Transparency data

National rail contracts - tranche 1

Updated 27 November 2023

Background

This assessment was completed to align with the full business case (FBC) which was submitted to DfT Investment, Portfolio and Delivery Committee (IPDC) in April 2021.

Context

In March 2020, in response to the impact of Covid-19 on public transport the department implemented emergency measures agreements (EMAs), which enabled the continued operation of critical passenger and freight services. These were replaced by the emergency recovery measure agreements (ERMAs) in September 2020. The ERMAs are being replaced with national rail contracts (NRCs), which are being negotiated through a programme of direct awards to incumbent train operating companies (TOCs) in 3 tranches, this assessment relates to tranche 1 that covers contracts on Essex Thameside, South Western and TransPennine Express.

Regularity

In awarding the NRCs the department is relying on the Secretary of State (SoS)’s powers under Section 26(1) of the Railways Act 1993 (RA93). S.30 RA93 contains an obligation on the SoS to provide continuity of rail passenger services on designated parts of the rail network. Section 26(4A) RA93 requires the SoS to publish, and have regard to, a statement of policy concerning how he proposes to exercise his power to let rail service contracts under section 26(1). Section 26(4B) RA93 requires the statement to include policy concerning when it is likely that an invitation to tender will, and will not, be issued, and the means by which the SoS proposes that the selection of an operator will be made in cases where no invitation is issued.

The statement assumes that direct awards should be entered into only where a competitive tender process has not been possible or has failed to complete. If a competition does not take place, the statement sets out an order of priority of potential recipients of a directly awarded contract, with the incumbent operator first or if required by the circumstances sets out in paragraph 14 of the statement another operator.

Propriety

Negotiations with the three TOCs have been carried out in parallel but on a ‘level playing field’ basis using a common set of template contract materials. Where differential approaches were considered between TOCs, these reflected clear differences in their operational circumstances (e.g. the widely-differing sizes of the TOCs in question, which has necessitated some minor difference in the approach to fees and risk capital). In all cases, the NRCs represent the best achievable position following robust and well-resourced negotiations.

Value for money

The methodology for assessing the value for money of awarding national rail contracts (NRCs) compares the costs and benefits of awarding individual contracts with the private sector train operator against most appropriate counterfactual of contracting service provision with the operator of last resort (OLR).

Each economic case mapped all material potential economic and strategic costs and benefits, which were monetised where possible. While attempts were made to quantify costs and benefits, fixed and performance-based fees made up the vast majority of monetised costs, and benefits were largely qualitative. Benefit cost ratios (BCRs) for each NRC were not calculated, as benefits are unquantifiable.

The strategic arguments for awarding an NRC with the incumbent operator include maintaining a private sector bidding market ahead of passenger service contracts, business continuity, and performance improvements through greater incentivisation. Other strategic factors were assessed on a case-by-case basis, such as the quality of the business plan, innovation, economies of scale, access to owning group resource, ambitiousness of targets, and potential budget padding. This is in addition to any TOC-specific factors that were considered. These strategic benefits were weighed up against OLR-specific strategic benefits, such as the ease of agreeing changes with the operator in-life, and departmental contract management costs. Given the inherent uncertainties surrounding the magnitude of benefits arising from non-monetised factors, it was not possible to robustly determine whether awarding contracts to the OLR or to the incumbent operator through NRCs offered best value for money.

Decision makers were presented with this evidence and determined that the benefits including the strategic case for awarding the NRC to the incumbent outweighed the costs.

Feasibility

Section 30 of the Railways Act requires that the department continues to run train services across the entire network, including in circumstances where a franchise holder becomes unable to do so.

The option of implementing NRCs is the most feasible and lowest-risk option for ensuring this outcome in the near-term. In particular, the NRCs will play a vital role in maintaining a functioning market of private operators of passenger rail services. This is consistent with both the current statutory framework (which assumes private operation of passenger services as the default) and the future direction of planned reforms.

While delivering value through this approach will depend on ongoing effective management of the NRCs by DfT, they appear to offer a feasible and low-risk solution. .

Conclusion

As the accounting officer for the DfT, I have set out the key points that informed my decision in April 2021.

I considered the proposed awards of national rail contracts (NRCs) on South Western, TransPennine Express and Essex Thameside.

I am satisfied the awards rely on clear legal powers, meet the standards of managing public money and accords with the generally understood principles of public life, represents good value for money for the Exchequer as a whole, and is feasible to deliver.

On that basis, I am satisfied that the decision taken represents a good use of public resources.