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Railways: Public Procurement

Volume 722: debated on Tuesday 30 November 2010

Question for Short Debate

Asked by

To ask Her Majesty’s Government what public procurement lessons they have learnt from the railways.

My Lords, it would seem that in the future more and more public services will be procured by local authorities contracting with the private or voluntary sectors actually to deliver those services. The object of this debate is not to discuss the rights or wrongs of such a policy; rather it is to try to make sure that if that is the way we are going, we should try to do this as well as we possibly can. To me that must mean not merely looking forward to what we want to achieve but, just as importantly, looking back to learn the lessons of past experience. At this point, I stress again as strongly as I can that this is not a debate about the rights and wrongs of public procurement, nor is it meant as a moment at which we revisit our views on the role of the state in our lives. Surely what we have learnt from all of this can and should guide us in future exercises.

Probably one of the biggest exercises in public procurement that we have had was the privatisation of the railways. With this in mind, a short while ago I set up a small group of experts to help me identify some of those lessons, and I would like to thank them for their enormous contribution. I also thank the International Longevity Centre-UK, which I am privileged to head, for its sponsorship of this work.

What, then, are the lessons that we draw? The first and perhaps the most overriding thing in any public procurement exercise is that the reasons and objectives of the exercise must be clearly laid out. It is essential that the Government are honest not merely with the public but with themselves. Only in this way can the delivery be monitored, success or failure assessed, and changes, if necessary, made.

Secondly, in negotiating the contract, experience has shown that it is essential that a realistic and workable alternative method of operation is in place first. A Government without a credible fallback situation are not in a strong position when negotiating the original contract or in its subsequent enforcement.

Third is the need for proper risk allocation. In any public procurement, the Government need to be absolutely clear about what risks they want to allocate to the operator and why and how they intend to do that. For example, while some risks that arise from changes in public policy relating to the contract should clearly not be taken by the contractor, if the operator wants the profits of public procurement, it must surely take the commercial risks. It does so in its dealings with the commercial world—some people would say the real world—so why not in its dealings with the Government? From rail privatisation, one will have seen too often such risk merely being transferred back to the Government.

Fourthly, the Government’s ability to enforce the contract properly is essential. All contracts should incorporate, for example, an adequately-sized bond, to be forfeited if the contractor or the franchisee walks away from the contract. That should be accompanied by pre-defined penalties, to be levied for non-delivery at the end of, or even—dare I suggest?—during, the contract.

Sitting suspended for a Division in the House.

My Lords, I have already spoken about the need for the Government to be clear and honest about their objectives in any procurement exercise, and I have stressed the need for a workable and realistic alternative to give strength to the Government’s hand. I cannot stress strongly enough the need for a proper risk allocation. Next is the Government’s ability to enforce the contract properly. It is essential that all contracts should incorporate an adequately sized bond, to be forfeited if the contractor or franchisee walks away from the contract. That should also be accompanied by predefined penalties to be levied for non-delivery at the end of, or dare I suggest during, the contract. If the contractor is a wholly-owned subsidiary, these should also be guaranteed by the parent company. Finally, whatever mechanisms are used, it is absolutely essential that they are made subject to independent and credible audit. Past arrangements have proved to be deficient in this respect and there is considerable scope for improvement.

These are just some of the lessons that this group of experts drew from the history of rail privatisation. For anyone who may be interested, I would be happy to arrange to send them a copy of the report. May I ask the Minister—this long preamble does not change the fact that this is a Question for Short Debate—what he has learnt from past privatisation? What lessons have the Government learnt? Above all, can we have an assurance that these lessons will be properly reflected in any future public procurements? I am sure the Minister will understand that this debate is not just about the railways and that he will answer with that in mind. I intend to broaden my work on procurement with the help of experts in their field to look at education, the Prison Service, healthcare and housing to see how we can all learn from these lessons and ensure better procurement in the future. I am grateful to your Lordships for hearing me this afternoon.

