Rail 2014 Consultation Analysis

3 Procuring rail passenger services

Q1 - What are the merits of offering the ScotRail franchise as a dual focus franchise and what services should be covered by the economic rail element, and what by the social rail element?

Popular themes

1. - Against the dual focus franchise and in favour of a single focus franchise
2. - Support the dual focus franchise, in principle and if correctly regulated
3. - There is a difficulty in separating out 'social' and 'economic' services, a danger in doing so, or they should not be separated

Key themes

3.1 Respondents' opinions on the merits of a dual focus franchise (a single franchise with clearly defined economic and social routes) were split, with a small majority of respondents against it, some of whom stated, categorically, that there are no merits at all to a dual focus franchise. Some of these responses against dual focus stated that such a specification would result in a two-tier system where economic services would inevitably receive priority over social services.

"RMT believes that the dual focus franchise is fundamentally flawed because such an approach to the franchise will see the introduction of different levels of specification and regulation on what it considers to be economically viable (profitable) or socially necessary routes. Essentially this means shifting most of the responsibility for the socially necessary routes from the train operator onto the taxpayer and passenger, leaving the franchisee with the most profitable routes to exploit."
RMT

"While we appreciate that some services do not turn a profit, all services have a social 'element' and purpose. Making a strict division between those which are economic and those which are social may therefore be counter productive. There is a need for those providing profit-making services (such as the main intercity lines) to understand and measure their achievement of these social outcomes as well as economic ones."
Capability Scotland

3.2 Some respondents supported the dual franchise option, provided it was appropriately regulated. These respondents believed dual focus could allow attractive financial returns on an 'economic railway', whilst a different type of service on the 'social railway' could safeguard rail lines ensuring accessibility was maintained. Others noted that a dual franchise would allow the railways to reflect demand and also cater to genuine need.

"Offering the ScotRail franchise as a dual-focus franchise would ensure that traditional 'honey pot' locations in Scotland are identified as key economic drivers, and essential to the ongoing development of Scotland's infrastructure."

"VisitScotland would encourage every effort to ensure that those lines under the "social" heading would not suffer from a lower level of service or significantly higher fares, putting users of those services - both locals and visitors to the area - at a substantial disadvantage."
Visit Scotland

"A dual focus franchise would enable ScotRail to set differing objectives to the franchisee pending on whether a rail network was deemed to have primarily economic or social characteristics. While value for money and efficiency would underpin the aspirations of running services on both types of network the social benefits of a rail service continuing in certain rural areas would be given more substantial weight when assessing the viability of the service."
Public Response

3.3 The third most popular theme was that it would be too difficult to separate out 'social' and 'economic' services and that there is a danger in doing so: the danger being that this leads to confusion and eventually disjointed services. Unlike responses which stated that dual focus should not be incorporated, these respondents chose to state why they thought this option to be unworkable.

"The possibility of splitting the franchise into Economic and Social parts of the railway causes concern. There are many uncertainties around this possibility which are unresolved such as what parts of the network would be considered 'economic', particularly if that may include some parts of routes?"
Nestrans

Organisational and individual responses

3.4 Responses were broadly similar between both organisations and individuals across each of the key themes identified. However a higher proportion of organisations than individuals did not support dual focus. Organisations were more likely to express concern that it would lead to a two-class railway with economic services likely to be prioritised over social routes.

3.5 Organisations were more likely to say they would like to see more detail on the dual focus franchise, and individuals that a dual focus franchise has no merits or that there should be a move towards nationalising rail services.

3.6 Public sector organisations in particular tended to be against a dual focus franchise, preferring a single focussed and managed franchise. Whilst organisations from the tourism sector were much more supportive of a dual franchise, if properly regulated.

3.7 Trade unions and Regional Transport Partnerships both expressed concern that a dual franchise agreement would lead to a two tier/class railway, whereby economic services would be given priority over 'social services'.

Q2 - What should be the length of the contract for future franchises, and what factors lead you to this view?

