near as complex in terms of the scale and length of time over which you are imposing changes on customers. It is very complex in terms of the number of services that have to be rearranged for those three weeks during August.
Q330 Chair: Are there any other views on this?
Tim Shoveller: It is right for the industry to have that challenge. We should respond to passengers’ needs for enhanced services and get extra capacity as quickly as possible. The fact that that now falls during a franchise change date, which might see a change in owning group or might not, is part of the challenge for the bidders and for the industry. They must make sure that it is delivered successfully. I am very confident that we can do that.
Roger Cobbe: Perhaps I could add, not as a bidder for South West but from observing a number of other franchise transfers, that a fundamental principle of the UK rail franchising system is that they are transferred as going concerns. In the same way that the workforce, usually all the trains and all the facilities move from one to another on a change of franchise even if there is a new owner, all the planning work is also required to be transferred. The incumbent will be required to do everything as if they are continuing to operate indefinitely. We have a very mature process, where we have variously won franchises off each other or lost franchises to each other. It is in all our interests to make sure that these transitions happen smoothly. That has included infrastructure work on previous occasions, so I do not see anything intrinsically wrong with it.
Q331 Chair: You have full confidence in the Department, do you?
Roger Cobbe: I have full confidence in the transfer from one franchisee to another, should that be the outcome in this case. Even if the present franchisee retains the franchise, it is a new contract and many things need to be set in place, as has just happened with Abellio in Anglia. I am also confident that, because any franchise operator would hope to retain the business, they would continue to do everything to fulfil their present franchise agreement right up to the handover day.
Chair: Thank you very much. The session is concluded.
Paul Maynard MP and Peter Wilkinson.
Q332 Chair: Good afternoon and welcome to the Transport Select Committee. Could you give us your name and position for our records?
Paul Maynard: I am Paul Maynard, Member of Parliament for Blackpool North and Cleveleys.
Chair: And you are here as Minister for Rail.
Peter Wilkinson: Peter Wilkinson, managing director of passenger services at the Department for Transport.
Q333 Chair: The number of additional delay minutes as a consequence of the London Bridge works was forecast to be 10,000 per year. The reality was 10,000 additional delay minutes per week. How could the Department have got it so wrong?
Paul Maynard: That is a very fair criticism to make. It certainly skewed the entire planning process for how we were going to introduce and transition to the new franchise. I agree that it is very important that we understand why it occurred, not least because we are going to see significant works at Waterloo coming up at the same time as we renew the franchise there. It is very important that we understand what did not work the first time round, to make sure that we do not repeat the same mistakes when we have to deal with Waterloo.
Q334 Chair: Are you confident that those mistakes will not be repeated in relation to Waterloo?
Paul Maynard: There are steps we can take to ensure there is continuity of provision. If I say anything that is commercially confidential I will no doubt get told off, but we are trying to make sure that all those who are looking to bid for the franchise have put into their bids very clear handover plans on how they are going to take into account the works at Waterloo, and how to ensure continuity of approach and mindset. It is worth stressing that, although the works at Waterloo are significant, there is a fundamental difference from London Bridge, in that we are not taking out entire platforms. We are just working on the extra platforms to one side, on the site of the former international terminal. Access to and from platforms 1 to 18, if my memory serves me correctly, should not be interrupted to the extent that it was at London Bridge, where we had severe restrictions.
Q335 Chair: Mr Wilkinson, was the failure there due to you? Was it your miscalculations?
Peter Wilkinson: The London Bridge programme is a function of the Thameslink programme, which has been in the planning now for 12 to 15 years. I cannot take personal responsibility for that, but I share the Committee’s absolute concern that the lessons from London Bridge must be learned and we must make sure that they are not repeated, both in relation to the programme coming up at Waterloo but also for whatever comes out of HS2 at Euston. We really must learn these lessons, yes.
Q336 Chair: Do you think you have learned them?
Peter Wilkinson: We still have work to do to make absolutely sure that, in relation to Waterloo, the management arrangements that we put in place in the successor franchise are absolutely clear about who is accountable for what and the division of responsibilities between the train operator and Network Rail. We know we have to do those things, and we have, therefore, taken those lessons from what we learned at London Bridge, yes.
Q337 Chair: Let me turn to the troubled GTR contract, and in particular the issue of driver-only operation. It appears that the proposal for the requirement for driver-only operation was in the tender documents but not at the consultation phase, when it could have been discussed, for example, with the trade unions. Is that correct?
Paul Maynard: I personally was not in the Department at the time, so I cannot answer from personal knowledge. Mr Wilkinson might have been in the Department at the time and could answer that.
Peter Wilkinson: I can confirm that is true.
Q338 Chair: It is correct.
Peter Wilkinson: It is correct, yes.
Q339 Chair: How did that happen?
