Mutual and Co-operative Rail Franchise Bids

– in Westminster Hall at 4:29 pm on 20th October 2010.

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Photo of Gavin Shuker Gavin Shuker Labour, Luton South 4:29 pm, 20th October 2010

It is a pleasure to undertake this debate today. I thank the Minister of State for the communication that I have had with her office in the past few days. We are talking about an important subject. We all like to grumble about the railways. Hon. Members are not exempt from that; indeed, I could tell the story of my last disrupted journey, which was this morning. However, the very difficult privatisation of the early 1990s, brought about by the Minister's predecessors, sought to privatise a network in 40 weeks. That meant severe growing pains and a sharp learning curve. Other countries are travelling down that path over several decades, which is perhaps a salutary lesson to the present Government about the path and speed of change. However, we all accept that a new order is emerging, and it is right to accept that aspects of the industry today are the envy of Europe.

In the past 10 years, the combined measure of reliability and punctuality has risen from 78 to 91.5% and satisfaction has risen from 72 to 83%, with more passenger journeys now undertaken than at any point since the second world war. Yet, as we come into the constrained spending context of the comprehensive spending review, as the Department closes its consultation on rail franchising, and as customer expectation will rise in light of the massive fair increases of RPI plus 3 proposed by the coalition Government, a re-examination of provision on the UK's passenger railways must surely be prioritised.

So, how do we improve rail? It is my assertion today that co-operative and mutual ventures across the industry can raise the bar. They can model accountability and effective public engagement, and improve services. When looking at franchising, which is the bedrock of the passenger network, it is necessary to set it within the context of the industry, which means briefly discussing the infrastructure manager-Network Rail.

Network Rail's board structure, with about 100 members, is perceived as clunky and ineffectual in providing effective control. In 2004, the then Transport Committee stated:

"Network Rail did not convince us that members of the company were exercising an effective control of the company".

In July 2008, the Committee returned to the theme of Network Rail, and found its governance "inadequate". Network Rail provides a vital public service and was created as a public interest company, limited by Government guarantee, but genuine accountability, which is essential for driving up standards across the railways, is vital and should be expected in return for the large sums of money that the body receives from the taxpayer.

The Co-operative party has been key in developing a mutual model for Network Rail through "The People's Rail" campaign, and as a Co-operative MP I welcome that contribution. The campaign contests the assertion that true accountability could be ensured by our all having the right to become individual members of Network Rail. As a genuine mutual venture, Network Rail could be structured in such a way that we all had a voice. A democratically elected members' council with power over the appointment and pay of Network Rail's board could drive up performance and accountability and, dare I say it, tackle a culture of excessive bonuses.

Photo of Gareth Thomas Gareth Thomas Shadow Minister (Business, Innovation and Skills), Party Chair, Co-operative Party

I apologise to my hon. Friend for missing the very first part of his contribution. Is there not a similarity between what he proposes for Network Rail and the model that the coalition Government have endorsed as the way forward for something that was introduced by us-foundation hospitals? Exactly that type of structure has been designed to help to hold to account the senior management of our hospitals.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

I thank my hon. Friend for his intervention, with which I completely agree, and I associate myself with his comments. What we have seen from the coalition Government is a desire to look at innovative models across public services, and I believe that railways should not be exempt.

As I was saying, a democratically elected members' council with the power of appointment and pay over Network Rail's board could drive up performance. Co-operative and mutual structures deliver organisations that act in our interests. Who would be a better boss of the rail network than the passengers and the British public themselves?

Moving on to the bulk of my remarks on rail franchising, in a reply to a question from my right hon. Friend Sadiq Khan in the House on 22 July, the Minister said:

"There would be no barriers to mutuals and co-operatives bidding for franchises if they fulfilled the criteria."-[Hansard, 22 July 2010; Vol. 514, c. 541.]

However, it is clear that there are still some barriers to entry, despite the stated desire of the coalition to explore innovative models of public service delivery. We in the Co-operative party would like to see those models given all the opportunities that are before them.

The system as it stands does not make allowance for the arrival of mutual and co-operative ventures. First, bidders are required to pass a number of detailed financial tests during the bidding process. ASLEF has said that a mutual bid would not be able to meet the performance bond requirement, and has called on the Department for Transport to review the performance bond criteria. Surely that is an area for examination. Secondly, bidders are understandably required to show experience of operating transportation systems. Can the Minister provide an assurance that the interpretation of that requirement is wide enough to ensure that mutual models in which individual members have extensive experience of running transport services-even the ones that they currently work on-but in which there is a new team coming together, perhaps under a new brand, are able to bid on a level playing field? Thirdly, the fact that no franchise has yet been awarded to a mutual ownership model on the railways itself serves as a barrier to entry.

