4.7 In this environment, the Department has to make difficult trade-offs. As set out in Part One, the Department is focused on maintaining the competition schedule, but going ahead when there are particularly high levels of uncertainty could result in costly and complicated changes during the life of the franchise. However, the option to put back competitions is complicated further where the existing franchise is coming to its end because an alternative means of maintaining rail services, such as a direct award, may be required.
Box 2 Uncertainty about Network Rail's infrastructure improvement programme At the time that the 2014-2019 programme was agreed, planning for many improvement projects was at an early stage of development, with 52% of planned spending on improvement being on projects which had still to demonstrate their feasibility. In June 2015, the Secretary of State announced that Network Rail's programme of improvement works for 2014-2019 would be reset as a result of delays and cost increases. He announced that electrification work on the TransPennine Express franchise and the Midland Main Line would be paused but that the electrification programme on the Great Western Main Line would continue. Following its reclassification as a public sector body, new constraints were placed on Network Rail's ability to borrow, which limits its flexibility to absorb cost increases, which have occurred as plans became more certain. The recently appointed Chair of Network Rail, Sir Peter Hendy is carrying out a review which will look at how the upgrade of the railway should be taken forward and is expected to be published in the autumn. The Department has contributed to this review by providing Sir Peter with a list of the projects that it sees as priorities to facilitate delivery of its projects, including franchise competitions. On 30 September 2015, the Secretary of State announced that the electrification of the TransPennine and Midland Main Line routes would be 'un-paused', but there remains significant uncertainty about costs, schedule, and funding. Source: Committee of Public Accounts Memorandum, Planning and delivery of the 2014-2019 Rail Investment programme |
4.8 The Department has shown it is prepared to change the programme schedule when there is uncertainty about infrastructure assumptions:
• In October 2014, two months before the Department was due to issue the invitation to tender, it decided to delay the Northern and TransPennine Express franchise competitions by two months because of uncertainty about the specification of Network Rail's electrification of the northern section of the TransPennine route. While this had relatively little impact on the overall schedule, the late change resulted in increased costs for bidders and the Department.
• In July 2015 the Department put back the start of the InterCity West Coast franchise competition from August 2015 to December 2015, because of uncertainty about plans for redeveloping Euston station as part of the High Speed 2 programme and the level of disruption this would cause for trains entering and leaving the station. This has made it challenging for the Department to decide how best to allocate risk between itself and the operator. The uncertainty about the detailed plans for Euston Station is ongoing. 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.
4.9 The Department has also managed uncertainty by tailoring its approach to individual franchises. In the Northern and TransPennine Express franchise invitations to tender, in order to run a consistent competition and to evaluate bids on the same basis, the Department required bidders to present proposals based on the assumption that electrification works and other infrastructure enhancements would not be completed during the term of the franchise. The Department was also clear that this could change during the franchise.
4.10 The Department considers a range of options on how best to allocate risk and what form of contract to use where uncertainty exists, and has tailored its approaches to franchises:
• The Department issued a management contract on the Thameslink, Southern and Great Northern franchise. Under this form of contract the Department is taking revenue risk to protect the operator from uncertainty and disruption resulting from the renovation of London Bridge station and to focus the operator on supporting the delivery of infrastructure works, rather than maximising revenue.
• On the Great Western franchise the Department has let two successive direct awards to the incumbent operator and is relying on managing contractual change during the life of the franchise to protect value for money. Because of the uncertainties about the electrification programme, the Department has been working with the operator and Network Rail to consider multiple contract changes concurrently, to develop a more efficient approach to managing infrastructure change and the impact on passenger services, operator costs and revenues.
4.11 The Department has begun to develop a more integrated approach to anticipating and managing interdependencies, including improving the alignment of Network Rail and franchise operators' performance incentives, but this approach is not yet embedded throughout the Department. It created the Integrated Delivery Directorate, headed by a Director within the Rail Executive, which works with teams on high risk projects to map and mitigate interdependency risks. Decisions on significant changes to programmes are discussed at the Integration and Change Board, which is attended by the Managing Director of Passenger Services and senior staff from around the Rail Executive. We have seen examples of this increased focus on integration benefiting the franchising programme:
• The Integrated Delivery Directorate supported decisions on the timing of the Great Western franchise competition by producing an assessment of Network Rail's infrastructure plans for the route and the timing of the introduction of new InterCity Express trains.
• The Passenger Services Team in the Department is currently working with the Integrated Delivery Directorate in light of plans for the redevelopment of Euston as part of the High Speed Rail Programme. The Department plans to work with the rail industry and HS2 Limited to manage the uncertainties this presents for the InterCity West Coast and West Midlands franchises.