Popular themes

1. - The contract should be long enough to encourage investment, allow the operator to make service improvements and innovate, or provide continuity
2. - There should be an option to review, terminate, or change the terms of the contract
3. - The contract should be around 10 years or at least 10 years

Key themes

3.8 Around one third of respondents to this question thought that the franchise should have a long length. This was for a number of reasons, most frequently to encourage investment and innovation by operators, to allow them to make service improvements, and to allow for a degree of continuity.

"CBI Scotland continues to call for longer and more flexible, rail franchises in order to unlock much-needed investment in the network and is concerned with the consultation's view that short-term franchises improve competitiveness. Short franchises encourage more of a short-term focus on managing railways with overly rigid and detailed specifications within the franchise agreement stifling innovation, new ways of working and better practice. At present the franchise as outlined in the consultation document has very little provision for innovation or safeguards for long term investment and CBI Scotland is concerned that the proposal for the next franchise to cover only a five year period will undermine Scotland's rail services."
CBI Scotland

3.9 Some noted that it would also reduce the cost to government and operators of refranchising. Others say that short-term franchises encourage a short-term outlook.

3.10 Whilst a large proportion of respondents specified a suggested time limit period on the length of franchise agreements, a number of others simply stated that contract lengths should be long enough to promote operator investment and innovation.

"The contract should be at reasonable length to ensure the franchisee is not dis-incentivised to provide long term investment and only fulfil the contract to gain short term financial gain by the contractor."
Public Response

3.11 Conversely, a smaller group said that if the contract is too long it leads to complacency or a lack of competitiveness. Others said that short-term contracts allow regular renegotiating and competitive focus.

"Long franchises breed complacency and are inflexible in the event of changing circumstances. A short franchise term will maximise the ability to adapt to changes in the future such as a major industry restructuring, which is inevitable since the present structure of the GB rail industry is unsustainable."
Public Response

"Franchises should be let for 7 to 10 years. A lesser period might discourage investment and development. A longer period might encourage a degree of complacency in what is effectively a monopoly service. The main argument for a longer period lies in investment but with the rolling stock being mostly already specified and matched to the franchise period through the leasing arrangements, the investment requirements and opportunities are relatively limited."
Public Response

3.12 It was suggested that the franchise should be 10 years or more, with a considerable number also stating it should be 15 to 20 years. Fewer thought it should be longer than this (around 20 to 25 years).

3.13 There was also a smaller group of respondents who thought the next franchise should be the same length as the current one, around 7 years. A similar number thought it should be between 5 and 10 years and another group saying that it should be more than 5 years.

Organisational and individual responses

3.14 Overall, organisations were more likely to suggest contracts of a longer length, typically 15 to 20 years, than individuals (where a considerably higher proportion stated that the contract should be long enough to encourage investment, allow the operator to make service improvements and innovate, or provide continuity).

3.15 Typically, individuals were more likely to suggest shorter contracts of around 5 years.

3.16 A higher proportion of organisations said there should be an option to review, terminate, or change the terms of the contract.

3.17 More than half of all economic/business groups or companies thought that franchises themselves should be long enough to encourage investment in services. Government groups, local authorities and tourism organisations answered similarly although not in as high proportions.

3.18 Both government groups and Regional Transport Partnerships also advocated that there should be an option for review, termination or change of terms built into future contracts.

Q3 - What risk support mechanism should be reflected within the franchise?

Popular themes

1. - The franchisee should take on the majority (or all) of the risk, there should be no risk support mechanism, or there should be minimal risk support
2. - There should be a share of risk, perhaps equal to the share of any profits
3. - The government should accept more/most risk

Key themes

3.19 Question 3 provoked a wide range of responses with many respondents, particularly individuals, admitting they did not have a strong understanding of the issues involved. Often the responses were difficult to group and as such common themes were hard to identify.

3.20 More respondents appeared to be in favour of the franchisee taking on most, or all, of the risk rather than the government. There was also a considerable group though who thought the risk should be shared, perhaps in equal proportion to the share of any profits. .