As someone who has spent most of my life working in the voluntary sector, often interacting with the private sector, it is not surprising that I have strong feelings about the procurement of services through these sectors. I know only too well how well, and sometimes sadly how badly, they can deliver services. The lunacy whereby we recently learnt that it would cost more money to cancel the building of two aircraft carriers than to have them completed must not be allowed to continue. It sometimes seems that the inmates have truly taken over the asylum. They say that hindsight gives 20:20 vision. Let us at the very least resolve to learn from the pains and tribulations of the past. I hope the Minister can assure me that Her Majesty’s Government will do just that in the future.

I have been a victim of privatisation in two industries. Your Lordships should reflect first on who benefits most from privatisation. We should perhaps do well to think about the vision. It was about small shareholders, employee shareholders and people taking part in the running of their companies, with the shares to be well spread. However, that was in the era of the carpetbagger, and the shares were disposed of by small shareholders and vacuumed up by big corporations. Moreover, the privatised companies, in particular water and electricity companies, geared up enormously. They had virtually no debt, because they had received money from the Government. They then went out and borrowed large sums of money and gave it to their shareholders, which was not what was intended. To crown it all, they then came back to the regulator and said, “We haven’t got enough money to repair what we’ve taken over. You must allow us more money”, so their prices went up to a level which I imagine would have been quite unacceptable had they remained in the state sector.

That is a bit of history. Let us turn to who benefited. I know very well that they were the professional money men, the merchant bankers, the lawyers and the consultants. It ended up with those people being paid salaries that were massively in advance of those of anyone who did the job on the floor of the business concerned, be they engineers, operators or the employees.

What do we want in future? When the Government privatise the Post Office, which seems to be next in line, and consider employee shareholding as a part of that—which is what the Prime Minister has said—how will they make sure that it remains a mutual? I believe that mutuality was one of the aims of the people who devised these systems, but the system just ran away with them. How can we privatise an organisation such as the Post Office in a way that engages its employees in the operation of their business?

The question goes much further. Once local government starts to privatise its services, how will we stop them being run by large foreign conglomerates in a way that is detrimental to the people in local government or to the customers of those organisations? We know that large American healthcare companies would be interested. Is responsibility for looking after people’s interests to be contractualised out of all recognition? It is essential to think carefully through any further privatisations or any contractual organisations that are set up.

I saw an article in the Times yesterday—I am sure that it was coat-trailed by another very expensive firm of consultants—suggesting that Network Rail should be split up into this and that. I should like the Minister, if he can, to deny that there is any truth in it. I am sure that the consultants who suggested that were not unmindful of the sort of work that it would create for them, their lawyer friends, their financier friends and their merchant banker friends, who are not really party to what Network Rail is doing. They would take money away from what Network Rail should be doing—and I have no particular brief for Network Rail.

I also ask the Minister to look very hard at the PFI schemes. Those have been, if I might say so, a financial disaster and, what is more, we are going to go on paying the bill for them for years and years. I experienced one of those in the police force, when we were made by the then Government to go out to a private finance initiative bid. It has cost a huge amount of money, not just for the new building but for the services that we were obliged to take as part of the deal. It has become a very expensive millstone around the neck of the authority.

Turning back to the railway, some railway franchises are well run, such as Chiltern Railways and Merseyrail, but I am very concerned about whether most of the people put the customer at the top of their list. I recommend that the Minister looks very hard at the survey work that is being done by Passenger Focus. It measures passenger satisfaction on many scales, which is very important in what we are doing.

My Lords, I thank the Minister for indulging my short absence. I also thank the noble Baroness, Lady Greengross, for introducing this debate and for sharing with me the paper from her transport forum. It reminded me of a paper that I had written some seven years ago, after 12 years’ experience of procuring goods and services for the public. I was procuring at the rate of something like £0.5 billion worth a year and I set down in a paper—it was literally only 22 lines long, so it was not a great seller—what I thought I had learnt from those 12 years. I ended up with 22 tips for contracting. I have looked at where the two papers coincided.

