The report, entitled Reform of the Rail Franchising Programme, notes that since the Department for Transport (DfT) restarted the franchising in the wake of the botched Inter-City West Coast (ICWC) procurement in March 2013, the average number of bids in franchise competitions has fallen from four to three. The previous 10 tenders attracted an average of four bids.
By its own measure, the DfT requires the participation of at least three bidders in each competition in order to achieve the desired level of quality in the offer it ultimately selects. However, just two operators, First and Stagecoach, are currently bidding for South Western, one of the largest passenger franchises.
The DfT says the quality of bids has been consistently high since 2013, but attempts to attract new entrants to the market have not been successful.
At the end of last year the DfT simplified the prequalification process in an effort to reduce the burden on companies seeking to bid. Developed following industry consultation with both existing players and potential new entrants, the Pre-Qualification Questionnaire (PQQ) Passport obviates the need to complete "resource-intensive" sections of the PQQ each time a bidder expresses an interest in competing for a franchise.
Bidders with a passport, which is valid for four years, will now only need to provide PQQ information once. In December the DfT confirmed 11 owning groups, most of them current franchisees, have been awarded PQQ Passports.
The DfT is also reviewing the size of contracts to make them more attractive to new entrants. Talks have taken place with four international operators about bidding for franchises and the DfT expects "two or three" of these companies to enter the market in the next few years. One operator which is not currently in the market, Trenitalia, has already been awarded a PQQ Passport, but it remains to be seen if any more will follow.
The 15 franchises let by the DfT are currently controlled by nine owning groups, and most bids in recent tenders have come from these companies. The DfT has acknowledged to the PAC that there is a risk that one of the current participants may drop out of the market, and has analysed reasons why the level of competition might fall further, including the liberalisation of other European rail markets and the lower cost of bidding for bus contracts. However, the PAC says the DfT has failed to clarify how it will retain interest from current bidders, or how it would alter its approach to procurement if a franchise fails to attract enough bids for effective competition.
The report therefore recommends that the DfT develops "alternatives to its current commercial approach" to ensure it can still deliver value-for-money if market interest in franchising falls to levels where competition is compromised.
The PAC also notes that train operators have expressed concern that the DfT is too rigid in its approach to letting and managing franchises, suggesting that the large number of committed obligations in contracts leads to inefficiency and limits innovation. While the DfT has strengthened its franchise letting capability since the collapse of the ICWC procurement, there has been less focus on franchise management.
The report recommends that the department needs to do more to develop partnerships with operators that facilitate innovation and improve service quality. It warns that a tendency to "over-specify detail" has stifled flexibility and innovation. By its own admission, the DfT has not made best use of the flexibility it is permitted under the standard franchise contract.
The PAC argues that the DfT's ability to manage franchise contracts "has not noticeably improved" and around 7% of positions in franchise management teams remain vacant, while 11% are filled by interim staff. "We recognise that building contract management capability is a challenge across government, but it is surprising that the DfT has not been able to attract more of the right people, despite having the flexibility from the Treasury to pay more additional allowances to high calibre experts," the report states.
The report recommends that the DfT should fill these vacancies with qualified staff as soon as possible. It also suggests that the DfT should set out the specific steps it is taking to encourage innovation both at the procurement stage and during the operation of the franchise.
Three years after franchising resumed, the PAC says there are encouraging signs that the DfT's management of franchises has improved, largely through the department's Passenger Services team, which has benefited from increased resources and more experienced staff. Furthermore, having previously selected operators largely on price, the DfT states that it now attaches "significant value to aspects of passenger service quality."
In the 20 years since privatisation the franchising system has stagnated. The complexity of bidding makes participation a costly prospect, even for larger companies, which has banished smaller operators from the market. Confidence in the system has been shaken by the ICWC debacle and even under optimal conditions, it will take time to rebuild.
The lack of flexibility is a deterrent and market opening elsewhere in Europe may lead some of Britain's established players to conclude that success comes more easily in other countries. The PAC report highlights a procurement system at a crossroads, and while change is happening, is it happening fast enough?