The First ScotRail passenger rail franchise



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The First ScotRail passenger rail franchise


Prepared for the Auditor General for Scotland

November 2008


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ISBN 978 1 906752 19 4


Introduction


First ScotRail provides most passenger rail services in Scotland

through a franchise contract with Scottish ministers, and will



receive £2.5 billion in government subsidy during the contract term.

Setting the scene



1. Rail transport is a vital service for Scotland, providing access to employment, education, services and leisure activities. Most passenger rail services in Scotland are provided through a franchise contract between Scottish ministers and the private train operating company First ScotRail Limited. The First ScotRail franchise covers more than 95 per cent of Scotland’s passenger train services and the long distance sleeper service between Scotland and London. First ScotRail operating statistics for 2007/08 are set out in Exhibit 1.
2. The franchise is in its second term following privatisation of passenger rail services in Britain in 1993.1 The franchise was operated by National Express from 1997 to 2004. Following a tendering process, the Strategic Rail Authority (SRA) and the then Strathclyde Passenger Transport Executive (SPTE), in consultation with the then Scotish Executive, awarded the franchise to First ScotRail Limited, a subsidiary of FirstGroup, in August 2004.2, 3 First ScotRail began operating the franchise in October 2004.
3. In November 2005, the Scottish Executive took over responsibility from the SRA and SPTE for letting, subsidising and managing the franchise and monitoring First ScotRail’s performance. These responsibilities were transferred to the Scottish Executive agency Transport Scotland when it was established in January 2006.

Responsibilities for rail services in Scotland are complex


4. Although most of the funding, strategic planning and management of Scotland’s rail industry is devolved to the Scottish Government, a number of rail functions for Britain are reserved to Westminster, for example, health and safety and Disability Discrimination Act compliance. The relevant British bodies consult with Transport Scotland on reserved matters where they affect Scottish railways. Exhibit 2 (overleaf) illustrates the structure of passenger rail service provision in Scotland.
5. Network Rail owns and operates most of Britain’s rail infrastructure (tracks, signals, bridges, tunnels and stations), and receives funding from the Scottish Government to maintain and improve Scotland’s rail infrastructure.4 First ScotRail leases the stations it manages from Network Rail, its trains from rolling stock companies, and secures the use of tracks through a track access agreement with Network Rail.5

6. The Office of Rail Regulation (ORR) is responsible for setting and monitoring targets for Network Rail, including setting station access charges and track access agreements. ORR is also responsible for ensuring that Network Rail, train operating companies (including First ScotRail), and rolling stock companies comply with rail specific health and safety regulations and that First ScotRail and Network Rail comply with their operating licences. The Department for Transport oversees Britain’s compliance with European Union rail strategies and safety standards and the Disability Discrimination Act 1995. The British Transport Police (BTP) is the national police force for the railways, with its services in Scotland largely funded by First ScotRail and Network Rail.
7. Transport Scotland and First ScotRail consult with Passenger Focus and the Mobility and Access Committee for Scotland (MACS) on rail passenger-related matters in Scotland.6 First ScotRail passengers’ satisfaction is assessed as part of Passenger Focus’s national rail passenger surveys. First ScotRail also consults with the statutory Regional Transport Partnerships (RTPs) regarding regional timetables, performance and regional transport priorities.7

Transport Scotland is responsible for managing the First ScotRail contract and developing the long-term priorities for Scotland’s railways