I take my first two points:

“Know what your objectives are”,

and, “Understand your suppliers’ objectives”. The essence of making a good contract is to think first of why you are doing it. You are doing it not for the Government but for the citizens, either singly or in groups, so you must know what you want and what that service is. You must have mutually compatible objectives and you really need measurable objectives. You do not want indulgences such as, “Let’s have innovation”, or all those fancy words. Get your objectives right first and understand your suppliers’ objectives so that they know whether those are possible.

I come now to contracts, which were at 11 and 12 on my list. I wrote,

“Contracts beyond their foreseen limits become progressively valueless”,

and, at point 12, “You cannot subcontract responsibility”. Because of those two facts, the idea that you can take contracts, litigate them and bring the behaviour of your contractor into line is pretty thin. My experience is that once you have a contract so far out of line that you cannot do business with your contractor, it is useless to try and litigate it and that, because you cannot subcontract your responsibility to operate the service, you are forced into a deadly embrace with your contractor. Much better than depending on tight contracts with penalty clauses is to have win-win contracts. In a good win-win contract, when a contractor’s manager thinks about making a decision to maximise the profit for his employer, he should be thinking, “That same action will maximise the benefit to the citizen”. Contracts that have those win-win characteristics are the only ones that really work over time, so win-win contracts with good mutual alignment are best.

My points 15 and 16 were:

“Risk migrates to the party of substance”,


“Risk transfer should be appropriate”.

This idea that you can somehow subcontract risk to the private sector is unreal. When things go wrong, the risk will come back to the state. The reason that the state provides this service in the first place is that it has to be provided and the state cannot back out. You can only transfer to your contractor the risks that he can manage. You should not try to transfer risks that he cannot manage because, if you do, your contractor will then be a gambler. If he is lucky, he will make a fortune but, if he is unlucky, you will pick up the pain. We should remember that the private sector is risk-averse.

Point 21 on my list is that the private sector is good at focus and continuous improvement. Therefore, I allowed the private sector an important role here. However, as I wrote carefully on my piece of paper as point 22, the private sector becomes increasingly dysfunctional in loss-making situations or, as I said in discussions with colleagues at the time, the private sector runs around like a headless chicken. If your supplier is not making profits, all the nice things that he said in the contract and during the negotiations—all the cuddly and furry bits round the edge of what he promised to do—will evaporate. Private sector companies cannot survive without making a profit, so it is in your interests to make sure that you think through how they are going to provide the service and make a profit.

The one area in the report which I missed out but which I think is very valid is transparency. I certainly believe that we have had too much talk of commercial confidentiality over the years and that far more openness and open-book policies in contracting would benefit both sides so that all parties, including citizens’ representatives and the citizens themselves, could see what was happening on their behalf. Therefore, I strongly support the idea of far more transparency, including during the contracting and bidding periods.

Returning to the question of the railway contracts, I ask the Minister, first, whether we have clear criteria by which future franchise renewals will be judged. Do we have criteria by which to create the invitation to tender? Are those criteria written down? If so, where are they and, if not, will they be written down?

Secondly, do the Government understand the importance of win-win contracts as the only contracts that really work over time? Finally, do the Minister and the Government understand the whole issue of risk transfer and how it must be appropriate so that the public and the state do not become the losers?

My Lords, I apologise for getting locked in the Division Lobby for a few minutes and therefore missing a little of the speech of my noble friend Lady Greengross. However, I have glanced at it and congratulate her very much on what she said and on initiating this debate.

The technicalities of railway systems are certainly not an area in which I have the slightest expertise or experience. However, as has been said, this debate is not about railways; its importance goes wider even than that issue. Indeed, the more I glanced through the report, the more I felt that most of its recommendations would be relevant to many other areas—not least when government departments are considering outsourcing social service contracts to the voluntary and other sectors, where many of your Lordships have considerable expertise and experience.

We know that the country is facing just such a situation, because the coalition Government wish to change and very much localise the big society—the way in which many, if not most, of our public services are provided in the future. If we take charities—the third sector—for example, we know that their main areas of concern and undoubted expertise are hardly likely to disappear. They were, after all, pioneers in what is now firmly accepted as state social service responsibilities. However, that does not mean that there will not be changes to be coped with in, to name but a few areas, population size, ageing, the effect of immigration, and medical advances, which mean that many more people live with quite severe handicaps, which again we provide for. Nor indeed does it mean that there will not be other challengers for these contracts from, as we have already heard, the business world claiming that they can provide an even better quality of service at a lower cost.

