Railways: Public Procurement

Earl Attlee Excerpts

Tuesday 30th November 2010 Grand Committee

[Earl Attlee]

My Lords, I congratulate the noble Baroness, Lady Greengross, and her colleagues on developing an excellent and thought-provoking contribution to the public procurement debate. This debate has been fascinating to me and will be valuable to my officials. The noble Baroness asked me whether we will learn lessons. Yes, because it is extremely boring to make the same mistake twice.

Rail delivers an essential service with more than 1.2 billion passenger journeys and more than 19 billion freight tonne kilometres in 2009-10. Total government support to the rail network was £3.9 billion in 2009-10. Two initiatives are central to the Government’s plans for rail services and to provide better value for money. The rail value-for-money study, chaired by Sir Roy McNulty, will help us tackle the greater costs of rail in the UK compared with mainland Europe, while our consultation on reforming rail franchising will assist us in devising a new franchising policy.

The Government want a stronger focus on the quality of outcomes for passengers, giving operators freedom to decide the detail of how they run their businesses. We also intend to grant longer franchises to encourage private sector investment in enhancements to the railway and to make it easier for train operators to establish long-term relationships with Network Rail and others, but we have to make sure that contracts are demanding and that operators are held to account.

The noble Baroness, Lady Greengross, talked about the penalties for poor performance. The department's policy has been to avoid renegotiation. National Express paid a large financial cost for its failure to deliver its commitments on the east coast. That sends a clear message to the bidding community. Sir Roy McNulty is not scheduled to present his final conclusions until next spring. The consultation on reforming rail franchising closed during October, and ministerial colleagues will shortly present our revised franchising policy and timetable.

I take this opportunity to thank everyone who took the time to respond to the reforming rail franchising consultation, including the helpful submission from the transport forum chaired by the noble Baroness. I will discuss some of the issues raised, without prejudging the outcome of the franchise reform review. One issue raised was the importance of negotiation and early engagement with shortlisted bidders. The responses provided broad support for the proposal in the consultation document that,

“bilateral discussions are held with each of the shortlisted bidders prior to the issue of the Invitation to Tender, enabling bidders to inform the specification and contract documentation”.

I expect this approach to be reflected in the new processes, ensuring that the department does not inadvertently prevent any bidder from proposing an innovative solution.

The noble Lord, Lord Tunnicliffe, talked about the need for transparency. The coalition has introduced new rules requiring the publication of all contracts and tender documents. This is an area where rail procurement can be held to have led the way. All selection processes, invitations to tender and successful contracts have been made available on the DfT website for many years under the previous Administration. The submission raises the important but complex issue of risk allocation. It correctly points out how important it will be for future franchises to make it clear which risks are to be borne by operators and which by the Government. The submission suggests that there might be merit in the Government bearing some of the risk of changes in the economic climate. We continue to develop policy in this area but are clear that risk transfer to the private sector may be costly.

The noble Baroness, Lady Greengross, and the noble Lord, Lord Tunnicliffe, both talked about risk allocation. Rail contracts strive to define which risks are held by which party. However, as the noble Baroness noted, some risks have reverted to the Government—for instance, if a franchise fails, the Government are legally required to run the train services. We seek to limit that risk by bonds, which the franchisee pays in the event of failure, but also by parental guarantees, which ensure that a parent company is required to support the franchisee through temporary financial difficulty.

I have already touched on the issue of longer franchises, while the question of break points will need to be considered carefully. There is a danger that break points negate the advantages of a longer franchise if it is then perceived as merely a series of short franchises. We want to reform the franchising system as a whole, improving incentives to invest and to take account of passengers. However, although we are seeking to develop a new approach at policy level, the department has a good track record in the processes of procurement.

The strengths of the rail franchise procurement process were recognised by the NAO as good practice in its October 2008 report, Letting Rail Franchises 2005-2007. Likewise, the Office of Government Commerce, the OGC, in its initial procurement capability review carried out in late 2007, reported:

“Rail franchising is now a very impressive process, which has demonstrated innovation, good market involvement, transparent and robust processes, and successful financial outcomes”.

