The Commons transport select committee said the system was fundamentally flawed and "past its sell-by date".

It warned the government against allowing private firms to "over-bid" for franchises and later using taxpayers' money to bail them out.

Train operators said franchising had brought improvements to rail services.

Under the system, private companies bid to run rail services on routes, with some receiving subsidies to do so but others paying the government a premium.

Bankruptcy protection

The system has come under the spotlight after Bermuda-based Sea Containers, the parent company of East Coast Main Line operator GNER, applied for protection against bankruptcy.

GNER, which runs services between London, north-east England and Scotland, is due to pay the government £1.3bn in premiums over 10 years under the original terms of its franchise.

"At the end of the day, passengers will pay the price when operators cut service levels or hike fares to pay the premiums" - Gwyneth Dunwoody

But now the operator is talking to the government about renegotiating its contract - something the select committee believes should not happen with operators who have "over-bid" to win their contracts.

"Were the government to give in to such pressures, the floodgates could be open to many future claims, and taxpayers would be left to foot the bill," the committee said in a report.

It added the drive to extract premiums could result in above-inflation fare increases and a reduction in customer service, investment and innovation.

The committee urged the government to spend money received from operators directly on service improvements and to consult passengers more closely.

It said that often the franchise requirements set by the government were too rigid and hindered improvements.

The MPs said passengers must be the first priority.

The report concluded the UK has the right number and size of train companies, but said there should be better systems for ensuring companies share both the money raised in fares - and the risk of something going wrong.

Passenger satisfaction

Committee chairman Gwyneth Dunwoody said the current system was "unsustainable".

"Our railway is the fastest growing in Europe and passenger satisfaction, at 80%, is higher than it has probably ever been" - George Muir

She said: "At the end of the day, passengers will pay the price when operators cut service levels or hike fares to pay the premiums, and taxpayers will foot the bill when operators default or walk away from their contracts."

Bob Crow, general secretary of the RMT transport union, said the report was evidence that privatisation was not working.

"The current system has handed guaranteed, risk-free profits to private operators who are demonstrably less efficient than British Rail," he said.

"The huge sums of taxpayers' and fare-payers' money already going into the railways should be spent on improving them, and bringing rail operations back in-house would be a massive step towards ensuring that that happens."

But George Muir, director general of the Association of Train Operating Companies, said franchising was responsible for improvements to rail services.

"There are still a lot of improvements that can be made to passenger services," he said.

"But our railway is the fastest growing in Europe and passenger satisfaction, at 80%, is higher than it has probably ever been."

See also:

UK transport select committee warns govt not to renegotiate rail franchises

AFX: 5th November 2006

LONDON - The government should not cave in to demands from train operating companies to renegotiate franchises, the Transport select committee warned.

In a damning report on the state of the franchise system, the all-party group said giving in to firms that had essentially 'over-bid' for their contracts would only open the flood gates to further claims.

Taxpayers would ultimately end up footing the bill if this happened.

The committee is referring to the East Coast Main Line franchise run by GNER, a unit of US-listed Sea Containers Ltd.

Only a year ago GNER agreed to pay 1.3 bln stg for its franchise until 2015, but it has failed to meet revenue projections. It is now trying to get the contract terms altered, but the government is not budging.

'The government must hold firm on its commitment not to re-negotiate franchising contracts with operators who have over-bid to win their contracts,' the committee said.

It also called on the government to 're-balance the way it evaluates bids so that more emphasis is placed on innovation, environmental improvements and wider socio-economic factors, and less weight is given to increasing premiums and reducing subsidies'.

'Innovation should be rewarded through an option to invest parts of the franchise premium directly into the services or infrastructure of the franchise. The government also needs to create incentives for operators to control their costs more effectively.'

Overall, the committee said the franchising system is 'a complex, fragmented and costly muddle which is unlikely to provide the innovation and investment needed for the passenger railways of the future'.

It said 'the Government has embraced the notion that private enterprise is best at delivering high-quality, innovative services such as the passenger railways, and yet it does not trust companies to deliver these services without highly detailed and specific contractual requirements which reduce the scope for innovation'.

'It supports competition, and yet appears to see open access operators as a threat to stability. It wants risk to be transferred from the public to the private sector, and yet risk cannot be transferred in anything other than name because, as everyone knows, no government could afford to let the railways go bust.'

Committee chairman Gwyneth Dunwoody accused the government of 'tinkering timidly round the edges to try to resolve the many problems'.