Larger charities have over recent years learnt to present their cases as required to fairly high commercial business standards and, with the help of organisations such as the NCVO, they are pretty well able to negotiate their own contracts, but smaller charities will certainly benefit from the report's emphasis on the need for greater transparency—I agree with what the noble Lord said—particularly when negotiating contracts. Clarity in the detail of what both sides are expected to deliver will be crucial. As the report states:

“a contract is the mechanism by which conflicts are resolved when things go wrong”.

This is one of the fundamental lessons which the report stresses should be learnt from the experiences of railway privatisation.

Two smaller but equally valuable lessons are what should constitute a sensible length for a contract and how risk should be allocated between the operator and the Government. One of the complaints that many third-sector operators have, apart from the main one that payments from the Government or the local authority are always late, is that the contract time, often only three years, is too short to achieve worthwhile results. The report's suggested sensible length of an initial contract is five years, a much more realistic timescale, which perhaps could be extended for the same period twice more if all the right boxes are ticked.

On risk, not least in the light of the ghastly situation that we are all facing, it should be realistically shared between the Government or the local authority and the operator or at least linked to something like the GDP, as is suggested. One crucial lesson when negotiating the contract is for the Government or the local authority to have a realistic and workable alternative method of operation in place before beginning negotiations, as my noble friend mentioned. There must be competition in the bidding process to get the best results. Another sensible suggestion is that an independent supervisory board can play a really effective role as a buffer between the day-to-day operators and the Government. Equally, there should be a representative on that board of those on the receiving end of such services.

The last element I want to stress is the need for there to be an independent audit of what is being achieved, not least to avoid the suggestion of inappropriate political influence. It is, of course, vital for the Government to be open and honest both with themselves and with the general public about what they are trying to achieve. Public procurement is not an us-and-them situation. A proper working relationship is essential if the contract is to be fully effective.

I shall end by underlining what my noble friend Lady Greengross said. The ideas and experience behind what the report is saying are important and contain lessons that need sober consideration by the many Ministers and government departments that will be involved in the massive amount of public procurement that is already under way. Can the Minister give the Committee his assurance that these lessons will have been carefully studied and learnt when future public procurements are made?

My Lords, like other speakers, I congratulate the noble Baroness, Lady Greengross, on her ingenuity in managing to hang a debate about the wider issues of public procurement on the rather slender hook of railway privatisation. I am glad that she intends to look at further areas of service delivery where this might apply, because although some lessons, particularly in risk, might arise from the experience of rail privatisation, it does not seem a particularly good analogy for most of the services in which government or local government are engaged.

However, as a frequent user of the east coast express line, I am somewhat nostalgic for the days of British Rail, but that is one area that the report did not touch on. Clearly, the issue of risk is widely recognised in that report and by previous speakers as being somewhat unreal when it comes to the expectation of benefit to be derived from privatisation or outsourcing, given the importance of the services in question.

There is one area which Governments of any political colour might be tempted to advance as an argument for privatisation. First, you have to raise capital, which may be more difficult, and secondly, you have to keep it off the public sector borrowing requirement. That seems to be the only compelling justification for the private finance initiative. Even then, contracts were entered into that were far too long. Clearly, if things go wrong, as they have done, the Government have to step in. It is always open for a contractor to liquidate rather than continue and to be made to pay penalties.

The noble Baroness referred to the possibility of bonds and penalties, which is superficially attractive, but that would be priced into the contract in the first instance and, in any event, it might not suffice in the end to deal with problems that arise. It struck me that a more useful transport comparison might have been the bus industry, which was largely municipally owned—it still is, very successfully, in London. The competition that ensued—sometimes there were too many buses chasing each other down the high street—and the standards of service that followed might have made a better comparison. It is important to recognise that there is virtue in having a mixed economy of provision in which public and private providers, and those from the voluntary sector, all have a part to play.

