1. Each year UK passengers make more than one billion journeys on rail services, run by the private sector. In 2006-07, passengers paid about £4.8 billion out of a total cost of £9 billion for these critical public services. The Department for Transport (the Department) provided around £3.1 billion as grants to Network Rail, £0.8 billion directly to train operators and £0.3 billion to local bodies.
2. In 2005, the Department took over responsibility for letting and managing rail franchises from the Strategic Rail Authority. Following the hand-over, it completed the letting of four franchises in 2005-06, including the InterCity East Coast franchise awarded to GNER. The Department specified and let the South Western franchise in 2006-07, and a further four franchises in 2007-08. Throughout planning and procurement, the Department has specified services that reflect its objectives to control costs and live within the public funding available. The Department is not, however, always well informed about the likely impact of its rail franchising decisions on passengers and, therefore, on its wider transport objectives.2
3. The Department's specification for each franchise is based on a cost-benefit test: services with higher benefits than costs are generally included in the specification. Some exceptions are permitted on safety grounds.3 Train operators are allowed to put forward innovative proposals, but the selection of winning bidders for each franchise is largely based on bids for the base specifications.4
4. Local bodies may also elect to pay for services to meet local needs and which need additional subsidy. Most train operators, however, admitted that they do not put much effort into working up the optional part of their bids. And, because the Department does not involve the local bodies in evaluating and negotiating the actual bids, local awareness of shortcomings in bid options might be overlooked.5 As a result, the crucial local voice in securing suitable train services may be lost.
5. Overall, the Department has been successful in stimulating competition and letting franchises to planned timetables. There has been keen competition with three or more bidders on seven out of the eight franchises, although overseas companies showed little interest because of the strength of the established UK bidders.6
6. Varying levels of activity make direct cost comparisons with the Strategic Rail Authority difficult. The Department's costs are generally lower, although for most bids the Department still spends over £2 million on consultants. Train operators have complained about their own costs of up to £5 million for each bid. The Department cannot influence the total cost incurred by bidders, which includes the bidders' own choices on success fees and bonuses, but it has reduced the document length and the number of detailed plans required in an effort to reduce bidders' costs.7
7. The Department has operated with fewer staff than the Strategic Rail Authority, bringing the cost of managing franchises down from £7.3 million in 2004-05 to £5.7 million in 2007-08. Some 30% of staff had departed within two years of the change in responsibility. The Department expects people to move on every two or three years and many Strategic Rail Authority staff had been in post for some time. The Department's rail service delivery team does not normally recruit from the wider civil service. It recruits largely from the railway industry itself instead, and has difficulty in attracting and retaining staff because it pays salaries towards the bottom quartile of that industry.8
8. The Department's arrangements for identifying and managing risks, including handling the failure of a train operator, follow good practice. For example, the parent company of GNER, which operated the InterCity East Coast line, was unable to support GNER through a period of financial difficulty. The Department negotiated a management contract with GNER to operate the service until the franchise was re-let competitively. The passenger experience on this line has, however, continued to be much the same after re-letting the franchise to National Express in 2006-07.9 National Express has committed in the franchise agreement that it will bring in a number of specified improvements in accordance with the timetable set out in the Department's note to the Committee.10
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2 Qq 94, 114, 122, 131-133, 159-161
4 C&AG's Report, paras 1.10, 13; Appendix 4
6 Q 115
7 Q 121
8 Q 99
9 Qq 15-16
10 Ev 18-21