Peter Wilkinson: The honest answer is that I do not know. I think it is a question of a legacy of the way the Department competed contracts over very many years. These things, generally speaking, were not discussed in the public consultation documents—the issue of driver-only operation in particular. Nor were the trade unions, leading up to 2012, consulted generally in relation to franchising at all. That has changed since.
Q340 Chair: Would a proposal of that nature be in future papers before a contract is actually awarded? Would it be subject to consultation?
Peter Wilkinson: We make absolutely clear now in ITTs what we are specifying. Those ITTs are fully published and available. Any changes to trains, or the management of those trains, that we require of a franchise, are all now made publicly available during ITT stage. We now publish an awful lot more information in our public stakeholder consultation documents. As much as we can, we work as hard as we can to consult with the trade unions as part of our ITTs as well.
Q341 Chair: Driver-only operation is very contentious. Is that why it was left out of the papers at consultation stage? Was it deliberate, because it was so contentious?
Peter Wilkinson: No, I do not believe it was because of that that it was left out. I think it was just a copying of practice that had been in the franchising system since privatisation.
Q342 Chair: How much does the Department stand to lose on the TSGN franchise from lost ticket sales and compensation claims?
Paul Maynard: I do not have a number off the top of my head, but I would be more than happy to write to the Committee with that piece of information. Clearly, one of the features of a management contract on TSGN is that we have to bear the revenue risk. That is why we specify the franchise as closely as we can, to make sure that we continue to drive quality. On commuter networks in particular, it is quality that drives the Department’s aims in terms of franchising. People often have no choice but to travel, so we use the franchise system to drive quality as much as we can in the franchising process.
Q343 Chair: Mr Wilkinson, you have been to this Committee before and given us oral evidence, and your Department has claimed in written evidence, that performance was measured against the original timetable, when we looked at the troubled situation on Southern Rail. Network Rail has now confirmed to us that performance is actually measured against the plan of the day determined at 10 o’clock the night before. That is very different. Why did you give us wrong information?
Peter Wilkinson: As I understand it, performance is measured against the plan of the day and I think we have confirmed that—
Q344 Chair: That is not what you told us before. Why did you give us wrong information?
Peter Wilkinson: I apologise if I gave you wrong information. I sought to clarify it in a letter that we sent to you subsequently.
Paul Maynard: Performance, of course, also applies to issues such as cancellations and other sorts of delays. It is not just the public performance measures, which is the number of trains arriving within 10 minutes at their destination. There are other ways of measuring performance, besides just PPM, which are not related to the plan of the day that is submitted from Network Rail the day before. Indeed, GTR is not judged in its franchise contract according to PPM either.
Q345 Chair: Mr Wilkinson, you have apologised for misleading the Committee, and we have already expressed our concern to you about misleading us. Was this just a mistake or was it part of something much bigger—an attempt to deceive? How on earth could this have happened?
Peter Wilkinson: No. I am the last person to want to deceive this Committee, or anybody for that matter. If I made a mistake, it was a mistake made in genuine lack of knowledge on my part.
Q346 Chair: Minister, we welcome the letter that you sent to us outlining your plans to publish performance benchmarks, and indeed to change the way that your Department assesses the progress or otherwise of a franchise. The Committee has now received the letter and we will be publishing it. I want to take this opportunity to say that we are very pleased indeed to get that response from you. Is this going to be the beginning of a new era of transparency from the Department? What does it mean?
Paul Maynard: It would be very easy for me to say that in the hope of getting a cheap headline of some sort. What I would say is that since I took over in July I have been wrestling, as has the Committee, I suspect, with trying to understand what the drivers of performance have been on GTR; what data has been collected; the use to which it has been put within the Department; and the way it has influenced the upholding of the contract.
I agree with what the Committee said. We need greater transparency, not just in the timeline of what contractual measures are in effect at any one moment in time, but also making sure that passengers can see what is going on in the franchises on which they rely. This goes back to the points I made before you in July. I want to be seen to put the needs of the passenger first, ahead of what is merely convenient to the industry. This is one example of trying to put the needs of passengers first by ensuring much greater transparency in terms of the performance against which we judge each and every train operating company in this country.
Q347 Chair: How is that going to work where you already have contractual arrangements with operators? Will it go against procedures that you have already agreed with operators?
Paul Maynard: Part of the decisions we now have to take as we seek to implement this measure is how we deal with in-franchise changes. With any great change we seek to make in service delivery, we can choose either to wait for a franchise to be renewed or to discuss delivering it in-franchise. My own preference is to try to do it in-franchise, so that we have transparency as soon as possible across all franchises. One reason I am not giving a fuller answer now is that I want to try to give you a fuller answer in the response to your report. That will have allowed us to do some of the scoping work as to how we might achieve this. It is a fact that these are commercially sensitive pieces of information. We need to ensure that the train operating companies are aware of what we are going to do and that we have that discussion with them. My instinct is to try to make sure that we have an equal level of information across all franchises, so that all passengers are treated equally.