That is valuable, and I would not want us to move in the direction that Nicholas Ridley once advocated of councils meeting once a year simply to let the contracts. Councils and other bodies should be both commissioners and providers of services. I say that in the light of experience in residential care in the 1980s and 1990s, which was largely privatised as a result of the then Government’s approach to paying for it. Previously, it was organised largely by local councils. Ultimately, most local authorities withdrew from the field—eventually, unfortunately, so did many of those who succeeded in obtaining contracts—and we were left with a very unsatisfactory situation.

The public sector needs to be involved as one of the providers. There also need to be safeguards. Clearly, there has to be a level playing field on terms and conditions for those competing in this arena. We saw in the National Health Service how outsourcing led to a significant reduction in the levels of remuneration of care staff, and we have seen the same thing happening to some degree in the outsourcing of domiciliary services, even when they are run by third-sector organisations. We clearly need accountability; I endorse what the noble Baroness, Lady Howe, said about that. Some of that can take place in the realm of local authority scrutiny, which can be quite effective provided that it brings in the users of services as well as others. In all this, we have to bear in mind the need particularly to encourage the role of the third-sector providers, which means looking at the size of contracts. It is possible to achieve economies of scale by letting large contracts all the time with which smaller organisations cannot compete, so we need to ensure that there are smaller or local-scale contracts, which will enhance accountability and allow for the innovation that the third sector often brings.

Have the Government given thought to the requirements of the EU on tendering? There is an assumption that you can take a workforce and turn it into a mutual and it will get a contract, but I understand that that may not be the case. Everyone has to compete in the same way as any other contractor, and there is no automatic assumption that that will happen.

Finally, I turn to one developing area that will require very sensitive handling. We are now moving into an area in which commissioning will be not only for a service and by a large commissioning body, such as GP commissioners or a local authority, but by individuals using personal budgets. That is to be welcomed, but it has to be managed; people will have to be helped to navigate their way through a system, choosing the right suppliers of a service and the right kind of service. The market has to be managed, and there has to be considerable quality assurance. A new dimension is opening up, and I hope the noble Baroness will look at that as well as the current practice in the areas that she has identified. I congratulate her again on her ingenuity, which struck me as being worthy of a Wall Street banker or derivatives trader, but in this case with much more benign results.

My Lords, I thank the noble Baroness for introducing this Question for Short Debate. She has certainly hooked me on railways. I shall mention one or two points about railway procurement, starting off with vehicles and moving on to franchise procurement, along with one or two problems which I think are occurring at present in this context.

The first thing, which is surprising after what was expected in 1994, is the amount of control that the Department for Transport has of rolling stock and dealing with the cascades, the specifications and electrification. That may not be surprising, but I do not think that it was the original idea. The second point concerns the rolling stock companies, or roscos. This is the one point of railway privatisation that British Rail would have liked, but now it has been shown that, broadly speaking, they do not accept risk; they want guarantees that the vehicles that they own will be used for the whole of their life. I cannot say that I am against the idea of vehicles being used for the whole of their life—after all, railway vehicles have a life of at least 40 years. That means that decisions made now will last well into the future. Unfortunately, rail vehicle procurement is somewhat stymied and paralysed until the Government decide what is to happen next. The roscos are not bringing in new stock for fear that it might not be needed for the full 40 years. That paralysis leads to problems for the rail vehicle builders, which would love to have a continuous flow of work but clearly do not. One joy of our historic position in the railways is that we have a smaller loading gauge than anywhere else. Therefore, there are no foreign, off-the-peg vehicles to buy, although of course British rolling stock can be used on the continent—albeit it looks rather smaller.

Then there is, yet again, the delay with the intercity express programme—the IEP. That means that the lives of the high-speed trains, or HSTs, have to be extended. It strikes me that we will be using them on the main line for up to 40 years at the rate we are going. They are good trains but it will be interesting to see what they are like when they are 40 years old.

