News Desk

Report of the Transport Select Committee

27th July 2009

The Select Committee system in this country is a constant source of fascination. Each committee has the right to ask the good and the great to attend their presence on parliamentary premises and ask them difficult questions; generally (Boris Johnson apart) the questions are eventually fully answered, however troublesome they may be. In a few cases obfuscation becomes obvious, just as good a result in its own way, since deliberate concealment is itself a finding. What happens then is a bit of a lottery. A report is produced, usually with a string of recommendations. The government produces a press release, usually not answering the specific points made (however rapier-like) and insisting that existing government policy is just perfect, or that the points made are out of date and have already been addressed. Life goes on and nothing much changes. Or that is how it seems.

The Transport Select Committee is all the poorer for the loss of its redoubtable chairman, Gwyneth Dunwoody. Her approach to witnesses was of the kind calculated to gain information through a combination of terror and shear personality rather than one which could be called encouraging, but her approach to the Executive was the same and, importantly, she could sow the seeds of a story to the press in a way where it was hard to ignore it, at least some of the time. The present Select Committee does good work gaining evidence, but seems to have lost the initiative in knowing how then to handle it. The present Transport Committee has just produced a report on fares and franchising where the hand of cards provided by the evidence collected does not seem to have been well played and therefore risks being marginalized.

On the basis of previous reports, the Committee has already determined that the higher the franchise premiums accepted by the government, the higher will be the fares. There is a certain logic to this. The first years of franchising stripped out most excess cost (where there was some) so more money to the government (or less revenue support, where it was available) can only have been achieved from more income. In turn, more income was a product of ticket sales and fares charged. It is open to question how much more aggressive marketing effort has been under private sector control, but a booming economy has certainly been a huge contribution to increases in rail usage. The remaining component, fares levels, is a troublesome area for analysis. In essence regulated fares (mainly walk-on fares available by any operator) are controlled by government which has encouraged significant above-inflation increases over the last few years. This is justified by government by the need to shift the burden of funding to the user rather than the taxpayer, even though some of the taxpayer’s contribution was created by the post-privatization difficulties precipitated by the Hatfield accident. In any event, with rail passenger volume rising, there was evidence that people were prepared to pay the higher fares which had followed a period of below-inflation increases. Unregulated fares (mainly single operator fares with various other restrictions) have been rising more than inflation. All in all, then, fares have gone up quite a lot and the Committee has seen through the mist of government announcements saying ‘fares are a matter for each train operator’ and placed the blame for increases squarely on government shoulders, which of course it finds an uncomfortable burden.

The Select Committee asserted in 2006 that the franchising system was nothing short of a ‘policy muddle’, while the government responded with a predictable statement that the system was delivering good services and value for money. Shortly afterwards, GNER pulled out of the East Coast franchise as it could no longer afford the eye-watering premium payments, and National Express was appointed, with higher short term payments, and seems to be about to go the same way. It is no surprise to see the Committee suspicious that all is in fact well with the process. In this connection, the Committee is also surprised to have been told repeatedly since February that the Secretary of State could make an assurance that no train operator was in financial difficulties or seeking to renegotiate terms. On 1st July National Express indicated it could not afford to continue support for the East Coast franchise and that they had been seeking to renegotiate the contract ‘over several months’. Now ministers do not tell untruths, do they, so we can surely find a succession of poorly posed questions and unhelpful, incomplete or misleading (but not inaccurate) answers behind all this. An interesting insight, perhaps, into the workings of the government machine. The Committee’s current view? ‘The current system of rail franchising is a muddle’.

Other points the committee settled on are as follows:

• Clearly a number of franchises have severely reduced costs (staff reductions have hit customer service in several cases) and the suspicion is that more franchises are in trouble. The Committee wants to see more transparency about this as it is potentially a huge risk to the taxpayer.

• The Committee lamented the fact that the actual risk transferred to private operators by the franchising process was quite small, and had been further diminished by the introduction of the risk-sharing mechanism often called ‘cap and collar’, where after a period of time the government shared in excess profit or carried risk of significant revenue shortfall, as the case may be. The government cannot let services stop, or significantly deteriorate. The Committee thought this led to excessive risk-taking by bidders and thought the DfT was unwise to accept promises of rising revenue as the key factor in arriving at award decision. This follows an observation made during the 2006 Inquiry by a noted transport consultant that ‘the economy posed the most serious risk to the railways’, and that ‘if there is a downturn in the economy, almost all the train operating companies will find great difficulty on their revenue line and that means the government will end up bailing them out’. Exceptionally a train operator can walk away, while the government cannot. The Committee makes some hard generalizations about the nature of private sector operators, but the criticisms are made as though they are supposed to behave like public sector bodies; they aren’t and never will be. The Committee wondered if the tight franchise specifications currently favoured makes it unduly hard to manage franchises properly. It did not draw comparisons with British Rail’s behaviour during recessions where it was able to move investment and other money around to protect fares and services during the bad times, a task almost impossible to achieve within a contractual framework.