Q348 Chair: It will be a work in progress.
Paul Maynard: Yes.
Q349 Chair: You will tell us more when you give us an official response.
Paul Maynard: Yes, but I recognise the need to get on with it.
Q350 Clive Efford: How do you reach the point where every passenger is treated equally and they all have equal access to the same information, if different franchises limit your scope to make information available to passengers? How do you reach that point of equilibrium?
Paul Maynard: One of the things that I have discovered in this role is that there is insufficient information for passengers to judge the performance of the train operating company; indeed, it is not always located in one convenient location. If we introduce what we discussed in the letter that we sent to the Committee on 3 November, it will get us to that point. I do not want to offer a blanket, cast-iron commitment that every franchise will be done at the same time, because I cannot guarantee that that will occur. The point I am making to the Committee is that that is my aspiration. That is the direction I want to move in.
Q351 Clive Efford: I accept that; it is admirable and good news. Correct me if I am wrong—I may have misunderstood—but I thought you were saying that some franchises would limit the scope of information that you could make available, even though it would be desirable from your point of view to do so. If you are trying to maintain equal balance across all the franchises, even though it may not be a contractual limitation in another franchise, it would limit your scope to make that information available.
Paul Maynard: I am not aware of any train operating companies that would seek to limit the scope of what I intend to do.
Clive Efford: That is the answer to my question. Thank you very much.
Q352 Huw Merriman: Minister, the Southern strike has been going on for eight months. I have constituents who have had to give up their job because they can no longer guarantee getting back for childcare. That is being caused by workers who have been given guarantees over jobs, so there is an unfortunate irony there. It seemed that we might be moving from one stage because the new technology is being brought in, but it appears now that ASLEF are refusing to operate the doors on the new technology. My question to you is, do you see an end in sight? If you do, what will cause the strike to break?
Paul Maynard: First and foremost, clearly I continue to remain exceedingly frustrated over the situation on the GTR network. I continue to urge the RMT to put the needs of passengers first and to call off their strikes. I cannot now personally discern the underlying reason for the strikes. Many of the striking guards have signed up to the new contracts to become on-board supervisors in the new year. I do not see the purpose of the strike, because it will not change the direction of travel that they are now embarked upon.
At the same time, every time I meet GTR I have a discussion with them about how they intend to improve relations with staff once the strike is concluded—once peace breaks out, as it were. It is very clear that passengers’ interests are not served by having staff who are demotivated and not wanting to provide the best level of customer service to passengers. I have seen the general secretary of the RMT say that I want in some way to dehumanise the railway. I find that a very strange accusation to level at me. More than anything else, I want to re-humanise the railway. I want to improve passenger service on GTR and on every train operating company. I undoubtedly see a case for continuing to recruit more staff. We have 31% more staff now than at the time of privatisation. Given the increasing expectations of passengers, the role of an on-board supervisor is to help passengers, support revenue protection, support disabled passengers and enable anyone who wants to utilise the railway to get the best possible experience they can.
I am sure you have heard the Prime Minister say that we want employees to have a stake in the success of their company. I want staff on the railway to have a stake in the success of their franchise. I urge both GTR and indeed all train operating companies to think about what they are doing to incentivise their staff so that they too can take part in sharing in the success of a franchise that works well for passengers.
Q353 Huw Merriman: I would agree with that, and I sympathise with Southern. They have given job guarantees up to the tenure of their franchise. They have given guarantees on jobs and pay. I am struggling to see what more they could do. We had the leaders of both the RMT and ASLEF in front of us. Every single answer was, “It’s all about safety,” despite the fact that this technology has been signed off by the regulator. Surely, it is for the regulator to determine what is safe or not. Doesn’t it come back to Government, indeed Parliament, legislating to state that it is not possible for a union to call a strike on the grounds of safety when the regulatory or safety body has already signed it off as safe?
Paul Maynard: I am sure you know that 60% of GTR commuter services are already under driver-controlled operation, and 85% of trains currently manufactured in Europe are equipped in that way. I do not accept the RMT’s arguments regarding safety. Indeed, I know that GTR have been working with train drivers and other train crew to make sure that the system is introduced in the best way possible, ensuring lines of sight at stations and ensuring that lighting is adequate, and doing everything possible to make sure that at every station where it is deployed it can be done safely. I have complete confidence in the safety of driver-controlled operation. It is standard practice around the world, not just in the UK.
Q354 Clive Efford: I want to know about resources within the Department. Do you have enough resources to be able to oversee franchises? For example, we are informed that no franchise has ever been taken back by the Department because of poor performance. There is no credible operator of last resort to manage the railway in the event of a breach of contract. Does that undermine your ability to enforce a franchise agreement?
Paul Maynard: We have credible operators of last resort; at the moment, it is contracted out to SNC-Lavalin. On your wider point, I left this Committee as a member just as we were starting an investigation into the west coast main line franchise debacle, and I have been struck, since I took over in this role, by the extent to which the Department has sought to learn from that particular episode. There were many things to learn.
