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Rail Fares and Franchises

It is a pleasure to serve under your chairmanship, Mrs. Anderson. I welcome the opportunity to have this debate, which comes at a good time. Three new franchise competitions will be launched this year: Essex Thameside, which currently trades as C2C, Greater Anglia and the East Coast franchise. We have heard some interesting contributions from the Chair of the Select Committee on Transport, my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman), from my hon. Friends the Members for Sheffield, Hillsborough (Ms Smith) and for Selby (Mr. Grogan), and from the two Opposition spokespersons. The National Audit Office report on rail franchising, published in 2008, found that the franchise system had delivered good value for taxpayers and generated keen competition for franchises. We remain committed to raising operational performance through the rail franchising process. By 2014, for example, we want punctuality to reach 92.6 per cent. or better. However, the performance of the franchise system in the recession raises inevitable questions and highlights major issues about how franchise contracts and competitions handle risk and responsibility. To set out our thinking and potential changes in the next round of franchises, the Department for Transport published "The Future of Rail Franchising" on 20 January this year. We are still debating the issues, so the views of the Committee are particularly timely and valuable. Franchising must strike difficult balances between competing objectives. The Committee report recognises that when it points out that contractual controls on services, ticket offices and fares protect passengers, but prevent operators from responding in a downturn by reducing services and costs. The Government have invited views on that and several other key matters considered in "The Future of Rail Franchising". Operational challenges vary between franchises, as does the scope for investment, new stock or major service change. That is why each franchise must be considered separately. There is no division between the Secretary of State and me on the question. The point that I was testing with the hon. Member for Wimbledon (Stephen Hammond) was about the Conservative line, which seems to be that if we extended franchises to 20 years or more irrespectively, it would somehow solve all the problems. The hon. Member for Lewes (Norman Baker) may have suggested the same in the past. However, I welcome the recognition that the KPMG report has brought new thinking on how variations in the economy during the life of a franchise might enable the management of risk sharing over the length of the franchise. We intend that the next rail franchises will be let for a minimum of 10 years. Bidders will be able to make proposals for terms longer than 10 years in return for commitments to additional investment. That will allow us to receive the benefits of continuity and longer-term partnership. However, we would not want to rule out shorter franchises in future. There is no single right length for a franchise, as changes on the network can make the future of the business hard to predict for prospective bidders. One of the most important issues that we are considering is the allocation of risk. The franchise system must be designed to deliver for passengers and taxpayers across the economic cycle, not just in a downturn. The recent downturn has tested the performance of the current system in exceptional circumstances. National Express's inability last year to continue its East Coast franchise due to economic conditions was regrettable. The current franchise system takes account of the fact that franchisees may face financial difficulties, and is designed so that core passenger services are not disrupted if an operating company defaults. The cost of terminating the East Coast franchise will be recovered from a performance bond maintained by National Express East Coast. The overall cost to the taxpayer will depend on factors such as ticketing revenue over the next 18 months, but the Government will receive all the revenues. That high-profile default and subsequent contractual termination must be viewed against the broader canvas of franchising as a whole. However, events have led us to reconsider the current franchise arrangements designed to ensure that the train operator remains solvent and cannot walk away from the contract without a monetary penalty. We therefore propose to increase the amount of the bond that franchise operators provide to cover the Department's costs in the event of default. We will also re-examine how parental guarantees are calculated, so that owning groups are required to stand behind losses incurred by the operator to a predetermined level. We propose to make it easier for operators to invest their own money during the life of a franchise and receive part of that investment back after the franchise ends. In assessing bids, we intend to place greater weight on additional ideas and options generated by bidders.