The Commons transport select committee said in a report released on Sunday that the system under which different private firms run various train lines is overly complex and fragmented and "past its sell-by date".

The report predicted that problems with the network would lead to passengers paying higher prices.

It pointed out that some train companies receive subsidies to run services while others pay the government a premium.

And it warned against the government allowing them to "over-bid" for franchises and then using taxpayers' money to bail them out through renegotiated contracts when they ran into trouble.

"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 report said.

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

"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," she said.

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Franchising of rail services is a 'costly muddle' MPs warn

The Guardian: November 6, 2006
Dan Milmo, transport correspondent

The railway franchise system is a costly "muddle" that punishes passengers and taxpayers without delivering any benefits to the rail industry, a group of MPs has warned.
A report by the Commons transport select committee raised doubts over the operation of the British rail network. Under the franchise system, the Department for Transport allows train-operating companies to run services in exchange for premium payments, usually over a 10-year contract.

The system has come under scrutiny following financial troubles at one of the best-known operators, GNER, which is struggling to meet the £1.3bn premium attached to its 10-year deal. Two other operators, FirstGroup and StageCoach, which have signed billion-pound contracts, are ripping out seats from carriages to meet increased demand on a network that is running out of capacity in some areas, particularly the south-east.

Gwyneth Dunwoody, chairwoman of the committee, said the system had "passed its sell-by date" and tended to encourage short-term thinking at the expense of coordinated planning between the government and the rail industry.

"This muddle is unsustainable," she said. "For the best part of a decade, the government has tinkered timidly round the edges to try to resolve the many problems. But no amount of tinkering can resolve the fundamental flaws."

She added that the government underwrote most of the risk, leaving taxpayers to foot the bill if a company walked away from the franchise. The MP said passengers would also be affected when they paid the increased fares levied by operators to cover the rising premiums.

The MPs recommended some short-term measures including: not renegotiating franchises or all operators would demand reduced payments; valuing bids more on innovation and socio-economic benefits, not premium payouts, and encouraging new entrants into the market.

There is concern within the rail industry that franchise terms are too specified, demanding a set number of buffet cars and even laying down strict guidelines on timetables. Some executives would like to see the franchises set targets for accommodating the projected 30% increase in passenger numbers in the next decade.

George Muir, of the Association of Train Operating Companies, said franchising had improved train services and dismissed the claim that the franchising policy was a muddle as "just not true".