I am sure the Committee is familiar with the Brown review and its recommendations on how to improve franchising. Since the pausing of the franchise competitions in 2012-13, we have seen six successful separate franchise competitions, driving value for the taxpayer and, most importantly, driving improved quality on the part of passengers, not least in the renewal of rolling stock. I believe that the Department has sufficient capability to manage this process, not least because it has learned the lesson that it needs to look beyond the Department for Transport for the people who are going to do it, and get people with the relevant commercial experience who can make a success of it. We have come a long way. I do not pretend for a moment that it is perfect. There are always ways you can improve matters, but the Department has learned many of the lessons highlighted by the Brown review and is in a much better place to conduct the current franchising schedule.
Q355 Clive Efford: The franchising schedule shows that eight franchises are expected to be let by 2019. You say that you feel your Department has learnt sufficiently from the west coast franchise experience and has the resources to be able to conclude those successfully.
Paul Maynard: As I sit here now, yes, that is my belief. Should I doubt that, I would clearly seek to expand resources if I need to. We need to be reasonable.
Q356 Clive Efford: In your judgment, is there anything within the Department that needs to be addressed in order to ensure that you can carry out those responsibilities?
Paul Maynard: At the moment, what is most needed on the part of the Department is as clear and predictable a schedule as possible, because the industry likes nothing less than uncertainty. At the same time, I am sure there are improvements that can be made. Maybe Mr Wilkinson can highlight where he thinks he needs to improve what is happening in his own Department. I do not see any grave cause for concern unless you wish to suggest some that I ought to be looking at.
Q357 Clive Efford: Our report might suggest some for you.
Paul Maynard: I shall look forward to it.
Peter Wilkinson: In the six years leading up to 2012, the Department had let only two contracts. At least one of those was quite a short and small contract. In the three years subsequent to 2012, we have actually let 16 contracts successfully—six of them in full competition and 10 of them as direct awards, which are in many ways no less complicated than a competition. We have managed to gain a track record in contracting and franchising. We have a schedule, which, for the very first time in 2013, we published, to show the deal flow to market through franchising, going out eight to 10 years from that point. We have regularly renewed and updated that franchise to reflect the very latest changes as part of our transparency drive.
We expect to be making a further schedule announcement soon. The point you alighted on is a good one. There is some congestion in that schedule in the years ahead, and we are seeking to try to deal with that. The nature of franchising in the contract terms and lets is such that it is entirely conceivable that one will always run into some congestion in a schedule, particularly if there are changes in life in franchises that mean that the Department and Ministers need to make adjustments to franchise terms.
Q358 Clive Efford: If there is a franchise that is more complex, would it assist you if there were a more straightforward and more stable franchise to let, and to do that over a longer period of time, to allow you to focus on those that might be more of a draw on your resources?
Peter Wilkinson: Yes. We keep a constant eye on the schedule and the competitions coming up. Some are more complex than others. The west coast competition that we have just announced is a very complicated competition and procurement, because of the interface with HS2. Therefore you will see that we have allowed for a lot more time to undertake that procurement than we would a classic franchise competition.
Q359 Chair: You announced your plans for the west coast partnership on Friday and said that the next franchise holder of the west coast main line would also operate High Speed 2. Where did that come from? It appeared to be an announcement out of the blue. Why did you decide to do that?
Paul Maynard: I wanted to make sure that, after we initiated the procurement for the west coast main line franchise, we took into account the co-dependency with HS2 as well. It would not have made sense to launch a franchise solely for the west coast main line while taking no account of the needs of HS2. This seemed a pragmatic way to update the franchise process to take into account the fact that HS2 is now starting to be a very real proposition, and we need to start thinking about how services are going to be structured on it, what towns are served by the existing west coast main line and how towns further up the line will benefit from HS2 even if they do not have an HS2 stop. There is a lot of work that needs to start. I am sure that everybody around the table in front of me has ideas as to what HS2 ought to deliver in their particular local area. It seems a sensible way to start that process to ensure that we derive the maximum benefit from what is a very significant investment.
Q360 Chair: What alternatives did you consider before you made the announcement? Did you look at any other proposals for dealing with the situation?
Peter Wilkinson: Yes. We looked at a range of proposals, including franchising the west coast competition traditionally and separately from HS2. We looked at proposals that included a further direct award and extension of the current franchise until the new train services from HS2 could be procured. We looked at a wide range of options. The view we came to is that the right way to procure the franchise is to ensure that the franchise operator for the west coast has a vested interest in the success of HS2. The reason for that is that the business case for HS2 is predicated on a very strong and healthy rail market on the west coast. While we are building HS2 there would be risks, because of the construction impact on the west coast main line, that an operator might become frustrated, or frankly just work the current performance regime to their advantage rather than focusing on making sure that the HS2 construction phase is a successful one, and we get through that programme as quickly and as efficiently as possible.