"In general, the operating cost and revenue risks (the latter within the fares parameters set by Transport Scotland) should rest with the operators.

"As is also the thinking within DfT for forthcoming franchises, there should be a linkage between revenue risks and National Economic Performance built into the franchise which will encourage the operator to take greater risks to the benefit of the taxpayer without the worry of the wider economic climate beyond their control."
ATCO (Scotland)

3.21 Another theme which was frequently identified was that franchises should be protected against changes in the economic climate or government policy in order to maintain the current level of service.

"The service needs to be maintained even in a severe downturn in the economy: this needs to be reflected in the risk support mechanism."
West Aberdeenshire and Kincardine Labour Party

3.22 Some respondents thought that risk should be treated differently for different types of service, most frequently that franchisees should take on the risk for economic services and the government for social services.

"Risk support mechanisms should be made dependent on whether the franchise is split into 'economic' and 'social' rail services."
Fife Council

Q4 - What, if any, profit share mechanism should apply within the franchise?

Popular themes

1. - Profits over a certain level should be re-invested in the railway
2. - Profit share should be linked to the achievements of specific objectives, e.g. growth in passenger numbers
3. - Rail services should be "not for profit"; all profits should be reinvested in the railways

Key themes

3.23 The most frequently expressed view was that profits over a certain pre-determined level should be reinvested into improving the rail network and services. Another frequent view was that operators should only receive profits on the achievement of specific objectives relating to service provision, particularly an increase in passenger numbers.

3.24 A third key theme was those who thought that rail services should not be run for profit and that profit should be reinvested in the railway. A further opinion expressed in a considerable number of responses was that there should be a balance between risk and reward with those taking the most risk receiving the most profit.

3.25 A number of respondents commented that passengers and the public purse should be protected from operators who may seek to recoup their shortfall in any less profitable years.

"Whatever arrangement you decide upon, it must seek to avoid the franchisee being able to cut back to the bone in lean years to the detriment of passengers. It should also avoid the disincentive train operators who are in revenue support in England have to grow the business (because the majority of any additional earnings accrues not to them but to the Department for Transport)."
Passenger Focus

3.26 There was another smaller group of respondents who thought that, assuming they were providing a good service, operators should receive all the profits. A similarly sized number of respondents thought that railways should be run as a co-operative scheme where profits are shared with passengers.

Organisational and individual responses

3.27 There were two areas which had the biggest difference in responses between organisations and individuals:

• Organisations, in particular community councils and community groups, were more likely to suggest that profit sharing should be linked to the achievements of specific objectives (e.g. growth in passenger numbers)
• Individuals were more likely to state that profits over a certain level should be reinvested in the railway, suggest that rail services should not be run for profit, or should be run by some form of co-operative.

3.28 A number of local authorities and passenger groups suggested that all profits above certain threshold levels should be reinvested into the railways, whilst the passenger groups also warned of the danger that profit sharing would lead to operators cutting services to the detriment of passengers.

Q5 - Under what terms should third parties be involved in the operation of passenger rail services?

Popular themes

1. - Third parties should only be involved when no services exist at present: they will add value or additional investment, to plug gaps or to provide niche services
2. - Third parties should not be involved (or involved very little)
3. - Third parties should be involved locally through, for example, local rail user groups or community rail

Key themes

3.29 This question asks under what terms third parties (outside the current structure of Network Rail and the ScotRail franchisee) should be involved in the operation of passenger rail services. A large number of recurring themes emerged in the analysis of the responses.

3.30 Overall, the majority of respondents thought that there should be some kind of role for third parties in the operation of passenger rail services. Respondents frequently said that third parties should be involved where no services already exist at present, where they add value, where they provide niche services, or where they lead to additional investment. Others noted that third parties could be involved but should not compete against or detract from the main franchisee's services.

3.31 Around one in five of respondents to this question thought that third parties should not be involved in the operation of passenger rail services, or only involved to a small degree. The reasons stated were typically because they would lead to disjointed services.