'In the current system, the government tries to entice bidders into promising ever greater premiums, but in return, it has to underwrite virtually all the risks to which operators are exposed,' she said.

'At the end of the day, passengers will pay the price when operators cut service levels or hike fares to pay the premiums, and taxpayers will foot the bill when operators default or walk away from their contracts.'

'It is easy to see the costs to passengers and taxpayers, but we found it difficult to identify any benefits of this system.

The MPs also want to see new entrants encouraged to the franchising market.

'The current concentration with a small number of large players dominating the market indicates that barriers of entry in the rail franchising market are too high,' they said.

See also:

Legislators attack Britain's rail concession system

Reuters: Nov 5, 2006
By Adrian Croft

LONDON - A British parliamentary committee sharply criticised the way the country organises its passenger railways on Sunday, saying the system of awarding rail concessions to private companies is a muddle.

Britain's railways were privatised in the 1990s under the previous Conservative government.

State-backed Network Rail is responsible for rail infrastructure while the government awards concessions or franchises to private companies to operate passenger services.

"More than a decade after rail privatisation and the introduction of franchising of passenger services, we remain to be convinced that the system has achieved its objectives, or that it is indeed capable of doing so," the House of Commons Transport Committee said in a report.

"Passenger rail franchising, far from being a model capable of delivering quality rail services for the next half century, appears to be a policy muddle," it said.

It made no proposals for an alternative system but urged Prime Minister Tony Blair's Labour government to carry out a strategic review of the long-term needs of rail passengers and "an honest appraisal of the structure best suited to fulfil these needs over the next several decades".

It made a series of short-term recommendations to improve the current franchising system in the meantime.

The government, which seeks to encourage people to use trains, is already due to publish a long-term strategy for the railways in the summer of 2007.

SAFETY FEARS

The death of 31 people when two trains collided near London's Paddington station in 1999 and the death of four people in another accident a year later caused public alarm over the state of Britain's crumbling railways.

The government has since poured billions of pounds into modernising the network. Rail travel is booming and passenger numbers are expected to grow by up to 30 percent in Britain over the next decade.

But railway operators now pay large sums to win the right to operate train services, raising concerns that operators could try to recoup the money by cutting back services, cramming more people onto trains or raising ticket prices.

In March 2005, GNER, a unit of U.S.-listed Sea Containers, agreed to pay 1.3 billion pounds to the government for the right to keep running the lucrative East Coast main line for 10 years, the most expensive rail concession in European history.

But GNER has since struggled, with passenger revenues falling 31 million pounds short of its plans in the first 14 months of the new franchise.

"The current franchising model has passed its sell-by date. The railways require a coordinated long-term strategy for development and investment to provide the capacity and service levels that future generations will demand," the Labour member of parliament who chairs the transport committee, Gwyneth Dunwoody, said in a statement.

The parliamentary committee said it was crucial for the government to resist any pressure to renegotiate franchise agreements if operators got into difficulties.

It said the absence of new entrants into the passenger rail franchising market was a clear indication of unreasonably high barriers to entry.

"We are deeply concerned that a small number of companies have come to dominate the franchising market," it said, urging the government to act to bring new companies into the market.

See also:

Rail franchise system flawed - MPs

Press Association: November 5, 2006

The rail franchise system is a "costly muddle" and passengers will end up paying the price, a report from MPs has warned.

The system in which private companies bid for and run rail routes, with some getting subsidies and others paying the Government a premium, will not improve passenger services in the long run, the report from the House of Commons Transport Committee added.

"The current franchising model has passed its sell-by date," said the committee's chairwoman Gwyneth Dunwoody.

She added that the system was "fundamentally flawed" and delivered only "fragmentation and short-term thinking".

The franchise system was put under the spotlight after East Coast Main Line operator GNER's parent company, Bermuda-based Sea Containers, applied for US Chapter 11 protection against bankruptcy.

This threw GNER's franchise into difficulty, particularly since it is due to pay the Government £1.3 billion in premiums over 10 years.

One of the recommendations made by the Transport Committee was that the Government should "hold firm on its commitment not to re-negotiate franchising contracts with operators who have over-bid to win their contracts".

The committee went on: "Were the Government to give in to such pressures, the flood gates could be open to many future claims, and tax-payers would be left to foot the bill."

The MPs also said: "We are concerned that the drive to extract premiums from some parts of the network will result in further above-inflation fare increases and a deterioration in customer service, investment and innovation."

The committee said the franchise system had had a decade to prove itself, but had failed to achieve its core objectives.