On a franchising rather than vehicle procurement issue, there is what I consider to be the clumsy handling of the Pendolino integration. I understand that Virgin asked for a franchise extension in exchange for integrating the new Pendolino carriages, extending them by an extra two carriages per train and bringing into service four new trains. I understand that it wanted a franchise extension but the DfT did not want to give it one. Although I am certain that there is right on both sides, it would be better if the existing franchisees—the people who have been handling those trains for the past few years—handled the integration of the new carriages rather than handing it to a new franchisee.

My sixth point on vehicle procurement—my noble friend will not be surprised to hear me mention this yet again—is the desirability of having trains that are suitable for tourist routes. I understand that they must be cascaded, but it is very important that on the scenic lines throughout the British mainland we get some straightforward window and seat alignment so that people can take advantage of the scenic potential of tourist and holiday railways.

My time is, unfortunately, coming to an end. On franchising, I should like to pick up the point about competition. There is rarely competition within franchise procurement. Usually, it is the allocation of regional or, in the case of Scotland, national fiefdoms. I am one of the few people who has competition, at least in theory, because, living equidistant between Edinburgh and Glasgow, I can come to your Lordships’ House with either Virgin or East Coast Trains—or, if I were being really pedantic, I could go down to Carlisle and then go from Carlisle to Leeds with Northern and then East Coast Trains, but even I want to get here.

The franchise context has changed. Initially it was all about entrepreneurialism; now it has become entrepreneurialism in the context of the death of the railways. The most important thing, which has really muddled the situation, is that people might want to travel by train. Railways are back on the up and the franchise context is now about management contracts rather than entrepreneurialism.

Finally, how happy are the Minister and his department with the way that the franchising process has been wandering about, accidentally arriving where it is now? Does he have a clear idea of where he would like franchising to go?

My Lords, I, too, begin by congratulating the noble Baroness, Lady Greengross, not only on her introductory speech, which emphasised the value of the report of the Transport Forum, which she chaired and which did such valuable work, but on indicating that there are a few hares that may run well beyond the range of the railways issue for the Minister to consider. It is not often that I express sympathy for Ministers, and I will not make a habit of it, but I have a little sympathy for him today. I am sure that he has concentrated a great deal on the railways, and I want to reflect on the lessons that we need to learn in relation to them, but other Members of the Committee have taken the opportunity to identify areas which ought to be considered in the light of the report and its formative work on the issues of public services and public procurement.

I hope that the Minister has some response for the noble Lord, Lord Bradshaw, about the future of the Post Office and about where mutuals may play their part in the provision of services. The Minister will also have noted the experience of my noble friend Lord Tunnicliffe in procurement and the way that contracts need to be drawn, pursued and followed through. On that, we derive insight from the railways, but not all those insights give us much comfort at present. Hence, a number of noble Lords have identified their areas of anxiety.

My noble friend Lord Beecham, with his vast experience of local government, brought up the issue of PFIs. The range of responsibilities and opportunities that may derive from them makes it important for the Government to learn lessons on procurement, given the range of issues to be covered. The noble Baroness, Lady Howe, identified the voluntary sector, and the noble Earl, Lord Attlee, therefore has a great deal on his plate when responding on the lessons on which we want enlightenment. I look forward to his response.

My party has been very concerned about what we need to learn from the experience of railway service provision. We were on the brink of re-evaluating the way in which the present system of privatised railways works. That is why we produced an outline policy document on the key issues that we had learnt from years of operating the railways. It was quite clear that important lessons needed to be learnt, and they have been identified to a very large extent in this report. We were particularly concerned about how to encourage innovation and investment. The business process needs to be altered to put greater emphasis on that. We were also concerned about the changes required during the life of a franchise. It seemed to us that it is necessary to have elements of flexibility that enable you to come to terms with changed circumstances over a franchise. We were concerned about the specification and delivery. In particular, we thought that the TOCs needed to be contractually required to deliver services and other outputs important to the public. We need those contracts to be established in a clearer way than has, perhaps, been the case in the past. We are concerned about risk. I bear in mind the point made in the debate that the risk falls upon the public sector—either the local authority or the state—because that is where responsibility for the service lies. Nevertheless, that means better management of risk and incentivising operators.