To bring about the innovation that could drive up levels of service and accountability across the industry, will the Minister carefully consider the arguments for awarding the first mutual franchise during her time as Minister? Perhaps she could start by meeting representatives of ASLEF. The union has been preparing a mutual bid to run the east coast main line rail franchise when invitations to tender are announced in 2011. It believes that the co-operative principles of sustainability and accountability should be brought front and centre in the provision of passenger rail in the UK.

A common perception is that co-operatives are small and therefore unable to step up to the financial requirements of such a large franchise. However, the Co-operative Group has a turnover of more than £10 billion, and the east coast franchise turnover is only £550 million. The Go! Co-operative is one of the most recently established train operating companies, and down the track, as it were, it seeks to run open-access train services. That co-operative has already been authorised by the Financial Services Authority to raise the required funds, and I am sure that the Minister will want to welcome that initiative. I encourage her to take the time to talk to representatives of Go! Co-operative and to understand, in real time, both the challenges and the opportunities that are presented to people who enter the franchise system.

Photo of Louise Ellman Louise Ellman Chair, Transport Committee

Does my hon. Friend agree that the strength of mutuals is that they can represent the interests both of those working in the organisation and those who use its services?

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Absolutely. I thank my hon. Friend for that intervention, and I would like to associate myself with her comments. It is true that when different stakeholders, including the people who work on the railways, are brought together, that always results in a much better service. Rail franchising is a key aspect of mutuals' activity on the railways, but there are other ventures, too, to consider.

Enterprises that are owned and controlled by those who have a vested interest in their success should not be confined to the running of the railway itself. Many services that work alongside the main business add value to the traveller experience. Services such as cleaning, catering, customer service and training would be greatly improved by local accountability that allowed the services to respond flexibly to changing needs. The Cleaning Co-op based in Bristol has already won contracts to work with Birse Rail, CrossCountry and Virgin Trains. It provides cleaning services to Oxford and Bristol universities, local schools and the NHS. As a result of its unique structure, it not only provides a highly professional service but has a high staff retention rate and a motivated work force. It is highly valued by its clients, who are also its partners. The Cleaning Co-op is one example, but there are many successful retail, catering and training co-operatives, all of which could add to the traveller experience in a mutualisation of rail franchising.

Mutualism has much to offer in the governance of Network Rail, the system of rail franchising and the services that enable a decent passenger experience. I hope that the Minister will speak about the positive contribution of these talented, professional and visionary co-operatives. As we all recognise, UK rail faces significant challenges in the years to come. There is a requirement to show that passengers are getting a fair deal. There is a desire to see profits reinvested in better services. What better way to reassure passengers that the railways have their interests are at heart and that the staff who serve them truly have a seat at the table, than to see mutual operators on our railways?

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport 4:39 pm, 20th October 2010

It is a pleasure to serve under your chairmanship today, Mrs Brooke.

I congratulate Gavin Shuker on securing the debate and providing us with the opportunity to discuss an important issue, namely the potential involvement of mutuals and co-operatives in the rail franchising process. The issue is of concern to a number of hon. Members and has been the subject of a range of parliamentary questions.

I would like to make it clear that the coalition Government support the creation and expansion of mutuals, co-operatives, charities and social enterprise. We fully appreciate and recognise the brilliant work done by the co-operative, mutual and not-for-profit sector in many areas of policy and public life. In fact, we want to see such groups playing a bigger role in delivering public services and in helping us to tackle the key social problems that we face in modern Britain.

I want to be clear: the Government would treat a rail franchise bid from a mutual or a co-operative in exactly the same way as they would treat a bid from a competitor in the commercial sector. If a mutual, co-op or any other not-for-profit organisation can meet the accreditation criteria, it may bid for a franchise. If it offers the best deal for the passenger and the taxpayer, it can win the franchise. I cannot promise to bend the rules for mutuals and co-operatives, but I can promise to treat them fairly and objectively, judging their proposals on the same basis as those of their commercial competitors.

Before I deal with how the accreditation and procurement process works, I will respond briefly to the points made by the hon. Member for Luton South on Network Rail-not obviously the subject of today's debate, but important none the less. I hope, Mrs Brooke, that you will allow me the latitude to respond.