"We are sceptical about the scope for third party operation of passenger services as distinct from other functions such as station management, with the exception of special services such as the Jacobite Train. We would not support anything which detracted from the integrated operation of the main franchise."
Passengers' View Scotland

3.32 Remaining responses were essentially supportive of third party involvement and provided opinions of what role third parties should take.

3.33 One of the main roles identified for third parties, was that of the provision of tourist routes or 'social' services. A common suggestion was that third parties would be particularly suited to marketing these routes and services.

"The Fort William-Mallaig 'Jacobite' trains have been very successful. Development of more tourist trains by third parties, using heritage trains with relatively low capital cost, would attract more visitors to the West Highlands. However, these trains must not abstract revenue from the year-round ScotRail train service."
Lochaber Transport Forum

3.34 There were a number of respondents who said that locals and/or local community groups should be involved as third parties, and a similar sized group which thought the same about local authorities or Regional Transport Partnerships.

"Other than community involvement in enhancing station facilities (which should be encouraged), the concept of 'Community Rail' has not been tried in Scotland. However, in light of the apparent success of some of these schemes in rural parts of England, there may be case for trialling a scheme in Scotland should the right environment exist. In general, third party involvement in passenger rail service operations should be welcomed where benefits are apparent and there is no disadvantage to passengers. An example could be the involvement of the Regional Transport Partnerships in promoting enhanced services or new facilities, such as the successful Inverness services in Highland. However, any third party resources should as a general rule not be seen as a substitute for existing resources."
ATCO (Association of Transport Co-Ordinators) Scotland

3.35 Outwith these popular themes, other common responses included:

• not if it damages the integrated nature of services / 'less is best'
• local authorities / Regional Partnerships (e.g. SPT) should be acknowledged as constructive third party contributors
• tourist routes / social services may merit special consideration
• third parties limited to outsourced aspects (on-board, trolleys, ticket inspection, shops, booking offices, cleaning, and maintenance)
• third parties should not impede/compete against main rail franchise or detract from main franchise's service
• should be possible for third parties to get involved
• open access should be encouraged
• OK for them to be involved but this is a complicated issue
• as long as they provide competitive service/reduce costs/add value

Organisational and individual responses

3.36 Organisations, in particular economic/business groups, local authorities and local government groups were more likely than individuals to suggest that third parties should be involved locally through, for example, local rail user groups or community rail groups. They also considered that the franchisee has to take the ultimate responsibility for overall services.

3.37 In addition, organisations were more likely to state that local authorities and/or Regional Transport Partnerships should be involved as third parties, although they also warned that third parties should not diminish the integrated nature of services.

3.38 Trade unions and individuals were more likely to respond that third parties should not be involved, or minimally involved. Individuals tended to support the notion that third party involvement should be limited to outsourced aspects, such as on-board trolley services, ticket inspection, shops, booking offices, cleaning and maintenance.

Geographical analysis

3.39 As explained within section 2.26, a geographical analysis was undertaken of all the responses that included location information. In terms of this question, there was a higher than average proportional response from the SEStran region, with 30% of all the responses that could be mapped. Within the SEStran region itself, the City of Edinburgh and Fife accounted for a combined 68% of the overall response numbers.

3.40 Considering the key themes identified, the SPT area accounted for more than half of all responses who suggested that 'third parties should only be involved when no services exist at present; they add value or additional investment to plug gaps and provide niche services'.

3.41 The SPT and SEStran areas also provided around a third of all respondents who thought that third parties should not be involved at all.

3.42 HITRANS, SWestrans and tactran all provided a sizeable number of responses to the third key theme that 'third parties should be involved locally through local rail user groups or community rail groups.

Q6 - What is the best way to structure and incentivise the achievement of outcome measures whilst ensuring value for money?