8. The Railways Act 2005 established the current regulatory structure for rail in Britain, devolving most of the funding, strategic planning and management of Scotland’s rail industry to the Scottish Executive in April 2005. Along with the Transport (Scotland) Act 2005, the Railways Act 2005 replaced the Strategic Rail Authority and Strathclyde Passenger Transport Executive with Scottish ministers as parties to the franchise contract.
9. The Railways Act 2005 also enabled Scottish ministers to develop their long-term strategy for rail in Scotland, with Transport Scotland leading this work. Scotland’s Railways was published in December 2006, detailing Scottish ministers’ 20-year vision for rail in Scotland.8 Scotland’s Railways shares the strategic aims
of Scotland’s National Transport Strategy to improve journey times
and connections, reduce emissions, and improve the quality, accessibility and affordability of public transport
in Scotland.9
10. Network Rail published its first Route Utilisation Strategy for Scotland in March 2007, developed in consultation with Transport Scotland and First ScotRail.10 The strategy considers future changes in demand, assesses existing services, and identifies a range of initiatives aimed to make more effective use of Scotland’s railways. The initiatives include increasing capacity between Fife and Edinburgh, reducing journey times between the central belt and northern cities, and improving connectivity between Edinburgh and Glasgow.
11. In July 2007, Transport Scotland published the High Level Output Specification (HLOS), setting out Scottish ministers’ priorities for the rail industry from 2009 to 2014.11 The HLOS aims for First ScotRail to achieve an average of 92 per cent of services arriving on time by the end of 2014, and details a number of major and small-scale rail infrastructure projects to improve reliability, reduce journey times and increase capacity.12 The projects include the Glasgow Airport Rail Link (GARL); re-opening the Airdrie to Bathgate and Edinburgh to Tweedbank (Borders) passenger rail lines; lengthening station platforms on specified routes to allow longer trains and increased capacity; and infrastructure improvements to improve journey times.

First ScotRail will receive £2.5 billion in government subsidy over the ten-year franchise term


12. The First ScotRail franchise was established in 2004 as a seven-year term with the option to extend the term by a further three years.
In April 2008, Scottish ministers extended the franchise to November 2014. First ScotRail will receive
£2.5 billion in government subsidy over the ten-year franchise term, which includes subsidies to ensure First ScotRail provides vital but non-commercially viable rail services.13 In 2007/08, First ScotRail received an average of 11 pence per passenger kilometre in government subsidy. Remaining operating costs are met through passenger fares and other revenue generated by First ScotRail.
13. The franchise contract sets out both Scottish ministers’ and First ScotRail’s obligations.14 Transport Scotland, on behalf of Scottish ministers, is required to manage the franchise contract, monitor First ScotRail’s performance, and ensure all other Scottish ministers’ obligations under the contract are fulfilled. First ScotRail is to pursue agreed revenue targets and is required to deliver a number of service obligations under the franchise, namely:


  • Operate train services specified in the franchise contract.

  • Meet reliability, punctuality and capacity targets that become more challenging over time.

  • Meet the Service QUality Incentive REgime (SQUIRE) train and station quality benchmarks, including cleanliness, security, accessibility, comfort, and provision of travel information.

  • Deliver a capital programme of station, passenger information, safety, security and train stock improvements.

  • Deliver specified service improvements, such as introducing new services, when requested by Scottish ministers. Scottish ministers can choose to purchase any service improvements, including improvements for which Transport Scotland has already agreed prices with First ScotRail (priced options).

Scottish ministers introduced a number of changes to the contract in the franchise extension agreement


14. During the first year of the contract (2004/05), First ScotRail reached a point at which 80 per cent of any additional revenue for the year was returned to the Scottish Executive (a condition of the original contract, Exhibit 3). First ScotRail’s revenue has not reached this level again, however, in 2006/07 it would have required only 0.4 per cent additional revenue to do so. Additionally, by the end of 2005/06, First ScotRail’s performance was outstripping its punctuality and capacity targets.
15. Transport Scotland’s forecasts indicated that First ScotRail would continue to return 80 per cent of additional revenue for the remainder of the franchise. Transport Scotland was concerned that this would reduce the incentive for growing services, since First ScotRail’s costs to improve services might exceed its 20 per cent share of the revenue achieved. This would be contrary to the Scottish Government’s strategic aims as set out in Scotland’s Railways, the Route Utilisation Strategy and High Level Output Specification.
16. Transport Scotland reviewed options to address these concerns, and the three-year extension to the franchise contract was announced in April 2008 (Part 3 of this report describes the review process).15 The extension introduced the following main changes:


  • Punctuality and capacity compliance targets have been made more challenging from 2008/09 onwards. Permitted delays caused by First ScotRail and the percentage of services permitted to provide less than the planned capacity have both been reduced by more than a third, bringing the targets more in line with recent performance.

  • Revenue targets have been revised from the start of 2007/08, in line with more recent forecasts, increasing the target by 7.5 per cent between April 2007 and November 2014.