Q361 Chair: Where is the work that was done on looking at alternative ways of approaching that? Is it publicly available?
Peter Wilkinson: It is not publicly available, no.
Paul Maynard: I think it would constitute advice to Ministers in terms of what decisions we could or could not take. It is worth stressing that the nature of this particular west coast partnership reflects the changing nature of franchising overall. Franchises are becoming more complex, especially on the south-eastern commuter routes, and indeed the intercity routes. We need to try to get a broader consortia of firms involved, which do not just have a background in operating trains, for example, but are better at the customer service aspects of travel and the manipulation of big data.
The portfolio of skills that successful bidders will need will be far in excess of what is traditionally found on the railway. To my mind, this is an example of where franchising needs to go in the future. We will see it in London and the south-east, too, in terms of the skillsets that will be required there. We are, essentially, moving to what are mass transit authorities rather than pure rail companies.
Q362 Graham Stringer: Did you consider setting up franchises so that the current west coast main line competed with HS2?
Paul Maynard: That would clearly have been one of the potential options to look at.
Q363 Graham Stringer: I am asking whether it was considered.
Paul Maynard: I had a discussion that might have involved that particular option, but I rejected it on the basis that I felt that HS2 and west coast main line needed to interact together. We need to ensure that when HS2 is launched it has the best possible chance of success. I do not think it would have been in the national interest to have had two competing providers on an existing network, given the investment that has been made in that line. Five or 10 years hence it might be a different matter, but as you launch the service you need to ensure that you have that transfer and that you do not, as we discussed with Waterloo and London Bridge earlier, have delays and problems on the infrastructure that you might not have if you had commonality of interest.
Q364 Graham Stringer: That is a very interesting argument from a Conservative Minister, if I may say so: co-operation over competition. Can I take you back to your comment on the Brown review? As you say, one of the recommendations was that the Department looks at the organisation and location of rail franchising. Have you looked at that? If you have not, when are you going to look at it?
Paul Maynard: I am not sure quite what you are referring to in the Brown review. Could you explain in a little more detail, please?
Q365 Graham Stringer: It was a recommendation, basically, because the Department had made such a mess of the franchising of the west coast main line. They were saying, “Is the Department up to managing the franchises? Is it up to letting the franchises? When you have got over the original mess, shouldn’t you look at the location?” Should there be an arm’s length body or should it be completely separate? That was the recommendation. I was asking whether you have considered and carried through that recommendation.
Paul Maynard: As you will be aware, before the Department took over franchising responsibility, it sat with the Strategic Rail Authority. That was considered not to have been a great success either.
Graham Stringer: I agree.
Paul Maynard: The track record of the Department since 2012-13, as Peter has just pointed out, letting six franchises and 10 direct awards, shows that the capacity is there, not least in the quality of the franchise outcomes that we have seen and are going to see across the recently let franchises. Our track record since 2012-13 demonstrates that we are right to retain it in-house at the moment.
Q366 Graham Stringer: Does that mean, in simple terms, that you have not considered that recommendation?
Paul Maynard: I personally have not since I took over in July.
Q367 Chair: Minister, you made some interesting comments in relation to the west coast partnership. You said that maybe it was the way franchising might go and that considerations like passenger experience should be more prominent. I do not think you used that word exactly, but that is what you were indicating. Does this mean that you are thinking of changing the way that all franchising is approached, and not just this particular issue?
Paul Maynard: My firm view after a few months in the role is that there is no one ideal model of franchising. There is no steady-state theory of franchising. It is a shifting dynamic market in itself among the bidders, and the expectations and needs of the network constantly shift as well. What I think we have seen since 2012-13 has been a growing role for quality in the franchise competitions, often using a franchise process to drive up the quality of the service as a one-off opportunity to get the bidders themselves to innovate and put passengers’ interests first. That is why we have seen significant investment in over 5,000 carriages across the network, for example.
That is very much the direction I want to go in. I am still open to taking it further in that direction by looking at how we can improve the national rail passenger survey to make it a more powerful tool for driving train operating company behaviour, and looking at the entire spectrum of passenger experience, not just from the moment they step on the train. There is more that we can do in that regard, and I am constantly looking to refine the franchise system each time we have gone through a process and possibly learned something from it as to what can be done better or differently.
Q368 Chair: Would it be fair comment that no current train operating company need have any fear of the franchise being removed from it? We have seen what happened on Southern Rail, and there does not seem to be any move to take that franchise away. As mentioned before, we do not know of any franchise that was removed because of bad performance.
Paul Maynard: I understand the point of the question. My response would be to ensure that we continue to have in our franchise competitions, as we have done in recent years, and perhaps more so, a number of indicators of the quality of performance to ensure that there is active monitoring as we go along. One of the important roles the Department can, and should, play is to monitor franchises from the day that they are let and to actively intervene, in a way which is proportionate, should there be a problem on the network. That is why we saw a remedial plan brought in on GTR, for example. We were trying to ensure that that service improved.