Popular themes

1. - There should be a reward for meeting targets, which are clearly defined and transparent as part of the contract, and/or incentives for good performance
2. - There should be penalties for failure to meet targets
3. - Incentivise based on customer opinion/satisfaction, most likely through customer surveys

Key themes

3.43 The majority of responses from individuals and organisations said that there should be incentives to meet targets. There was also a considerable group, overlapping with the first, who said that there should be penalties for failing to meet targets.

"A system of penalties related to failure to deliver agreed franchise specification, should also be matched by rewards to the train operating company for improving on the specification e.g. punctuality and genuine commitment to resolving or mitigating persistent areas of passenger dissatisfaction."
Railfuture Scotland

3.44 A large number of these respondents added that targets should be transparent at the outset of the awarding of the franchise. A further group of respondents agreed that targets should be clearly defined and measurable; these respondents did not specifically state whether there should be rewards or penalties. Some respondents also reported the factors which they thought should be used to evaluate or measure performance, such as an increase in patronage, modal shift to the train, punctuality or reliability.

"Reliability, punctuality, journey time reduction, efficiency, response to disruption and customer satisfaction should all provide benchmarks for performance."
HITRANS

3.45 The next large group of respondents were those that said incentives should be based on customer opinion, and it was suggested that this should be through public satisfaction surveys.

3.46 A considerable number of respondents thought that rail operations should be run on a not-for-profit basis by the government or a public body. Others said that the franchisee should be incentivised to provide good performance but did not specify what form the incentives would take (i.e. financial, extension of franchise etc).

Organisational and individual responses

3.47 There was a difference in responses with regard to rewards for meeting targets, which were supported by a much higher proportion of individuals than organisations. Individuals were also more likely to support penalties for failure to meet targets or think that rail services should be public or state owned.

3.48 Organisations were more likely to suggest that incentives should be based on clearly defined measurable targets, e.g. patronage or modal shift, or that the present system works well and does not necessarily need to be changed. These views were frequently expressed by trade unions, tourism groups, economic and business groups and rail groups.

Equality issues

3.49 Equality groups did not generally comment on this question although both the Scottish Accessible Transport Alliance (SATA) and National Federation of the Blind of the UK stated that:

"The question seems to assume that all outcomes can be measured. This is not so. Accessibility is an outcome which cannot be measured by statistics or by using phrases such as value for money. It requires consultation with disabled users and other interested parties and consistent action to ensure delivery. Improved accessibility which enables disabled people to use rail services which they previously could not use greatly improves their quality of life and may be thought to represent very good value for money."
Scottish Accessible Transport Alliance (SATA) and National Federation of the Blind of the UK

3.50 Equality groups argued that rail users with accessibility requirements should be consulted prior to contract design.

"The Scottish Government should work with MACS and SATA to ensure passengers, and more especially, disabled passengers (including deaf people) are involved in the procurement process. This would help to ensure the operators are fully aware of the needs of passengers from the start of any contract."
Scottish Council on Deafness

Q7 - What level of performance bond and/or parent company guarantees are appropriate?

Popular themes

1. - Performance bonds price up bids and discourage bidders
2. - Performance bonds and/or parent company guarantees should be high enough to cover the cost of retendering and transfer to a new operator
3. - Performance bonds and/or parent company guarantees should be based on current best practice or further investigation

Key themes

3.51 There were fewer responses to this question than many of the others, with many respondents, particularly individuals, indicating they did not have a great deal of knowledge of the issues involved. This has made it more difficult to identify recurring opinions and themes.

3.52 The most common theme, however, was that performance bonds drive up the price of bids and can discourage bidders. However, another reasonably large group of respondents said that performance bonds or parent company guarantees should be high enough to pay for re-tendering and/or the cost of transferring over to a new operator.

"Performance bonds/parent company guarantees should be set at a reasonable level to avoid potential risk to the taxpayer but also not at such a high level that will discourage companies from bidding for the franchise."
Falkirk Council

3.53 Others said that the level of performance bonds or parent company guarantees should be based on best practice in the industry and that perhaps this would require further investigation.

