Back On Track: Reforming rail franchising

Delivering the best value for money on rail is therefore vitally important for consumers and businesses.

As this report shows, there are significant failures in the current rail system – both in terms of its efficiency and in terms of responsiveness to passenger needs. Turning blindly to nationalisation is not the answer. The future rail service requires significant investment, which is better determined by the market than by the shorter-term horizons of politicians and governments. It also needs to benefit fully from the huge technological opportunities that lie ahead – such as smart ticketing and the move to digital traffic management on the tracks. These are best maximised in a market structure that enables and encourages innovation. Looking back to nationalisation would also ignore the significant benefits derived from rail franchising, including huge expansion in the number of passenger journeys and an upward trend in quality over recent decades. For these reasons, this report argues that we should look to radical reform of how we franchise rail services to deliver a more efficient and passenger-orientated system.

Failings that need addressing

Despite notable improvements in rail performance as well as huge increases in patronage in the last two decades, there remain significant areas where passengers and taxpayers are being let down.

In the first place, the efficiency of UK rail lags considerably behind comparators in continental Europe. With fares constrained and fiscal pressure to contain taxpayer subsidy, tackling such inefficiencies has never been more important. Past estimates put the efficiency gap between the UK and continental comparators as high as 40%. As it stands, operators have limited incentives and scope to innovate and to control costs or drive efficiencies because of the high level of specifications in contracts. Such specifications include timetabling, regulation of many fares and the types of improvements to be invested in.

Second, despite some notable improvements in service quality in recent decades, customer satisfaction is now flagging on key measures and passengers are being failed on core aspects of the service.

Levels of dissatisfaction are unacceptably high on several measures: a third of passengers are dissatisfied with ‘the value for money of the price of your ticket’, one in five are unhappy at the amount of room to sit and stand and three in ten are unhappy with how companies deal with delays.

‘Overall satisfaction’ has flat-lined and even dipped in recent years. The same is true for satisfaction with punctuality and reliability.
Satisfaction scores vary markedly between TOCs and some operators are performing far below others.

Reforming rail franchising

Chapter 2 argues that radical reforms to rail franchising are needed to ensure that efficiencies are unlocked and so that services are responsive to what passengers want. In particular, operators have too little flexibility and incentive during the life of the contract to encourage necessary quality improvements or cost reductions. To overcome this, the report recommends that:

• The Department for Transport should develop a single measure of overall satisfaction against which it would score operators. Set this goal, companies would then have the flexibility and incentive to target the aspects of quality or cost of service that affect passenger satisfaction the most. For example, depending on passenger demands, some franchisees could choose to prioritise additional services, punctuality or more comfortable journeys.
• Satisfaction scores would be used to determine rewards and penalties for train providers during the contract, and in particular to determine whether additional flexibility should be awarded to the train operating company.
• High-performing operators that over-achieved on their targets would be awarded additional flexibility. Additional flexibilities could include the ability to vary fares as long as total fares remained the same or relaxation in specifications on timetabling. To keep these privileges, operators would have to continue to meet stretching satisfaction targets.
• Poor performing operators would by contrast have to pay penalty charges for low overall satisfaction scores. Given the limited ability for train operating companies to raise fares, particularly due to price regulation, these penalties would reduce overall profitability.
• New measures should also be introduced to clamp down on delays and on the failure to pay compensation to passengers. The total paid out by TOCs in compensation in 2014/15 was £25m. However, only one in ten of passengers claim compensation for delayed journeys. These figures suggest that some £1bn of compensation from operators will go unpaid over the course of parliament.

As it stands, passengers are often unaware of their rights to claim compensation and find the process too onerous, and operators benefit because of this. Instead, operators should be given a strong incentive to compensate delayed passengers by fining them to the value of all unclaimed compensation payments. This would encourage them to make the processes simpler and to boost take-up of compensation. The money raised by these fines should be distributed as additional reward payments to the operators that over-achieve on overall satisfaction targets.

• The House of Commons Transport Select Committee should institute an ‘Annual hearing into rail performance’.  This would be an opportunity to regularly audit whether passenger services have improved over the last twelve months. As a rule, senior representatives from the operators that score worst on overall passenger satisfaction should expect to be called as witnesses. MPs are also likely to want to hear from the Department for Transport, Network Rail and Transport Focus.