  • The revenue share and support arrangements have been changed (Exhibit 3). The combination of the revised, higher revenue targets and the change in the revenue share arrangement means that, providing it achieves, each year, revenue of more than ten per cent above the revised revenue targets, First ScotRail could retain up to £236.7 million in additional revenue over the remaining franchise term without paying a share to Scottish ministers. However, this would require First ScotRail to achieve significant further improvement, a situation Transport Scotland considers unlikely.

  • Additionally, a profit cap has been introduced to guard against First ScotRail achieving unexpected profit levels.16 Half of any profit (revenue minus costs) exceeding
    £27.3 million in any year, and half of any profit achieved from the additional service improvement options, is to be paid to Scottish ministers, or invested into further service improvements.17

  • In exchange for the extension and the change in the revenue share arrangements, Transport Scotland has secured a guaranteed
    £73.1 million investment from First ScotRail.18 Scottish ministers will determine how to use this investment. For example, ministers could decide to reduce the government subsidy or invest in service improvements that will address the priorities set out in Scotland’s Railways.

  • First ScotRail is required to provide additional information to better inform planning for the next franchise or to inform alternative options.

  • First ScotRail is required to participate in the development of new major rail projects that will begin services after the franchise term.

The franchise contract reflects but does not determine the structure for passenger fares


17. Fares for First ScotRail services are a mix of controlled fares (where Scottish ministers determine the fare prices for the greater Strathclyde area), regulated fares (where price increases are restricted by Scottish ministers) and unregulated fares (with price increases determined by First ScotRail).19 Appendix 1 provides further details on the structure of First ScotRail fares.
18. The Britain-wide Ticketing and Settlement Agreement (TSA) covers fares on routes served by more than one train operating company and is administered by the Association of Train Operating Companies (ATOC) and approved by the Office of Rail Regulation (ORR). Following the devolution of rail responsibilities, Scottish ministers became responsible for the fares policy for routes covered only by First ScotRail. The Scottish ministers’ fares policy is administered by Transport Scotland but outside of the management of the First ScotRail franchise contract. Transport Scotland is currently developing a new fares policy to encourage a shift to rail transport, with the intention that the fares structure be easily understood by passengers and, where possible, be competitive with other transport modes.


About the study



19. This report provides an assessment of Transport Scotland’s management of the franchise contract, including the awarding of the three-year extension in April 2008, and First ScotRail’s performance against the franchise terms. We did not examine the initial development and awarding of the franchise contract as this occurred prior to the devolution of rail responsibilities to the Scottish Government. The report is organised into three sections:


  • Management of the franchise
    (Part 1).

  • The franchise extension (Part 2).

  • First ScotRail’s performance (Part 3).

20. This report draws on various sources of information, including:


  • a review of relevant documents, including the franchise contract, the extension agreement, meeting minutes and franchise management reports

  • analysis of the costs of the franchise, including subsidy levels, performance payments and management costs

  • analysis of First ScotRail performance data, including comparisons with other British passenger rail franchises

  • interviews with Transport Scotland officials, First ScotRail staff, other rail and transport bodies, rail transport academics, and passenger representative groups.

21. A project advisory group provided the study team with independent advice and feedback at key stages of the project. The membership of the group is shown in Appendix 2.

Summary of key messages





  • First ScotRail will receive
    £2.5 billion in government subsidy for the franchise over its ten-year term.

  • Transport Scotland is generally managing the franchise contract effectively, but there is some scope to improve its consultation with stakeholders, budgeting for performance payments, and the alignment between performance measures and passenger and wider government priorities.

  • Transport Scotland makes only limited information about the contract and associated performance readily accessible to stakeholders and the
    wider public.

  • By extending the franchise Transport Scotland has secured a guaranteed £73.1 million that will be used to reduce the government subsidy or be invested in rail services. However, governance arrangements for the review that led to the extension could have been better managed.

  • First ScotRail’s train running
    and quality of service performance is good and improving in most areas.

Recommendations

To improve the management of the franchise Transport Scotland should:




  • review performance measures to improve alignment with passenger and wider government priorities

  • consider allocating and monitoring a budget for franchise performance payments

  • clarify whether all other funding commitments relating to the franchise are secured until the end of the extended franchise term in November 2014. Where funding has not been secured, Transport Scotland should clarify the arrangements

  • clarify its consultation arrangements, both for passenger rail and its overall transport responsibilities, to improve stakeholder engagement.