Q369 Chair: On that service at the moment, the penalty has been exacted because of bad performance, but it is 0.2% of the management fee. That is not going to worry them very much in financial terms, is it?
Paul Maynard: I recognise that point. It is why I would also emphasise the reputational damage that can be done to any train operating company by poor performance. I recognise that there is a need to make sure not only that the contractual obligations in the franchise are more transparent but that the penalties for failure are far more transparent. One of the things that affects the number of bidders in a franchise competition, for example, is the size of the parent company bond that has to be put up. That is at risk and is forfeit if a train operating company loses a franchise, for whatever reason. That in itself is a sizeable financial incentive on the train operating company to seek to improve its performance.
Q370 Huw Merriman: This follows on from the Chair’s question. Minister, you talked about having more ongoing monitoring of the franchise terms and the performance. Is there a role for the rail regulator in that?
Paul Maynard: The rail regulator has an important role to play in licensing the train operating company as a safe train operating company. It also has an important role in economic regulation. Much of what we seek to do through the franchising process is a matter of Government policy. We are using franchising not just to get value for the taxpayer but to achieve specific objectives on behalf of the passenger. That is why we seek to use some of the punctuality indicators and the passenger survey indicators.
It is important from the point of view of democratic accountability and legitimacy that the Department retains the ability to use the franchising process to drive up standards. The ORR has an important role to play, not least in economic regulation, but Ministers and Parliament also have an important role in managing those franchises.
Q371 Huw Merriman: I find that a little inconsistent. Obviously the regulator has those powers when it comes to Network Rail, yet when it comes to the performance of the train service itself, the regulator does not. We have had the regulator before us, and each time she has just referenced that it would be for the Department for Transport to decide whether more power should be granted.
Paul Maynard: We have recently completed a memorandum of understanding with the Office of Rail and Road that looks at how we are going to interact more effectively. To my mind, the ORR’s role is a very important one, but when they discharge their duties against Network Rail and they seek to fine Network Rail it is merely moving taxpayers’ money around the public sector. That is very different from the more commercial role we have with train operating companies. Perhaps there is a conclusion to be drawn from that.
Q372 Graham Stringer: I want to follow up on this series of questions. I am going from memory, but you may know, Minister. Train operating companies have walked away from the south-west franchise and twice from the east coast franchise. There may be other examples. Are you saying that you do not believe that can happen now because of the financial penalties?
Paul Maynard: My answer was in reference to whether the Department would take away a franchise, as opposed to a train operating company walking away from a franchise. That is still a theoretical possibility, clearly, but there would once again be a cost to that train operating company in terms of the lost bond.
Q373 Graham Stringer: That is precisely the point I am trying to get at—the balance between being sacked and the cost of them walking away. They clearly thought, when they walked away from those three franchises—I cannot remember if there were any more, quite frankly—that the cost of walking away from the franchise and leaving the problem with the public sector was less than carrying on operating. Are you now satisfied that that cannot, and will not, happen?
Paul Maynard: I would be very nervous of saying that it can never happen. The point I am trying to make is that we need to ensure that train operating companies realise that they have an obligation to maintain their franchise and to ensure that when they bid for franchises they are plausible and realistic bids that can last the length of the franchise. In the past, before 2012, there were instances when bids were overly ambitious and the Department did not scale down the size of the bid to make it more realistic when assessing it.
Q374 Graham Stringer: A lot of your answers in terms of the Department carrying on with the responsibility for letting and monitoring the franchises are about the competence of the Department. Does that apply to the whole length of the handling of the TSGN franchise? Do you think that reflects well on the Department’s franchising competence?
Paul Maynard: I do not want to give a full answer to the report that the Committee issued recently, because that will be on its way to you. What I would say in answer to your question is that there are clearly many lessons that the Department will need to learn, partly because this was such a complex franchise in terms of the needs, the specification and the taking of the revenue risk. It was not like a normal franchise that the Department had let before. I undoubtedly agree that, therefore, there are lessons that can be learned if we have to manage one of similar complexity in the future, not least in the planning stages as opposed to the management stage.
Q375 Graham Stringer: I suppose I am getting round to repeating the question about the competence of the Department. You said that the Department is now competent to the point where you had not considered implementing the Brown review. I just wanted to know if that was covered by the experience of the TSGN franchise, which I would have thought was a bit of a shambles.
Paul Maynard: My answer to your question about the Brown review was that I personally had not considered it. Of course, many of the decisions on the Brown review were taken long before I arrived in the Department. They would have been taken around 2013-14.
Q376 Graham Stringer: Maybe I should rephrase the question. You were very specific about that. Do you know if your predecessor Ministers rejected that recommendation or not? Was it considered and rejected?
