Recommendation 4

It is not yet clear that the interim National Rail contracts fairly distribute risks between government and operators, or provide incentives for operators to deliver efficient, high-quality, and value-for-money passenger services. In previous reports the Committee highlighted failings in the Department’s previous commercial model of rail franchising. The COVID-19 pandemic brought an end to this approach and transferred all revenue and cost risk from operators to the government through two rounds of emergency measures which overlaid franchise agreements. These arrangements directly expose the taxpayer to operators’ income and expenditure positions and led to significant financial support to operators during 2020–21. The Department is now putting in place interim National Rail contracts as a bridge between emergency measures brought in in response to the COVID-19 pandemic and implementing long-term reforms to service delivery set out in the Rail white paper. It will be vital to put in place contracts which reduce taxpayer risk exposure, alongside providing the necessary resilience, and meaningfully incentivising operators to grow revenue, reduce cost and harness commercial expertise. However, the Department has not set out in sufficient detail the exact nature of these contracts, nor how it will use them to incentivise improved performance. In addition, we are concerned that the majority of cost risk Overview of the English rail system 7 and revenue risk will remain with government under these contracts, leaving the taxpayer exposed to fund a currently unquantified bill. The Department will also require significant resource to manage and oversee these new contracts. Recommendation: The Department should set out in its Treasury Minute response the high-level terms of the new National Rail contracts, where revenue and cost risk will lie, and how it is using these to incentive improved performance, beyond the planned performance-based management fees.