Press Release - The South Eastern Passenger Rail Franchise
2 December 2005
The Strategic Rail Authority successfully managed the
termination of Connex South Eastern’s franchise after the SRA lost
confidence in the company’s financial management, according to the
National Audit Office. Taxpayers’ interests were largely protected
and passenger services maintained. But this case did highlight
lessons for the awarding and managing of franchises.
In June 2003, the Strategic Rail Authority, which awarded and
monitored rail franchises run by Train Operating Companies (TOCs),
decided to terminate early Connex South Eastern’s (CSE’s) franchise
for providing passenger rail services in Kent, parts of East Sussex
and South East London. This is the only occasion to date that a
franchise has been terminated early. According to today’s report to
Parliament by head of the NAO Sir John Bourn, taxpayers’ interests
have, on the whole, been protected and South Eastern Trains (SET),
a subsidiary of the SRA, has improved services and increased
passenger satisfaction since taking over the franchise in November
2003.
Connex ran into financial difficulties early in the life of its
franchise, which it had won with an ambitious bid in 1996 when the
government was typically awarding franchises to bidders requiring
the lowest subsidies. CSE failed to achieve expected reductions in
operating costs because, in common with other TOCs, its wage and
driver costs were much higher than anticipated. The SRA's attention
was focused on the short-term solvency of TOCs and it remained
unaware of CSE’s financial difficulties until CSE requested a
two-year extension to its 15 year franchise and additional
subsidies to fund capacity and service improvements. The SRA
subsequently identified a funding gap that would require additional
subsidies of between £384 million and £820 million through to 2011,
the scheduled end date of the franchise. But there was uncertainty
about how much more subsidy CSE really needed. The SRA also had
concerns about weaknesses in CSE’s financial management, including
the transparency of its reporting of transactions with sister
companies.
In December 2002, the SRA agreed to provide CSE with additional
funding of £59 million during 2003 to stabilise its finances. CSE
was given a deadline of 31 March 2003 to improve its financial
management, control and reporting. CSE’s franchise term was also
reduced by 5 years, to December 2006. The SRA also agreed to enter
into negotiations for further additional subsidies for 2004 to
2006. However, while CSE’s financial management and reporting did
improve from January 2003, reviews by consultants engaged by the
SRA found that CSE’s progress was slow and fell short of full
compliance with what the SRA required, although the extent and
nature of the engagement between the SRA and CSE at this time was
unclear from the documentation we have seen. The SRA concluded that
the TOC would not be able to satisfy it within a reasonably short
timescale that the additional subsidy sought for 2004 to 2006 would
be applied efficiently and economically. This led to the SRA’s
decision to terminate the franchise.
After announcing the termination of CSE's franchise, the SRA
managed the risks well, in co-operation with CSE, and secured the
smooth transfer of operations to SET within five months and without
disruption or any significant deterioration in passenger services.
The SRA secured a reasonable financial settlement upon CSE’s exit
from the franchise in November 2003 and recovered £2.8 million of
its own costs from CSE. The SRA decided not to exercise its
contractual right to recover further costs totalling £1.8 million,
as it was concerned about the significant financial and operational
risk of Connex becoming insolvent in the face of such claims. Nor
did it seek to recover other costs of £2 million that it spent on
several reviews of CSE’s financial difficulties and financial
management leading up to the termination decision. The SRA believed
that no useful purpose would be served in seeking to recover costs
that it had no contractual right to recover, and that doing so
would have undermined already difficult exit negotiations and
increased the risk of Connex insolvency.
The SRA equipped SET to manage the franchise effectively from
the outset and SET has controlled its costs well. As the franchise
is now in the hands of a public body and the risk of fare evasion
rests with the taxpayer, action has been taken to strengthen
revenue protection measures. SET is on course to cost the taxpayer
£6 million (2 per cent) less than originally expected. Although
SET’s costs are likely to be £22 million (8 per cent) higher than
the amount of subsidy that CSE was prepared to accept to continue
to run the franchise, the SRA had little confidence that CSE would
have kept within this amount.
SET has improved its operational performance in line with
similar London commuter TOCs, although better Network Rail
performance has been the single biggest factor in this. Passenger
satisfaction is now at its highest level for the franchise since
the National Passenger Survey started in 1999, but, like CSE before
it, SET still has one of the lowest passenger satisfaction ratings
of all TOCs.
Sir John Bourn said:
“The seeds of Connex South Eastern’s difficulties were
sown when the train operating company won its franchise with an
over-ambitious bid. It indeed subsequently proved to be
undeliverable. The Strategic Rail Authority lost confidence in CSE
and took the difficult and finely balanced decision to terminate
the franchise. The SRA went on to demonstrate that the successful
termination of a train operating company’s franchise is feasible,
and that taxpayers’ and passengers’ interests can be protected,
through careful management of the attendant risks.
“This case highlights lessons to be learned, however, in
how franchises are awarded and managed, which the Department for
Transport must keep in view as it takes forward the
responsibilities it has recently inherited from the Strategic Rail
Authority.”
Notes for Editors:
- The government established the Strategic Rail Authority (SRA)
in February 2001 to take over, from the Office of Passenger Rail
Franchising (OPRAF), responsibility for specifying, awarding,
managing and monitoring rail franchises and to deliver strategic
leadership to the rail industry. Under the Railways Act 2005, the
government is abolishing the SRA and has transferred its strategic
and franchising roles in England and Wales to a new Rail Group
within the Department for Transport. These roles in Scotland are
being transferred to the Scottish Executive.
- South Eastern Trains (SET) is a subsidiary of the SRA, set up
specifically to take over CSE’s franchise in November 2003. SET
will continue to run the franchise until a new Integrated Kent
Franchise, combining the services that SET currently provides with
new domestic services on the Channel Tunnel Rail Link (CTRL)
commences on 1 April 2006, at which point the SRA will be fully
wound up.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 65/05
All enquiries to Bill Schaper, NAO Press Office: Tel: 020 7798
7335
Mobile: 07795 120 838