Paul Maynard: I will ask Mr Wilkinson if he can answer that question.
Peter Wilkinson: I will go back to a couple of points you raised, Mr Stringer, which are very pertinent. First, the Department is absolute in its commitment to remove a franchise if the conditions are such that that decision is merited. There would be no hesitation on the Department’s part if, in the public interest, it was right to remove a franchise from a franchise holder.
Secondly, we have modified the franchising system since 2012, such that the penalties for failure are not just the performance bond but we can now call upon a certain amount of parent company support to prevent the Department, and therefore taxpayers, taking on any losses in connection with a franchise failure. That might include projected earnings beyond the life of the franchise that the Department would have expected to have achieved.
The TSGN franchise is what I would describe as a bridging franchise. When the Virgin west coast competition collapsed in 2012, the TSGN competition had already effectively started. Its die was rather cast in the sand at that point. It was not one of the competitions that was cancelled and restarted; it was paused. The Department, in restarting that competition, had largely to follow the logic set given to it by the design set before the failure of the west coast competition, which, therefore, limited its freedom to design that franchise anew. It is fair to say that we would not embark on a franchise of that design, that construct and that nature again. It is absolutely clear to us that we have arrived at a place with that franchise that, in plain English, one would not start from here.
Q377 Graham Stringer: I keep coming back to the same point about competence. It is not just about letting the franchise but about monitoring it as well, and why there is not more consideration of alternative ways and alternative bodies for doing that. I did not quite catch the answer as to whether or not previous Ministers had considered and rejected or otherwise the Brown recommendation.
Peter Wilkinson: The Brown recommendation you refer to was looked at within the Department and was considered by Ministers. The decision taken at the time—this is going back a couple of years—was broadly to retain the franchising process within the Department and not put it outside, beyond the walls of the Department.
Q378 Chair: It could be reassessed.
Graham Stringer: I think it means that Sir Humphrey won.
Chair: Could it be reassessed, if necessary? Could that decision be revisited?
Paul Maynard: I am sure we will always look at things in the light of events. At the moment, I do not see any reason to doubt the competence of the Department overall. Part of the idea of improving the transparency of contracted performance, as I set out in my letter, is to give a framework for the Department’s monitoring process that actually enhances confidence in what the Department is doing to maintain the reliability and punctuality of the service.
Q379 Martin Vickers: Minister, a few minutes ago you said, as I understand it, that the Department would scale back bids that were overly ambitious. Assuming that the operating company are experienced in this and they are going to suffer a financial penalty if they walk away from a franchise, why should Ministers or departmental officials know better what the market can take than the train operators themselves?
Paul Maynard: It is in the interests of train operators to make sure that their assessment of risk is sensible and plausible. One of the problems we had pre-2012-13 was that by having longer and longer franchises, up to 15 years in length, particularly on intercity services, it can be very difficult to predict revenue that far in advance. One of the lessons of the Brown review was to have shorter franchise periods, of around seven to 10 years, to allow a balance to be struck between assessing the revenue risk and assessing other types of risk as well, so that the Department could have reasonable confidence in what it was granting to the train operating company. Peter might wish to expand my answer.
Peter Wilkinson: Thank you. During the period of evaluation, we go through a process known as risk adjustment. Essentially, we look at the assumptions that a bidder has given us to arrive at their financial position in the bid, to ask ourselves whether we have achieved the most credible outcome. We stress-test, effectively, through a series of very detailed and rigorous examinations, all lines of cost and revenue in their bid, by applying more conservative assumptions to their bid to see what it does to their franchise. We are testing to see that the franchise can survive its term in all reasonable probability. There is no 100% certainty. If there was to be 100% certainty, it would not be a commercial process; it would be a very different sort of procurement undertaking.
We try to satisfy ourselves using risk adjustment that the bid we have received will survive a term that we have predetermined and published in the ITT, under a wide range of different economic scenarios. The purpose of seeking very large sums of parent company support from owning groups to back up their bids is, effectively, to cause them to put their money where their mouth is. What we do not do is scale back their price. We actually contract the price they have given us, but we ask them to put behind that price a big amount of parent company support, so that if the price does not materialise we can start to call on the parent company funding to fill the gap.
Q380 Chair: Would you like to see more open access, Minister?
Paul Maynard: Personally, yes indeed. Anyone who googles my Hansard contributions will know that I am a great apostle of open access and have called many a time on previous Ministers to enhance the level of it on our network. Blackpool, my own area, will greatly benefit from open access in my view. At the same time, we have to ensure that open access grows in harmony with the network. We need to work with the ORR to ensure that track access charges are equitable and do not penalise franchise operators or, for that matter, open access operators disproportionately. There is also work to do around consulting on what is called a public service obligation levy that we suggest we might want to levy on open access operators to help support parts of the network that might still require financial support from the Department.