I would ask the noble Earl to think about and respond on one little matter. He will be aware that the level of costs borne by fares was 57 per cent in 1992 and that it went down to 54 per cent by 2008. What is his estimate for 2014-15 in the light of the recent indication of the part that the rail passenger has to pay in increased fares? What will the fare burden be as a percentage of the costs of the railway four to five years from now? I am sure the noble Earl has quite enough to respond to.

My Lords, I congratulate the noble Baroness, Lady Greengross, and her colleagues on developing an excellent and thought-provoking contribution to the public procurement debate. This debate has been fascinating to me and will be valuable to my officials. The noble Baroness asked me whether we will learn lessons. Yes, because it is extremely boring to make the same mistake twice.

Rail delivers an essential service with more than 1.2 billion passenger journeys and more than 19 billion freight tonne kilometres in 2009-10. Total government support to the rail network was £3.9 billion in 2009-10. Two initiatives are central to the Government’s plans for rail services and to provide better value for money. The rail value-for-money study, chaired by Sir Roy McNulty, will help us tackle the greater costs of rail in the UK compared with mainland Europe, while our consultation on reforming rail franchising will assist us in devising a new franchising policy.

The Government want a stronger focus on the quality of outcomes for passengers, giving operators freedom to decide the detail of how they run their businesses. We also intend to grant longer franchises to encourage private sector investment in enhancements to the railway and to make it easier for train operators to establish long-term relationships with Network Rail and others, but we have to make sure that contracts are demanding and that operators are held to account.

The noble Baroness, Lady Greengross, talked about the penalties for poor performance. The department's policy has been to avoid renegotiation. National Express paid a large financial cost for its failure to deliver its commitments on the east coast. That sends a clear message to the bidding community. Sir Roy McNulty is not scheduled to present his final conclusions until next spring. The consultation on reforming rail franchising closed during October, and ministerial colleagues will shortly present our revised franchising policy and timetable.

I take this opportunity to thank everyone who took the time to respond to the reforming rail franchising consultation, including the helpful submission from the transport forum chaired by the noble Baroness. I will discuss some of the issues raised, without prejudging the outcome of the franchise reform review. One issue raised was the importance of negotiation and early engagement with shortlisted bidders. The responses provided broad support for the proposal in the consultation document that,

“bilateral discussions are held with each of the shortlisted bidders prior to the issue of the Invitation to Tender, enabling bidders to inform the specification and contract documentation”.

I expect this approach to be reflected in the new processes, ensuring that the department does not inadvertently prevent any bidder from proposing an innovative solution.

The noble Lord, Lord Tunnicliffe, talked about the need for transparency. The coalition has introduced new rules requiring the publication of all contracts and tender documents. This is an area where rail procurement can be held to have led the way. All selection processes, invitations to tender and successful contracts have been made available on the DfT website for many years under the previous Administration. The submission raises the important but complex issue of risk allocation. It correctly points out how important it will be for future franchises to make it clear which risks are to be borne by operators and which by the Government. The submission suggests that there might be merit in the Government bearing some of the risk of changes in the economic climate. We continue to develop policy in this area but are clear that risk transfer to the private sector may be costly.

The noble Baroness, Lady Greengross, and the noble Lord, Lord Tunnicliffe, both talked about risk allocation. Rail contracts strive to define which risks are held by which party. However, as the noble Baroness noted, some risks have reverted to the Government—for instance, if a franchise fails, the Government are legally required to run the train services. We seek to limit that risk by bonds, which the franchisee pays in the event of failure, but also by parental guarantees, which ensure that a parent company is required to support the franchisee through temporary financial difficulty.

I have already touched on the issue of longer franchises, while the question of break points will need to be considered carefully. There is a danger that break points negate the advantages of a longer franchise if it is then perceived as merely a series of short franchises. We want to reform the franchising system as a whole, improving incentives to invest and to take account of passengers. However, although we are seeking to develop a new approach at policy level, the department has a good track record in the processes of procurement.