The hon. Gentleman is right that we need to reform Network Rail. I am glad that there is growing consensus around that-before the previous general election, the Government seemed to think that there was no justification for reform, so I welcome his voice joining those of us who think that we need mechanisms to make Network Rail more accountable. He is right that we need to take care to get any reform right-we want not to rush into it, but to think carefully about the best way to deliver results for passengers and taxpayers.

I recognise and, to an extent, share the hon. Gentleman's concerns about the Network Rail decisions on bonuses in recent months. I am pleased that the company has suspended its management incentive plan, which I hope we see reformed in the future. We are determined to make Network Rail more accountable and more efficient. Our work is informed by that of Sir Roy McNulty, and I have no doubt that our discussion today and the speech by the hon. Member for Luton South will also form an interesting part of the McNulty review.

In order to address the issues raised by the hon. Gentleman about mutuals, one first needs to consider the general rules on rail franchising. As the hon. Gentleman acknowledged, rail franchises deliver an essential service. There are 1.2 billion passenger journeys made every year. The train operating companies are, at the moment, substantial businesses-they each have a turnover in excess of £100 million per annum and they provide employment to hundreds and, in some cases, thousands of people.

The Government have a twofold interest in rail franchises. First, we need to protect the passengers' interests and to hold train operators to the demanding obligations of service delivery placed on them by their franchise contracts. Secondly, we need to protect taxpayers' interests, by obtaining value for money from the franchise contracts and for the considerable sums spent on the railways.

The hon. Gentleman will appreciate that, while some franchises pay a premium and others receive a direct subsidy, all operators benefit from the Government grant made to Network Rail to maintain and renew the infrastructure. He will appreciate that considerable sums are at stake when a franchise is let and that, in letting a franchise, we trust the operator with serious and important responsibilities in relation to our economy and transport system. Therefore, the greatest care is needed to ensure that we do the best that we can to make the right decisions on whom we award a franchise to.

A key issue for the hon. Gentleman was clearly the accreditation process used to assess whether a bidder can qualify to take part in a franchise competition. The Department for Transport has recently completed a consultation on rail franchising-it closed on Monday-and I take the opportunity to thank all those who took part. Until the consultation responses have been properly considered, I cannot say with certainty whether the reforms that we will undertake will involve changes to the accreditation process. Although this is not the primary focus of the consultation, we are happy to consider whether ways can be found to make the process of letting franchises less complex and expensive to carry out. Whatever reform we adopt, however, it must still ensure that the process is fully compatible with objective public procurement principles and regulations. I am sure that the debate will provide useful input for the decisions on whether reform to the accreditation process is needed, to be considered alongside the consultation responses.

The procurement process has two main elements: first, accreditation; and, secondly, the formal bid stage. The appropriateness of potential bidders is considered at the first stage. The accreditation process is designed to achieve a manageable field of bidders, which can be expected to submit attractive, competitive and realistic proposals. Keeping the number of operators that can proceed to the formal bid stage to a manageable number reduces cost for Government and industry. The winning bidder must be capable of delivering a high-quality service at the price it has undertaken to pay. The procurement methodology needs to comply with European Union procurement law and treaty principles, including equal treatment, proportionality and transparency.

The legal entity signing the franchise agreement is required to be a limited company formed for that purpose, but the accreditation process assesses the financial standing and technical capability of the parent organisation, so it would be open to a mutual or co-operative to establish a special purpose vehicle in order to run a franchise in the same way as commercial parent groups do now. Bidders are assessed to ensure that they have a level of financial standing proportionate to the size of the franchise concerned, in order to provide assurance as to the stability of the potential operator. The Government need to be confident that each bidder will have sufficient financial capacity to meet the working capital needs of the franchise business. We need to assess with great care whether the bidder will be able to absorb the risks that we seek to transfer to it, which at the moment means obtaining the performance bonds that the Department needs as security in the event of a franchise default.

The hon. Gentleman has made a passionate plea on behalf of co-operatives and mutuals. I value their work, but I would be very reluctant to compromise on rules that require us to make a careful assessment of the financial capacity of those that bid for rail franchises, because of the accompanying potential risks. Having said that, we are looking at the whole process of the franchising system as part of our response to the consultation. A key aim of the franchising process must be to protect the interests of passengers and taxpayers, so it is essential that we have safeguards in place to avoid letting the contract to an organisation that, ultimately, finds that it cannot cope. The most recent example of franchise collapse, that of National Express East Coast, shows that it is possible to deal with that situation without disruption to services. However, such collapses are clearly unsettling for passengers and the work force, and leave the taxpayer with the considerable cost of stepping in to run the railways as the operator of last resort.

