PAC: "Passengers paying the price for broken model of rail franchising"

REPORT SUMMARY

We are deeply concerned that the Department for Transport’s management of two of its most important franchises has been completely inadequate and could be indicative of wider weaknesses in its contract management capability.

Passengers on the Thameslink, Southern and Great Northern franchise have suffered an appalling level of delays and cancellations since the franchise started in 2014. At one point, less than two thirds of trains arrived on time.

This totally unacceptable state of affairs which caused misery for passengers was due to a catalogue of failures by the Department, Network Rail and the operator, Govia Thameslink.

The Department was too ambitious about what could be achieved, and it overlooked the poor condition of the infrastructure of the rail network. The Department was also ambivalent about the risk of industrial action and neglected to engage constructively with rail unions. 

The Department failed to see, or chose not to see, the perfect storm of an ambitious upgrade programme coupled with plans to increase driver controlled operation of trains.

While there has been some improvement recently and there are signs that Network Rail and Govia Thameslink are now working together more effectively, we remain sceptical that this will address the serious and deep-rooted problems we have identified. 

On the East Coast franchise, the Department has failed to learn the lessons from previous failures of the franchise, and has again allowed the operator to promise more than it could deliver. The Department will have to put in place new arrangements for running train services. 

We are concerned that the Department could terminate its contract with VTEC yet still give the operator the opportunity to run the franchise again in the future.

The issues we have found with the East Coast and TSGN, and the small pool of potential bidders in the market, highlight the broken model of franchising.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“The operation of the Thameslink, Southern and Great Northern franchise has been a multi-faceted shambles causing untold misery for passengers.

“Meanwhile, the East Coast franchise has failed for a third time because of wildly inaccurate passenger growth forecasts.

“In both cases the Government appears to have seen its task as simply to contract out the service, with wholly inadequate consideration given to passengers’ best interests and behaviour.

“This imbalance cannot continue. The franchising model is broken and passengers are paying the price.

“If taxpayers are to have any faith in Government’s ability to deliver an effective passenger rail network then it must conduct and act on a thorough review before any further franchises are awarded.

“At its heart should be new measures to embed the protection of passengers’ interests at a contractual level – and to ensure taxpayers’ interests are properly protected should franchisee performance break down.

“Govia Thameslink’s new train timetables kick in next month. This will be a critical test for the operator and we will be watching closely.”

CONCLUSIONS AND RECOMMENDATIONS

Passengers have suffered unacceptable levels of disruption due to the Department’s inability to effectively balance the trade-offs between short-term returns to taxpayers and sustainable improvement of passenger services. The Department had complex priorities for the franchise: to maximise the number of services for passengers, modernise practices on the railway and support the Thameslink programme, and to do all of this while operating on a congested and unreliable network. The Department’s failure to manage these competing aims meant that the priorities and incentives of the operator and Network Rail were not adequately aligned in the interests of passengers.  In the first three years of the current Thameslink, Southern and Great Northern franchise, services delivered by Govia Thameslink were the least punctual on the whole rail network, causing misery for many passengers. Network Rail told us that the increasing number of trains using the railway meant that knock-on effects of any problems are greater than they used to be, and that until recently it was ‘virtually impossible’ to get enough time to do the required amount of maintenance work, since the operator runs trains, as part of its franchise agreement, throughout the night on parts of the network. It now recognises the need to spend £900 million to ensure that the network can accommodate the increased number of train services that will be delivered by the Thameslink Programme. In its written evidence to the Committee, ASLEF points to a lack of communication between Network Rail and train operators that results from the lack of alignment between control periods and franchising schedules and more successful collaboration would be mutually beneficial. Network Rail and Govia Thameslink told us that they are now working together much more closely, and that this has led to a 38% improvement in the reliability of the railway infrastructure coming out of London Victoria station.         

Recommendation: From the next franchise it awards onwards, the Department should ensure that the priorities and incentives of Network Rail and the franchise operator are aligned to serve the passenger. These incentives should be embedded in contracts, rather than relying on good relationships between individuals.

The Department turned a blind eye to the potential level of industrial action on the Thameslink, Southern and Great Northern franchise, a particular lack of foresight given that it already knew that passengers were at risk of disruption from the Thameslink programme. The Department recognised that the Thameslink programme is probably the most complicated upgrade it has ever attempted on the live UK rail network. It told us that it wanted the operator to focus on delivering the programme rather than maximising revenue. In spite of this objective, and alongside other ambitious elements such as increasing the number of services, the Department allowed bidders for the franchise to propose increasing the proportion of driver-only operation (also known as driver-controlled) trains, although it knew that there had already been some industrial action relating to the introduction of driver-only operation. The Department told us that it expected this to cause some disruption for passengers, although it admitted that it had not discussed its plans with the rail unions. The RMT told us that no specification for any franchise has ever been shared with them and that extending Driver Only Operation was not in the public consultation for the Southern routes. ASLEF also assert that the Department accepted GTR’s driver only operation plan but did not fully evaluate the possible effects on passengers of industrial action, nor did it ask GTR to do so. The Department asserted that the large-scale and long-term industrial action was responsible for the worst levels of disruption, including the period when fewer than two thirds of trains arrived on time. The way the Department designed the franchise meant that the operator did not have the usual incentives to maintain performance levels for passengers as it did not benefit from rising passenger revenue. Whilst the Department seeks to heap blame on the unions, it must acknowledge that its own decisions and lack of constructive engagement have played a large part in the dismal service for passengers.

