Nigel Keohane is research director at the Social Market Foundation.
For all the improvements since rail privatisation, there are significant failures in the current rail system – both in terms of its efficiency and in terms of responsiveness to passenger needs.
Despite notable improvements in rail performance as well as huge increases in patronage in the last two decades, there remain significant areas where passengers and taxpayers are being let down.
The efficiency of UK rail continues to lag considerably behind comparators in continental Europe. With fares constrained and fiscal pressure to contain taxpayer subsidy, tackling such inefficiencies has never been more important. Past estimates put the efficiency gap between the UK and continental comparators as high as 40 per cent. As it stands, operators have limited incentives and scope to innovate and to control costs or drive efficiencies because of the high level of specifications in contracts. Such specifications include timetabling, regulation of many fares and the types of improvements to be invested in.
Despite some notable improvements in service quality in recent decades, customer satisfaction is flagging on key measures and passengers are being failed on core aspects of the service. Satisfaction scores vary markedly between train companies and some operators are performing far below others. Despite modest improvement, today’s new rail passenger satisfaction survey results show that almost a third of passengers (31 per cent) are dissatisfied with the value for money offered by rail ticket prices, one in five (21 per cent) are unhappy with the amount of room to sit and stand, and over a fifth (23 per cent) are unhappy with how train companies deal with delays.
To put these failings right the future rail service requires significant investment which, we argue, is better determined by the market than by the shorter-term horizons of politicians and governments. It also needs to benefit fully from the huge technological opportunities that lie ahead – such as smart ticketing and the move to digital traffic management on the tracks.
Turning blindly to nationalisation, however popular it remains with voters, is not the answer. Arguments in favour of nationalisation ignore the significant benefits derived since the introduction of rail franchising, including huge expansion in the number of passenger journeys and an upward trend in quality over recent decades. Instead, we need to build a market structure that enables and encourages innovation.
For these reasons we should look to radical reform of how we franchise rail services to deliver a more efficient and passenger-orientated system. In particular, operators have too little flexibility and incentive during the life of the contract to encourage necessary quality improvements or cost reductions. In other word, we need to set the railways free.
The Social Market Foundation’s new report, Back On Track: Reforming rail franchising, calls on the Department for Transport to develop a single measure of overall satisfaction against which it would score train operators. Companies would then have the incentive to target the aspects of quality or cost of service that affect passenger satisfaction the most. For example, depending on passenger demands, some companies could choose to prioritise additional services, punctuality or more comfortable journeys.
Under our proposals, satisfaction scores would be used to determine rewards and penalties for train providers during the contract, and in particular to determine whether additional flexibility should be awarded to the train operating company.
High-performing operators that over-achieved on their targets would be awarded additional flexibility. Additional flexibilities could include the ability to vary fares, so long as total fares remained the same, or some relaxation in specifications on timetabling. To keep these privileges, operators would have to continue to meet stretching satisfaction targets.
But we still need to make sure that customers’ interests are safeguarded.
We propose that, by contrast, poor performing operators will have to pay penalty charges for low overall satisfaction scores. Given the limited ability for train companies to raise fares, particularly due to price regulation, these penalties would reduce overall profitability.
New measures should also be introduced to clamp down on delays and on the failure to pay compensation to passengers. The total paid out by train companies in compensation in 2014/15 was £25 million. However, only one in ten of passengers claim compensation for delayed journeys. These figures suggest that some £1 billion of compensation from operators will go unpaid over the course of parliament.
As it stands, passengers are often unaware of their rights to claim compensation and find the process too onerous, and operators benefit because of this. Instead, operators should be given a strong incentive to compensate delayed passengers by fining them to the value of all unclaimed compensation payments. This would encourage them to make the processes simpler and to boost take-up of compensation. The money raised by these fines should be distributed as additional reward payments to the operators that over-achieve on overall satisfaction targets.
As the representatives of the travelling public, MPs also have a role to play in our revised franchising system. The House of Commons Transport Select Committee should institute an ‘Annual hearing into rail performance’. This would be an opportunity to regularly audit whether passenger services have improved over the last twelve months. As a rule, senior representatives from the operators that score worst on overall passenger satisfaction should expect to be called as witnesses.
Putting the emphasis on passenger satisfaction, whilst creating measures and incentives to ensure this is the focus of train companies, is the best way to ensure Britain’s railways are put back on track.