The strengths of the rail franchise procurement process were recognised by the NAO as good practice in its October 2008 report, Letting Rail Franchises 2005-2007. Likewise, the Office of Government Commerce, the OGC, in its initial procurement capability review carried out in late 2007, reported:

“Rail franchising is now a very impressive process, which has demonstrated innovation, good market involvement, transparent and robust processes, and successful financial outcomes”.

A report on the second procurement capability review in March 2010 also reflected:

“In a number of areas, DfT performance is leading edge in government procurement terms; for instance, the rail franchise process, the openness and transparency of communications with suppliers, and support for ‘policy through procurement’ initiatives are all exemplary”.

The procedures and techniques first applied in rail franchising have now been adopted across all major Department for Transport procurement activity. At the request of the OGC, the DfT has also provided advice and guidance to other departments.

The noble Baroness talked about performance bonds. An appropriate balance must be struck on this issue. If the bond is set too low, it may discourage a franchisee from handing back the keys at the first scent of trouble and it might be inadequate to cover the direct incremental cost to government of stepping in to deliver the train service and running an additional unscheduled franchise competition. However, if the bond is set too high, we may inadvertently exclude smaller operators from the franchise marketplace and we will pay a substantial cost for the performance bonds, the majority of which are never called upon. The noble Lord, Lord Beecham, talked about some of these difficulties.

The rail value-for-money study, led by Sir Roy McNulty, is looking at why UK railways are so much more expensive than those in the rest of Europe. Focusing Network Rail on the regions and routes may have some benefits. Certainly no decision has been made to split up Network Rail, but all options are being considered in Sir Roy’s review.

The noble Baroness talked about the need to have a fallback in negotiations. During competitions, the fallback is clear: the contract may be awarded to a competitor. Mid-term negotiation is of course always more difficult, but contracts contain a provision for government to impose a “reasonable” settlement and, ultimately, the franchisee will lose the franchise if it is in default.

I was delighted to see the noble Lord, Lord Tunnicliffe, put his name down to speak in this debate. Few noble Lords have as much experience as he does in public procurement for transport infrastructure. The noble Lord raised the advantages of win-win contracts. The alternative, of course, is a win-lose or a lose-lose situation. Train operators need to make a profit by attracting more passengers and increasing revenue. This revenue incentive helps to make contracts win-win, but we are reviewing how to improve incentives further.

The noble Lord, Lord Beecham, touched on the size of contractors and, I think, by implication, SMEs. SMEs are an engine of the economy, providing nearly 60 per cent of our jobs and 50 per cent of GDP, and it is only right that they should benefit from the Government’s substantial purchasing power. The public purse will benefit from the ability of small businesses to offer value for money, flexibility, responsiveness and innovation.

The noble Earl, Lord Mar and Kellie, talked about the problems of interlinking rolling stock and electrification. He also talked about the IEP project. This is a very complex, long-term project and it is vital that we get the decision right. I hope that we will be able to announce our conclusions shortly.

The noble Earl talked about roscos wanting guarantees. The department seeks to avoid giving these guarantees, as they reduce flexibility. However, there have been cases where such guarantees have brought down the cost to the taxpayer. He also talked about the Pendolinos on the west coast franchise. There have been many positive aspects to Virgin’s management of the intercity west coast franchise and I look forward to seeing how it will develop and build on that as part of a competitive tendering process for the new franchise.

The noble Earl also talked about scenic railways. The layout of trains provides a scenic view from all seats but it is a matter for the operator, not something that the department should be micromanaging.

I wonder whether the noble Lord might reflect on the fact that it is the load factors which the department insists on that make the roscos move all the seats closer together, so that they meet the target set by the department.

My Lords, I will certainly reflect upon that and have a chat with my officials afterwards.

The noble Baroness, Lady Greengross, spoke of future studies in other areas of public procurement. We look forward to her results with interest and we will certainly take note of them. I am confident that the public procurement processes adopted for rail will continue to represent best practice and provide transparency and equal treatment for bidders. The rail franchise specifications which are procured will evolve and reflect the results of the consultation to provide an environment where operators have the freedom to provide improved value for money and the improvement that passengers want.

Sitting suspended.