The CMA believes such competition would mean “lower fares, new routes and destinations, more innovations and flexible ticketing”. Because the two (soon-to-be three) current open access operators (OAOs) pay only variable - but no fixed - track access charges, nor pay a premium to Government, the CMA advocates levelling the playing field: OAOs would pay more towards infrastructure costs, and through a Public Service Obligation levy help to support socially necessary but unprofitable services.
Smith agrees with many other responses in favouring Option 1. “As a consumer organisation we quite like choice because it tends to drive competitive behaviour, which tends to deliver better outcomes for passengers. But we can see where choice can tip into anti-choice - it becomes so complicated you can’t make an informed choice, or because the service on offer becomes so restricted you can’t buy the whole product. The off-peak return is a very useful ticket - the flexibility it offers and the number of trains that can be used is very powerful.
“There is a fine dividing line in these things. Having competition upstream with competition for franchises gives the Treasury some comfort - there is a degree of cost control in the system which otherwise seems to be notably absent, ranging to on-rail competition.
“But only being able to take a green train or red train would fundamentally alter the way we use the railways. The ‘walk up and go’ railway is a great thing. The flexibility and frequency we have on Britain’s railway is astonishing - you wait for a modern fast train to London for 19 minutes in Birmingham, 19 minutes in Manchester, 59 minutes in Glasgow and 29 minutes in Cardiff. It’s very impressive. On many parts of the network you no longer need a timetable.
“I worry that moving towards an advance purchase railway we would lose some of that attractiveness. That would be a really negative thing. Make it simple: turn up and go, as TfL has done with its ticketing, brilliantly. People pay a premium for simplicity.”
One area where Smith feels there is unquestionable value in open access operations is the provision of new services: “People don’t like changing trains. There is a visceral sense of being connected to the outside world by having direct trains to London. OAOs have sent a frisson through that debate.”
The impact of revenue abstraction by OAOs prompted the ORR’s 2004 report into moderation of competition, which recognised that long-term investment cases rest on a reasonable degree of assurance that their assumptions will not be undermined.
James Lambert, Director, Sector Regulation at the CMA, envisaged a greater role for OAOs on key intercity routes, building on the customer benefits that competition has delivered on the East Coast, such as “an 85/15 split to increase the competitive pressure, but not so much that it is destabilising or setting in train a race to the bottom. The DfT and ORR are looking at our recommendations and the DfT will consult on the PSO levy in the autumn. We may see some smaller franchises with more overlap. We recognise that there are some risks which we need to work through in implementing greater competition and we are working closely with ORR and DfT.”
That risk is evident from looking at East Coast’s financial results. Is it coincidence that the TOC in the greatest financial difficulty is the only one subject to open access competition? Or that the European railway with the highest number of per capita journeys, Swiss Federal Railways, has no on-rail competition and very limited competition from coaches or buses?
Continental OAOs are cited by the CMA in support of its case, and there is no doubt that in Austria, the Czech Republic and Italy competition between OAOs and the national operator has benefited passengers with reduced fares. But the price war has been destructive: Leo Express in the Czech Republic lost CZK 63.6 million on sales of CZK 88.7 million in the first half of 2014, and NTV in Italy has already had to undergo a debt restructuring. Both have had court battles with the national rail operator.
Another downside of additional operators would be exacerbating the difficulty of devising sensible cascades, reducing the size of train orders (ultimately paid for by higher fares) and probably increasing the multiplicity of train types, and thus adding to cost and reducing reliability. There are currently 37 types of EMU in Britain, with eight more on order.
Nor is it considered wise practice to use up every train path available. Many countries are reluctant for track capacity use to exceed 80%-90%, so that there is some resilience in the system to cope with inevitable perturbations.
THE FUTURE
What’s next? The DfT plans/has to start competitions for the InterCity West Coast, West Midlands, South Eastern and East Midlands franchises over a period of eight months, and award all five franchises between February and November 2017. Consultation on West Coast began in May for an April 2018 start.
The PAC is critical of the DfT’s lack of a strategic vision for the rail system, and of the costs that absence might impose at a later date. Although the importance of this cannot be overestimated, it falls short of highlighting the absence of wider transport policy that reflects environmental commitments. A rational policy would also factor in the many external costs of transport, and seek to mitigate them.
The railway has become a much more complicated industry in the wake of privatisation, and franchising is a major contributor. Complexity adds cost. The costs inherent in the replacement of a command structure by contracts between a multiplicity of suppliers have been quantified by the consultancy Just Economics at an annual £290m. What is incalculable is the cost of the seemingly endless reviews and studies made to improve the structure and operation of the franchised railway, nor the costs of reorganisation to implement those findings deemed worthy of action.
Nevertheless, a European Commission study in 2013 concluded that Britain’s railways were the most improved in Europe since the 1990s. They have grown faster than any other country, while also becoming the safest.
The lamentable state of regional and even inter-city services in some parts of France gives the lie to those who champion renationalisation. Given the disaster of Railtrack and the patchy performance of Network Rail in maintaining and enhancing the infrastructure, a large part of the credit for passenger growth in Britain must be due to the TOCs. As the Brown Report observed: “It is highly unlikely that these successes could have been delivered if franchising was fundamentally flawed.”