• The Committee thought is was wrong to insulate franchises from each other through Special Purpose (financial) vehicles to protect parent companies in the event of impending default. It called it ‘sharp practice’. This seems a bit naïve and if followed through would reduce transparency further.

• The committee applauded the policy of not renegotiating franchises if they get into trouble. It is accepted that if it is done once (in the present circumstances) it could open the floodgates and discredit the entire process. On the other hand there are circumstances where it could be the least-worst option (and the Committee had already stated that the process was somewhat discredited anyway).

• For East Coast, likely to come back under government control on temporary basis, the Committee wondered if trying a different franchise model might be a good use of the opportunity.

• Longer franchises should be considered, with output-based franchise specifications, allowing operators more freedom and an incentive to put major investment in place over the long term. The LUL PPP contracts (such as that with Metronet) were done that way, though. The present government seems most unlikely to get out of the detail while the intentions of the Conservatives are not yet known.

• The Committee wanted to see more effort made in franchises to accommodate passengers’ needs rather better, and hoped the new South Central franchise might be used as a model.

The Committee had a number of observations to make about fares. In particular:

• The recent fares rises averaged 6 per cent (regulated) and 7 per cent (unregulated). Because regulated fares are averaged across discrete ticket ranges some individual fares rises of 11 per cent were noted. Against a depressed economic background where prices in general were pretty stable this was thought perverse as it depressed general economic activity and hit passengers unfairly. It came about because of the lag between when the retail price index (RPI) was measured (July) and when fares were increased (January). The actual effect on fares yield is currently unknown, of course, but fewer people than planned are travelling and fares levels will be a factor.

• Service level reductions (eg catering) and hidden fares increases such as for seat reservations came in for some adverse comment.

• The Committee welcomed the apparent simplification in fares that took place a year ago but still thought the system far too complex and unfair for some.

• The Committee applauded the government’s decision to remove the ‘fares basket’ concept next year. A ‘basket’ applies to regulated fares and each one is a set of fares of similar type applying to a similar ‘flow’ of traffic. Each ‘basket’ is subject to a rule that the total may only alter in price each year by RPI+1 per cent. However, individual ticket prices may go up by more or less, provided the average adheres to the rule. We may suppose that the rule was well-intentioned, but of course cash-strapped operators have discovered that they can increase ticket prices significantly on the popular tickets (sometimes by a huge amount) and reduce prices on the tickets with lowest sales. This greatly increases revenue and affects a majority of the customers, but it is within the rules. The Committee found it difficult to extract from industry witnesses exactly what the weighted increase in fares levels was, partly because of having not framed the questions with precision and partly because of disinclination by witnesses to be overly forthcoming. From next year the RPI+1 per cent rule will apply to all tickets. By the way, if RPI falls by more than one per cent then ticket prices will come down (and Lord Adonis confirmed this to the Committee immediately, though the train operators had to be asked four times before giving the same answer).

• The Committee had great difficulty comprehending the fine distinction between fares levels and prices actually paid by passengers. There are hundreds of millions of fares while the vast bulk of people only use a small proportion of these. There is no doubt from the evidence produced that some popular fares have actually gone down, but almost all of these were single operator fares with annoying restrictions.

• The Committee also got hung up about apparent secrecy about train operator profits. It was left to Charles Horton (South East Trains) to point out that each operator files accounts at Companies House which would show that margins are often of the order of 5 per cent on turnover. The Committee wanted to see copies of the accounts. Horton agreed but to their disgrace other operators said they would have to consult (they are public documents!). It is a shame to see time wasted by a Committee not being properly briefed and by certain operators making it look as though they had something to hide.

So that, in summary, represents the highlights from the latest sitting of the Transport Select Committee’s investigation into the rail sector. A formal response from government is awaited; in the meantime Lord Adonis was only able to refer to a National Audit Office report last year which referred to the franchising system delivering 'good value for money and steadily improving services'.