There are some tweaks to the system that would enable far more open access to occur on the network than is currently the case. I am pushing my officials wherever possible to be ambitious and innovative when it comes to open access, but also to make sure that we do not penalise the taxpayer by having a reduced amount of funds available to the Secretary of State to spend on the franchise services that we procure as a Government.
Q381 Huw Merriman: My question goes back to the answer given to Mr Vickers. Moving forward and looking at franchise renewals, do you think we are likely to see more contracts where the risk and reward stays with the Department for Transport, or do you think the future direction is risk and reward with the train operators?
Paul Maynard: I am not sure I can see any particular model. As I said earlier, as we have an ever more complex set of franchises, where there is greater complexity, there is a case for revenue risk sitting more with the franchise procurer, but it will vary for each franchise. I would be unwilling to set down a philosophical precept that I will be held to in the future when I decide, for whatever reason, that a franchise needs a particular type of model. There is certainly an issue around how you allocate risk and how far into the future you think you can see to best allocate that risk. We draw lessons from what is done elsewhere around the world where management contracts see revenue risk retained by the procurer. As the Brown report made very clear, the Department is not in the business of marketing, ticketing, sales and all that sort of thing. That is for the train operating companies to do. The Department lacks expertise in that, and that would always militate against moving to a TfL-style pure management contract for every franchise.
Q382 Huw Merriman: Politically, with a new Prime Minister, there has been talk of making sure there is more intervention, and that business cannot just govern for the privileged few. Do you think that is also very much the mantra of the Department for Transport as far as the rail industry is concerned?
Paul Maynard: I would hope it was, certainly by me continually stressing the fact that I want to put passengers first and not the convenience of the rail industry. That is what I continually seek to do with everything that passes my desk. I agree with you about that. It is hardly shock news that I agree with the Prime Minister, I suppose.
Q383 Martin Vickers: Minister, as you know, I am an advocate of open access like yourself.
Paul Maynard: To Cleethorpes.
Martin Vickers: I am encouraged by your reply, which seems much more encouraging than some replies we have had in the more recent past. Would you say there is evidence that the main franchise holders use some of their paths along the main line to block open access applications?
Paul Maynard: That would be leading me down a path of speculation that I am perhaps reluctant to go down. The point I would make about train paths is that they are not merely an opportunity to run a train on a network; they come with a number of seats as well. I would have concerns over any set of circumstances where a large train was replaced by a shorter train that saw a diminution of capacity, particularly where that might be one of the more crowded parts of the network. In my view, we have to keep an eye on the actual capacity that the train path represents in terms of seat numbers, as well as on who is actually running that train path.
Q384 Martin Vickers: You spoke earlier about the balance between open access and the money available to the Department to support the network and so on. Would it be fair to say that the Treasury might be less enthusiastic about open access than you?
Paul Maynard: You would need to ask the Treasury that.
Q385 Graham Stringer: You said earlier, Minister—I cannot remember the exact phrase—that there was not just one perfect system of franchising. There has been a long history of franchising, with short franchises, long franchises, management contracts and detailed specifications. Do you think the conclusion might be that there is not one system of franchising and that we should reintegrate the train operating companies and the track system?
Paul Maynard: I can understand why you go down that path. I would disagree very, very, very strongly with that being the prescription. Without resorting to clichés, we live in a changing world. The nature of passenger travel changes dynamically, and we see twice as many people travelling as at the time of privatisation. The context in which we are seeking to let franchises is always changing. I do not think there is any benefit at all in going back to the era of British Rail. That is not because of anything to do with sandwiches or on-board catering or anything else, but simply because of the size of private investment in the network since then. There are too many parts of the network that still require public subsidy, and I recognise that, but we have seen substantial private investment as well, and that would simply not be there if we just returned to British Rail. There is a lot of work to do in aligning the incentives between train operating companies and publicly owned Network Rail. That is where we can start to drive benefit for the passengers. I do not think reinventing British Rail is a way of putting passengers first at all. It does the complete opposite, in fact.
Q386 Graham Stringer: I do not think McNulty in his recommendation was reinventing British Rail. I think he was trying to say that some of the problems arose from structural problems between Network Rail and the train operating companies. I do not think he was talking about a national reintegration, but your answer is very clear. I have one final question, Minister. What are you doing on Boxing day?
Paul Maynard: I hope, if I happen to catch a television news programme, that I will be seeing successful ongoing work on many of the important infrastructure projects across the country as a whole.
Q387 Graham Stringer: Will you be available if something goes badly wrong?
Paul Maynard: I shall be in my native north-west, poised and ready to go, but I have every confidence in Network Rail’s orange army. The simple truth is that if we want the investment in our infrastructure that we are seeing at the moment, Christmas and new year is the best time to do it, because it is the quietest time on the network. As long as we warn passengers well in advance and give them every chance to plan their journeys, I think it can be done successfully.
Chair: On that note, we had better finish before we start a whole new debate. Thank you very much.