An Un-natural Selection: Why London’s Franchises Should Be Devolved

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In the concluding part of our recent series on the London Overground, we talked about the future of TfL’s Concession system. We also touched briefly on the wider topic – the “elephant in the room” – the question of rail franchise devolution.

With a government that (superficially at least) is committed to local devolution of services, questions over the franchise system being raised, key franchises soon up for grabs and the Overground standing as a shining example of a competent blend of public and private sector thinking, the time for TfL to grab back some control over franchising would seem to be at hand.

“You didn’t expect us to, but we passed your little test,” TfL seem to be beginning to say to the DfT, “so what are we going to do about it?”

As we indicated in the article, there had been hints that this was a topic that TfL had begun pushing the DfT on, having had NERA prepare a report detailing how devolution might work within the London context.

Handily, it appears that this report – entitled “The Costs and Benefits of Devolving Responsibility for Rail Services in London” can, with a bit of digging, be found on NERA’s website.

The report’s recommendations and conclusions are simple. If responsibility for management of Franchises within London were devolved to TfL, the report claims, this would not only likely improve passenger experience but also yield approximately £290m in net savings over the next 20 years.

The bulk of that saving, as well as the reduced complexity of managing rail project work in London, would enable investment of £180m into infrastructure improvements on those lines, which themselves would then deliver a further £350m worth of passenger benefits.

It’s a bold conclusion, but it’s one that will likely come as no surprise to many both within the industry and without. For as the McNulty report also suggested, the idea of the “one size fits all” franchising system is no longer effective for UK Rail – if it ever was at all.

Even taking on board the fact that it’s a TfL-commissioned paper, the report presents a strong case for the devolution of franchising within London at least. Almost 14% of all London workers use National Rail services to make their journey to work and there are 9 non-Overground Franchises that serve London (of which 5 are entirely or primarily concerned with passenger traffic within the London area). National Rail thus plays a key role in the day-to-day lives of many of London’s citizens and commuters, yet with the exception of the ability to propose increments or decrements (for which they must pay) to a Franchise Specification whilst the DfT is drawing it up, TfL currently have no official control or influence over Franchises. They are scoped by the DfT, awarded by the DfT and managed by the DfT, who also have responsibility for highlighting and dealing with any problems caused by the Train Operating Companies (TOCs).

The graphic above, taken from the report, gives a good visual summary of the current situation.
It’s one that, unsurprisingly perhaps, the report suggests causes significant issues for TfL and London in general. Firstly, the Increments and Decrements TfL can propose at the specification stage must be Franchise-specific, making it difficult to bring about changes and improvements that cross Franchise jurisdictions or are multi-modal. This is made worse by the fact that all of the Franchises start and end at different times and the difficulty in changing Franchise conditions mid-contract makes long-term London-wide system changes almost impossible to implement.

Indeed as regular readers will know only too well, the battle to bring Oyster to National Rail was a long and contentious one, and a good demonstration of these difficulties in action. It was a change that was resisted by many TOCs, who forced through the creation of an Oyster Extension Permit (OEP) system that was terminally flawed, penalised Travelcard holders and was eventually quietly removed earlier this year. Indeed TOC commitment to Oyster is still often less than enthusiastic, with the ability to top up at National Rail stations still occasionally a lottery, and the TOCs current obsession with “dumbelling” a contributing factor to the ever-increasing maximum Oyster cap.

As the NERA report also points out, the current Franchise system is also a major barrier to any attempt to reform the fare structure, in London at the very least, as well as a barrier to wider synchronisation of things such as branding and service levels.

It is worth jumping ahead here partially to consider why the above might be the case – after all, the privatization of the railways and the creation of the Franchise system was, conceptually at least, meant to bring about a better situation for all. The introduction of a healthy dose of competition in the market place would, the theory went, increase pressure on TOCs to price competitively. The threat of dissatisfied customers abandoning rail services if they were irregular or too expensive would then ensure a better passenger experience – less passengers would mean less money in the farebox and that would be bad for the Operator’s profits. Similarly, the Operator would be naturally encouraged to bring in service improvements, as they would bring more passengers.

