23 In the first wave of rail franchising, bidders lacked a real understanding of British Rail's operating costs and expected to be able to make substantial savings which were not achieved. The operators could not reduce staff levels as much as planned and competition pushed up drivers' wages. For example, on their South Eastern franchise, between 1997-98 and 2001-02 Connex expected to cut controllable operating costs by 11 per cent but they actually increased by 27 per cent.xv
24 In the future, the Department considers that operating costs are well understood and does not consider cost pressure an important risk. This is because:
■ Bidders appear to take a similar view on costs going forward. For example, on the South Western procurement, all four bidders predicted costs at a slightly higher level than the Department's historic shadow bid calculation then averaging four and one half per cent.
■ The Department's evaluation of bids identifies weaknesses in bidders' assumptions about costs and makes appropriate adjustments to their financial predictions.
25 This should mean that there is greater certainty and robustness to the operating costs within winning bids. As a result, bidders for the last five franchises have mainly competed on their revenue projections. Operating costs within bids were, on average, within five per cent of costs estimated by the Department. Passenger representatives, however, still find some mobilisation costs baffling and told us that re-painting carriages in the corporate colours of the new franchise operator - perhaps within months of previous scheduled repainting - annoys most rail passengers.
26 Following award, the Department provides the winner and losing bidders with feedback on their bids and the bid evaluation process for that specific franchise.