To improve stakeholder understanding and transparency regarding the franchise, Transport Scotland should:


  • establish a single source from which stakeholders can easily access the information they consider relevant regarding
    the franchise

  • ensure a guide to the franchise contract is developed that identifies key elements for passengers and taxpayers, is reviewed for its readability and made publicly available

  • publish a summary of the performance meeting minutes identifying key elements for passengers and taxpayers.

When developing the specifications for the next franchise contract, Transport Scotland should:


  • develop a systematic project plan for awarding the next franchise. This should identify the key stages and their timeframes, consultation strategy, decision-making criteria, and reporting and approval arrangements

  • specify under what conditions an extension will be considered or the criteria that will be used to decide whether an extension is appropriate, should the next franchise agreement include an extension option

  • consider any relevant recommendations from the recent National Audit Office report on letting rail franchises.20

The Scottish Government may also wish to consider:


  • introducing an obligation for all public transport providers to consult with other affected transport providers when proposing service or timetable changes, to assist further integrated transport improvements

  • introducing versions of the Service QUality Incentive REgime (SQUIRE) for other transport and service providers.

1 The rail network and passenger services in Northern Ireland remain state owned.

2 The Transport (Scotland) Act 2005 dissolved the Strathclyde Passenger Transport Executive (SPTE), transferring its rail functions to Scottish ministers and remaining transport functions to the Strathclyde Partnership for Transport (SPT), established by the Act.

3 Prior to September 2007, the Scottish Administration was referred to as the Scottish Executive. It is now called the Scottish Government. When dealing with the earlier period this report refers to the Scottish Executive but in all other instances it refers to the Scottish Government.

4 In 2007/08, Transport Scotland provided £365 million in capital and resource grants to Network Rail for the operation, maintenance and renewal of the rail infrastructure network.

5 First ScotRail manages most stations in Scotland except for: Edinburgh Waverley and Glasgow Central stations, which are managed by Network Rail; Dunbar station, managed by the National Express East Coast franchise; and Glasgow Prestwick station, which is privately managed by Glasgow Prestwick Airport Limited.

6 Passenger Focus is Britain’s independent rail consumer watchdog, established under the Railways Act 2005, replacing the regional Rail Passengers’ Committees. MACS is a statutory advisory body established in 2002 to advise the Scottish Executive on disability issues regarding transport.

7 The seven Regional Transport Partnerships were established by the Transport (Scotland) Act 2005 to allow local authorities and other regional representatives to plan and develop the transport strategy for their regions.

8 Scotland’s Railways, Scottish Executive, December 2006.

9 Scotland’s National Transport Strategy, Scottish Executive, December 2006.

10 Scotland Route Utilisation Strategy, Network Rail, March 2007.

11 High Level Output Specification, Transport Scotland, July 2007.

12 The ‘Public Performance Measure’ (PPM) will be used to determine whether 92 per cent of First ScotRail services arrive on time. The PPM is the main method used in Britain to assess passenger train punctuality. For regional operators, including First ScotRail, ‘on time’ is defined as arriving within five minutes of the timetabled arrival time. A train service’s punctuality depends on the performance of both the infrastructure (Network Rail) and the service provider (First ScotRail).

13 The £2.5 billion subsidy is in 2004/05 prices. Subsidy payments to First ScotRail are made annually, with its 2004/05 price inflated by the retail prices index (RPI) each year. The total inflation adjustment from the start of the franchise, October 2004, to the end of March 2008 was £36.5 million.

14 The contract is available on Transport Scotland’s website www.transportscotland.gov.uk

15 The franchise extension agreement is available on Transport Scotland’s website www.transportscotland.gov.uk

16 First ScotRail is required to provide Transport Scotland with its profit and loss account statement every four weeks, and have its annual accounts audited by an independent auditor approved by Transport Scotland.

17 All figures in this paragraph are at 2004/05 prices, except the £27.3 million profit cap, which is at 2007/08 prices, and will be inflated by the retail prices index (RPI) each year.

18 This is in addition to the £40 million First ScotRail is required to spend on a range of capital improvements during the first seven years of the contract.

19 Fares classed as controlled and regulated were determined by the fares policies of the SRA and SPTE (for which Scottish ministers are now responsible) or the British-wide Ticketing and Settlement Agreement (TSA).



20 The Department for Transport: Letting Rail Franchises 2005-2007, National Audit Office, October 2008.



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