A report on the second procurement capability review in March 2010 also reflected:

“In a number of areas, DfT performance is leading edge in government procurement terms; for instance, the rail franchise process, the openness and transparency of communications with suppliers, and support for ‘policy through procurement’ initiatives are all exemplary”.

The procedures and techniques first applied in rail franchising have now been adopted across all major Department for Transport procurement activity. At the request of the OGC, the DfT has also provided advice and guidance to other departments.

The noble Baroness talked about performance bonds. An appropriate balance must be struck on this issue. If the bond is set too low, it may discourage a franchisee from handing back the keys at the first scent of trouble and it might be inadequate to cover the direct incremental cost to government of stepping in to deliver the train service and running an additional unscheduled franchise competition. However, if the bond is set too high, we may inadvertently exclude smaller operators from the franchise marketplace and we will pay a substantial cost for the performance bonds, the majority of which are never called upon. The noble Lord, Lord Beecham, talked about some of these difficulties.

The rail value-for-money study, led by Sir Roy McNulty, is looking at why UK railways are so much more expensive than those in the rest of Europe. Focusing Network Rail on the regions and routes may have some benefits. Certainly no decision has been made to split up Network Rail, but all options are being considered in Sir Roy’s review.

The noble Baroness talked about the need to have a fallback in negotiations. During competitions, the fallback is clear: the contract may be awarded to a competitor. Mid-term negotiation is of course always more difficult, but contracts contain a provision for government to impose a “reasonable” settlement and, ultimately, the franchisee will lose the franchise if it is in default.

I was delighted to see the noble Lord, Lord Tunnicliffe, put his name down to speak in this debate. Few noble Lords have as much experience as he does in public procurement for transport infrastructure. The noble Lord raised the advantages of win-win contracts. The alternative, of course, is a win-lose or a lose-lose situation. Train operators need to make a profit by attracting more passengers and increasing revenue. This revenue incentive helps to make contracts win-win, but we are reviewing how to improve incentives further.

The noble Lord, Lord Beecham, touched on the size of contractors and, I think, by implication, SMEs. SMEs are an engine of the economy, providing nearly 60 per cent of our jobs and 50 per cent of GDP, and it is only right that they should benefit from the Government’s substantial purchasing power. The public purse will benefit from the ability of small businesses to offer value for money, flexibility, responsiveness and innovation.

The noble Earl, Lord Mar and Kellie, talked about the problems of interlinking rolling stock and electrification. He also talked about the IEP project. This is a very complex, long-term project and it is vital that we get the decision right. I hope that we will be able to announce our conclusions shortly.

The noble Earl talked about roscos wanting guarantees. The department seeks to avoid giving these guarantees, as they reduce flexibility. However, there have been cases where such guarantees have brought down the cost to the taxpayer. He also talked about the Pendolinos on the west coast franchise. There have been many positive aspects to Virgin’s management of the intercity west coast franchise and I look forward to seeing how it will develop and build on that as part of a competitive tendering process for the new franchise.

The noble Earl also talked about scenic railways. The layout of trains provides a scenic view from all seats but it is a matter for the operator, not something that the department should be micromanaging.

[Lord Bradshaw]

I wonder whether the noble Lord might reflect on the fact that it is the load factors which the department insists on that make the roscos move all the seats closer together, so that they meet the target set by the department.

[Earl Attlee]

My Lords, I will certainly reflect upon that and have a chat with my officials afterwards.

The noble Baroness, Lady Greengross, spoke of future studies in other areas of public procurement. We look forward to her results with interest and we will certainly take note of them. I am confident that the public procurement processes adopted for rail will continue to represent best practice and provide transparency and equal treatment for bidders. The rail franchise specifications which are procured will evolve and reflect the results of the consultation to provide an environment where operators have the freedom to provide improved value for money and the improvement that passengers want.