3.54 In fact an equal number of respondents said that bonds or guarantees should be substantial or significant as said there should be none at all.

Organisational and individual responses

3.55 Organisations, in particular community councils, were considerably more likely than individuals to say that performance bonds and parent company guarantees increase the price of bids and discourage bidders. Likewise, community councils and economic/business groups more frequently thought that the level of bonds or guarantees is a matter for the Scottish Government or Transport Scotland to decide.

3.56 Conversely, individuals were more likely to state that the level of performance bonds or parent company guarantees were substantial / significant or that, there should be none.

Q8 - What sanctions should be used to ensure the franchisee fulfils its franchise commitments?

Popular themes

1. - Financial penalties
2. - Termination, perhaps after warnings
3. - Existing Practice (including SQUIRE)

Key themes

3.57 The majority of responses to this question - around two thirds - noted that sanctions should be employed if the franchisee fails to fulfil their commitments. Just over half of these responses suggested financial penalties. These respondents did note that such sanctions may require to be clearly stipulated in the contract.

3.58 The second key theme (accounting for the remainder of those who wished some form of financial penalty) took the idea of sanctions further, recommending contract termination (although this was often cited as a last resort).

"Poor performance should be penalised depending on the scale of the poor performance and measures should include monetary penalties, the possibility for being stripped of the franchise, the possibility of being stripped of all franchises operated by the parent company, and the possibility of the parent company being barred from bidding for any future franchises in Britain."
RMT

3.59 The third popular theme was that the existing system, including SQUIRE, works well and that franchisees should be banned from bidding for future franchises if their performance is poor. It should be noted that whilst this was the third most popular response, it only accounted for around one in ten of all responses.

3.60 Other suggestions expressed by a few respondents included:

• capping shareholder dividends or managerial pay where performance does not meet expectations
• penalties should involve a move towards bringing services under public ownership and state control.

3.61 A number of organisations and individuals noted that any financial penalties levied upon the franchisee should be returned to inconvenienced customers. Similarly, others thought that the proceeds of profits should be used to provide better services for the public.

"Sanctions are essential to ensure robust control over quality and service. However, sanctions should be proportionate and the adoption of a 'traffic light' system could be introduced to highlight issues prior to financial or other sanctions being taken. Indeed, financial sanctions might not be the most appropriate for some failings - additional passenger benefits might be one approach to incentivise patronage rather than punish the operator e.g. offering discounts to passenger whose journeys have been persistently disrupted."
Strathclyde Partnership for Transport

"Presumably, failure to fulfil a franchise commitment will have resulted in passenger detriment in one way or another. Whatever model Transport Scotland adopts, it should ensure that the failure is put right as quickly as possible so passengers benefit or cease to be disadvantaged as rapidly as possible. Any financial penalty imposed on the franchisee should be used for passengers' benefit - after all, they are the ones who have suffered - rather than to defray Transport Scotland's overall costs. You could require the franchisee to commit to additional investment, subject to it being genuinely additional, from which passengers will benefit. Clearly, it is desirable that commitments are met and this situation does not arise. We therefore encourage Transport Scotland to carefully test the 'deliverability' of bidders' proposals and to have robust early warning arrangements if delivery of commitments is not on target."
Passenger Focus

3.62 Further to this, a number of respondents said that break points or clauses should be inserted into the terms of the contract subject to performance.

Organisational and individual responses

3.63 In comparison to other questions, there was very little difference between how organisations and individuals responded to this question. Slightly more organisations than individuals thought that there should be break points or termination clauses in the franchise, or commented that the existing practice (including SQUIRE) works well.

3.64 A number of individuals thought that rail operations should come under state ownership or that there should be a cap on shareholder dividends, managerial pay or bonuses. These views were expressed by none of the organisations who responded to this question.

3.65 In terms of specific sub groups of organisations, economic and business groups, local government groups and passenger groups strongly advocated the use of financial penalties, whilst all categories of organisations voiced some form of support for contract termination, after suitable warnings.