Recommendation: The Department should reflect on the lessons from TSGN about the level of change that can be achieved on any one route. Where it does anticipate change, it should ensure the franchise operator has robust risk management plans in place which take into account how other elements of the broader rail system have the potential to improve or harm delivery of passenger services. It must ensure it engages with all key stakeholders including rail unions, as an open and honest dialogue is in the best interests of passengers.

It is unacceptable that the Department agreed to disregard the terms of its contract and settle the level of fines Govia Thameslink will pay for future poor performance before knowing whether Govia Thameslink was performing well or not. The Department told us that it had considered cancelling its contract with Govia Thameslink Railway in early 2017 because performance for passengers was so poor. Instead, in July 2017, the Department agreed a settlement worth £12.4 million with the operator for the period between September 2015 to September 2018 to compensate for actual and expected poor performance. It said that a settlement would benefit passengers more because using the performance regime available within its contract with Govia Thameslink would have required management time spent ‘arguing over a huge number of detailed claims’ instead of focussing on improving performance. Govia Thameslink agreed that it was time to ‘draw a line and move on’. The Department asserted that it made a good decision in settling for performance in future as Govia Thameslink will pay more under the agreement than it would have done if the Department had enforced the terms of the contract. However, the standards expected of all public services dictate that penalties should always be determined by the actual level of performance. Settling on the basis of future performance means the Department has fewer levers available to it to manage Govia Thameslink’s performance if it does not improve. The Department told us that if performance deteriorated, it could always find Govia Thameslink in breach of the contract. This is not a credible threat, since the Department has already decided once that it could not use the performance regime in the contract.

Recommendation: The Department should write to us by September 2018, explaining how it has reviewed its approach to performance management of rail franchises, in order to reduce the risk that performance regimes break down in practice and to set clear expectations for protecting passengers and taxpayers if alternatives to the contracted regime need to be found. It should also set out how it held Govia Thameslink to account between September 2017 and September 2018, and how it will do so after the current agreement ends.

We are concerned that the Department still does not have a good enough understanding of what causes passengers to choose to travel by rail, given how central this is to making the right decisions for passengers and taxpayers. The East Coast franchise has now failed for the third time, and yet again it has failed because the operator’s passenger growth forecasts were wildly wrong and created a serious gap between predicted revenue and reality. The franchise previously failed in 2006 and 2009. In 2011, the previous Committee found that the Department had not been rigorous enough in questioning the previous franchise holder on its over-optimistic assessment of the business, and did not test bids against a range of different scenarios. As we were reminded in a written submission from the National Union of Rail, Maritime and Transport Workers (RMT), this story bears some of the hallmarks of the collapse of the previous East Coast franchise in 2009. The RMT also argued that the slowdown in passenger journeys between 2010-2013, precisely at the time when bidders were preparing their bids, did not support the expected increase in passenger numbers. The Department told us that this franchise is ‘perhaps more volatile than others’, but also said it had identified 50 or 60 factors that affect the behaviour of passengers and demand across the network, such as the relatively low cost of petrol and increased flexible working. It recognises that accurately predicting demand is extremely important both for itself and for the rail industry. The Department told us that it wants bidders to be ambitious about what they offer passengers. However, Stagecoach was clear that bidders would only put forward ambitious proposals if the level of risk they were asked to take on was acceptable. In written evidence to the Committee, ASLEF argue that train companies are encouraged to overbid because the highest bidders generally win. ASLEF also say that the government pushes for ambitious improvements such as increased capacity and more and faster train services which has led to unrealistic contractual demands and unachievable promises being made. The resulting problems and delays have had a knock-on effect on train operators. Companies appear to be aware of this, leading to fewer and fewer potential operators interested in bidding for franchises. Stagecoach told us that its failure to forecast passenger demand accurately means that it will lose about £200 million from the East Coast franchise, which is equivalent to about 20% of the company’s current value. But ASLEF also point out that when operators are forced to hand back the keys and the process of refranchising begins, it is ultimately the taxpayer who incurs the cost. Franchisees bid too much and the public sector pick up the pieces.

Recommendation: The Department must take urgent action to improve its understanding of what causes changes in passenger demand, and use its understanding of these factors to model a range of likely outcomes before awarding franchises. It must write to the Committee before it awards any more franchises to explain the improvements it has made.