As the NERA report acknowledges, however, the truth is that the above state of affairs (known as “Revenue Risk”) doesn’t actually hold true in London. London’s suburban lines are primarily utilized by commuters – a group that is relatively immune to major shifts in rail usage (at least within the timescale of the average Franchise). On top of this, many suburban services are now also often oversubscribed. Any “extra” capacity thus caused by significant service dissatisfaction is simply filled by the excess demand in place. In a nutshell, one of the primary crutches on which the Franchise system depends in reality doesn’t exist for most TOCs within London, yet in financial terms the TOCs still have to factor it in to the equation (in a “the value of your investment may go down as well as up” sense) increasing the price they charge for running the railways.

Given all the above, it is hardly surprising that the report suggests dramatically increasing TfL’s role in the Franchising process. What might come as a surprise to some, however, is just how far out the report recommends that influence be extended. As the diagram below shows, not only do the expected candidates of Chingford and Enfield feature – but so do commuter hubs such as Guildford and Stevenage.

The report suggests three main forms which this increased influence might take.

Firstly, it suggests that joint DfT/TfL contracts might be signed with Franchisees. These contracts would effectively split the services they covered into “inner” and “outer” services. The inner would cover London services and would fall under the responsibility of TfL. They would set the service levels, expectations and commitments and – most importantly – agree a set fee to be paid for delivery. This would remove revenue risk, reducing the cost of delivering the service which would be paid for by TfL from a London Rail budget transferred to it by the DfT. The outer services would either continue to be run as the DfT saw fit and be overseen by them.

The diagram below gives an idea how this might work structurally.

It’s a model that the report acknowledges has some problems that would need to be overcome. TfL and the DfT would have to agree boundaries and a framework for splitting revenue. They would also have to jointly create measures to prevent gamesmanship by the TOCs (retiming fast services, for example, or other timetable tweaks aimed at exploiting the penalties and rewards within the contract). Finally, an effective legal framework would have to be created that would support the joint stewardship of the Franchise by the DfT and TfL. The report concludes, however, that this first option represents the bare minimum that is needed to allow London’s rail to be reformed, and would at least mean no changes to the current Franchise boundaries were necessary.

The second model the NERA report suggests is more radical – a shakeup of the geography of the Franchise system to create specific London Franchises which would then be run by TfL as fully fledged Concessions – similar to the London Overground. This would be a more complex situation to bring about, and would require many Franchises to be redrawn and some of the resulting Franchise fragments may need to be combined to become viable operations. It might also prove slightly costlier to implement, but that would likely be counteracted in benefit terms by the reduction in the risk of gamesmanship and the simplification for the management structure (brought about by the removal of the DfT from the equation).

Finally, and interestingly, the report also suggests an option that would take this Concessioning approach one step further – give TfL the power to put in place the Concessions and give them the responsibility to act as Project Sponsors for any infrastructure projects carried out within the London boundary by Network Rail.

In some ways this is arguably the boldest suggestion within the report. It’s one however, that does make a certain amount of sense. As the report gently points out, TfL perhaps have a greater stake in seeing Network Rail carry out work efficiently and effectively on the network in London than the DfT, and that through taking responsibility for project sponsorship on the North London Line TfL have demonstrated that they can deliver efficiencies and savings effectively . Not so subtly (although it is at least buried in the footnotes), it also suggests that TfL feel that Network Rail could do with a bit more rigorous project oversight, as a close look at various London rail infrastructure projects had shown that Network Rail had been double-billing as project costs various elements of work that technically the DfT had already paid them to do as part of their maintenance and renewals budget.

All of the above options, the report concludes, would enable TfL to make the major improvements in both the quality and cost of London’s rail network indicated at the top of the article. It’s an impressive saving figure – £290m – that is quoted (although its worth remembering that this is factored over 20 years), and the report suggests that the vast majority of this saving will be gained through the absorption of revenue risk.

Beyond the cost saving though and of equal importance, is the perceived opportunity for major changes that the report suggests this would open up – the opportunity to reform the fare structure, improve services and make them more consistent, and invest further in London’s rail network.

It’s an interesting vision, and the report is well worth a read for those wondering just how any devolution or reform of the Franchise System might play out.

You can read the report in full here.

Written by John Bull