2.2 The Department paused its franchise programme following the cancellation of the InterCity West Coast competition. By the time it restarted the programme in 2013, this pause had added to congestion in the existing schedule of competitions and the Department could not further extend existing contracts. In line with the Brown recommendations, the Department tried to limit the number of competitions it ran in each year. This was to avoid overburdening the market and allow the Department and the operator market to plan resources effectively.
2.3 The Department therefore took the pragmatic decision to use single-tender contracts to let short-term 'direct awards' to incumbent operators. In doing so it had to weight the benefits of a manageable, staggered programme of competitions against risks to value for money such as:
• the absence of competition that would help drive down the price of bids or drive up service quality - as we explain in Part Three, effective competition is one of the Department's main ways of achieving value for money; and
• additional costs and demands on resources for the Department. While the resource requirement for a direct award is not as high as for a franchise competition (a direct award takes around 14 months from start to finish, compared to around 24 months for a franchise competition, and the team is smaller) it means the Department has to carry out two franchise procurements in relatively quick succession.
2.4 The Department is aware of the risks to value for money created by direct awards and has tried to limit their number and duration where possible. It has not used a direct award for five of the 15 franchises. Also, although the Department originally intended to use a direct award on the South Western franchise, this was with the aim of the incumbent operator and Network Rail working together in a close alliance across one of Network Rail's spending control periods, rather than to help stagger the programme. In the event, the Department cancelled the direct award process in July 2015 when it failed to reach agreement with the incumbent operator.
2.5 The Department has also tried to minimise the duration of the direct awards, and therefore the length of time a franchise runs without competition. Most last between two and three years. The exceptions are South Eastern, which will run for three and a half years, InterCity West Coast, which will run for three years and nine months, and Great Western, which could run for a total of six and a half years over two direct awards.
2.6 There is ongoing uncertainty about the detailed plans for Euston Station as part of the High Speed 2 programme. In November 2015, the Department decided to push back the competition for the InterCity West Coast franchise by a further six months to June 2016, in order to align the InterCity West Coast franchise with High Speed 2. As a result, the Department has had to extend its existing direct award contract with the incumbent operator. The Department has no further options to extend the current contract. If the Department needs to put the competition back again it will either have to issue another direct award, or appoint the government-owned Directly Operated Railways (DOR) to run the franchise temporarily.
2.7 The Department gave the first direct award for Great Western as part of the redesign of the franchise programme schedule. The contract ran from October 2013 to September 2015. The second direct award was agreed in March 2015 and is scheduled to run from September 2015 until April 2019, with an option to extend it for up to 12 months to April 2020. The Department decided to do the second direct award because it judged that work to electrify the route, and the introduction of new trains, created too much uncertainty to carry out an effective competition. It also wanted to use the incumbent's knowledge of the route to help with Network Rail's electrification programme and the introduction of a new fleet of Intercity Express trains. However, this means that if the full direct award term is used, the Great Western franchise could operate for six and a half years without the benefit of competition to determine the price.
2.8 The Department has completed ten direct award negotiations and has two more to complete (West Midlands and Cross Country).6 The Department has now completed five franchise competitions on the routes that have been run under direct awards.
________________________________________________________________________________________
6 The 12 Direct Awards cover 11 franchises. There have been two Direct Awards for the Great Western franchise: one which ran from 2013 to 2015 and a second which will run until at least 2019, which the Department signed in order to facilitate Network Rail's infrastructure programme and the introduction of new Intercity Express trains.