13 Uncertainty, delays and cost increases on major infrastructure works pose risks to value for money in rail franchising. The scale and complexity of planned infrastructure work has presented challenges for the franchising programme, and Network Rail's infrastructure improvement programme is costing more and taking longer than planned. In addition, there are major decisions pending about the construction schedule for High Speed 2. The Department must decide between a range of responses and judge how to protect value for money while keeping train services running. Its options include:
• Delaying competitions until there is more certainty about infrastructure plans.
The Department did this with, for example, the TransPennine Express, InterCity West Coast and Great Western franchise competitions. Further decisions to postpone competitions could result in the Department having to extend contracts, issue direct awards or appoint the government-owned Directly Operated Railways (DOR) to run the franchise temporarily without the benefit of competition. This is particularly the case with the InterCity West Coast franchise. As a result of putting back the competition again, to align the franchising programme with High Speed 2, the Department has used up its contractual options to extend the current direct award.
• Issuing a management contract that protects the operator from the risks to revenue.
The Department took this approach on the Thameslink, Southern and Great Northern franchise to enable the operator to focus on supporting the delivery of major infrastructure work, including the redevelopment of London Bridge Station, rather than maximising revenue where there are risks that services could be affected. This option could reduce returns to the taxpayer in the short term.
• Managing change during the life of the contract.
The Department is doing this on the direct award for the Great Western franchise, where there is significant uncertainty about the timing of infrastructure work. The Department may need to weigh up the risk of costly changes during the life of a franchise against the risk that bidders include additional costs in their bids where there is uncertainty about key assumptions at the time of the competition.
The Department is trying to balance these issues for forthcoming competitions. The Department has also set up an Integrated Delivery Directorate to help identify and manage interdependencies between different franchises, infrastructure work and changes to trains.
14 The resources of the Department and potential bidders could be stretched by high levels of activity planned for 2016 and 2017. The Department produced a phased competition schedule to avoid overburdening the market and to encourage competition. In July 2015 the Department decided to end negotiations for a direct award for the South Western franchise as it was not satisfied that contracting with the incumbent operator offered value for money. The Department instead brought forward the South Western franchise competition. In addition, in November 2015, the Department decided to push back the InterCity West Coast competition by six months. This means that the Department is now planning to start competitions for the South Western, InterCity West Coast, West Midlands and East Midlands franchises over a period of eight months and award all four franchises between February and November 2017. This remains in line with the recommendations of the Brown Review.
15 The Department may find it harder to get value for money in future competitions if market interest drops below the current level. The three competitions that have started since the Department relaunched the programme each received three bids. By the Department's own measure, if it receives fewer than three bids this may reduce value for money. The Department is trying to encourage new entrants to the market, and maintain interest from existing operating companies. For example it is simplifying the pre-qualification process and reviewing the number and size of franchises in the network. It has not yet decided how it might adjust its procurement approach to protect value for money if market interest falls, for example by introducing more competitive negotiation and dialogue with bidders.