I hear what the hon. Gentleman says, but financial credibility checks and standards are important, and likely to become even more so in the future as we move to longer franchises, as proposed in our consultation. We will need to make longer-term judgments on the credibility of bids and on the capacity of the potential franchisee to deliver major investment, which we hope will make a considerable difference to the quality of experience for passengers under the proposed new franchise model.

I turn now to the hon. Gentleman's questions about the experience assessed when looking at franchise bids. The current rules require bidders to demonstrate a track record of operating transport systems, not necessarily in rail. Recent competitions have said that it should cover a period of at least two years. However, a completely new organisation might be able to meet that requirement by showing that its management team and work force have such a record. The issues discussed by the hon. Gentleman could be taken on board in the assessment of whether the potential bidder had the right track record to give us confidence to take their bid seriously.

A new and small organisation may have less experience than other bidders and will, therefore, find it harder to get through this stage, especially if it is interested in one of the larger, more complex franchise opportunities. My officials have an open door policy for people who want to get into the rail franchise market. I am happy to meet the delegation from ASLEF that the hon. Gentleman mentioned. It is useful to put it on the record here that if there are others-whether they are commercial operators, mutuals or not-for-profit organisations-that are interested in bidding for a rail franchise, we are willing to talk to them, and my officials are happy to advise them on how to grapple with what everyone accepts is not an easy process.

The hon. Gentleman advocated waiving or reforming some of the requirements in the case of a bid by a mutual. Removing the financial standing and technical capability factors or compromising them would import some real risk to franchisee financial resilience. That is my anxiety about what he advocates. If we were to waive the experience requirements in relation to a mutual, we would have to make the change for all potential bidders. That would reduce our ability to consider the track record of the major franchise operators that are currently in the market. The EU rules on equal treatment and non-discrimination mean that we have to treat all bidders the same and assess them against the same criteria. Therefore, anything that we do to help a mutual or co-op would also have to be offered to a commercial operator. If we were to relax the requirement on a track record, we would not be able to assess the previous experience and performance of the only groups that currently hold franchises. There would be public anxiety if the track record of train operators could not be considered in the award of new franchises. Moreover, the existing process is a further incentive and addition to the other regulatory mechanisms. We must keep performance levels high. To get through this difficult process, I encourage any mutual or co-operative that is considering bidding to approach my officials to get further advice.

The hon. Gentleman referred to the Go! Co-operative. I am delighted that we have that as an example of a co-operative that has expressed interest in running open access services. I gather that it would like to operate services linking main lines to some smaller market towns. I am told that it has identified a route from Yeovil Junction to Oxford for its first proposed services and that it hopes to commence operation during 2011. That is a welcome initiative. It is not for me to say whether it will get its paths or even get the operation off the ground. None the less, I very much welcome its involvement in the rail industry. There are also examples of small community-based companies running services, such as the Wensleydale railway in North Yorkshire, which has taken on a branch line from Northallerton to Redmire and is running passenger services.

I want to touch briefly on one last area. The voluntary and not-for-profit groups are already successfully engaged with the UK's railways: I refer to community rail partnerships. The Government are very supportive of such partnerships and the work that they do. They have successfully brought additional passengers to many lines and helped to build up services and make better use of redundant property. For example, the Devon and Cornwall rail partnership works with the train operator in selling tickets at a number of locations. It encourages rail use by making it easier for the public to buy tickets. Partnerships such as South Fylde, Leeds to Morecambe and the Clitheroe line have produced impressive promotional material. Others such as the Bittern line in Norfolk have run successful promotional events. Almost all partnerships see the voluntary sector involved in improving and maintaining station facilities. There are numerous examples of local enthusiasts devoting huge care and attention to station gardens and floral displays. Right across the country, from Penmere in Cornwall to West Runton in Norfolk and Green Road in Cumbria, we see the visual evidence of the value of the work done by the voluntary and not-for-profit sector on our railways.

To conclude, the Government fully recognise and value the contribution made to the rail industry by the community-based and not-for-profit sector. I was interested to hear the hon. Gentleman's example of co-operative cleaning services. I have no doubt that there are other areas in which mutuals and co-operatives will get involved in rail supply services. Rail franchise procurement processes can present a daunting challenge to any organisation, particularly those that have not operated a similar contract before. That is why my officials offer an open door policy for potential bidders. If a mutual or co-op expresses an interest in running a rail franchise, we will not place extra barriers in their path. They will be subject to the same rules and requirements as commercial operators. If they can meet the accreditation criteria, they can bid for a franchise. If they offer the best deal, they can win a franchise. It is as simple as that.