Rail Franchises, Competition and Public Service

The UK rail network has undergone a series of massive restructuring exercises throughout its history. Having been run into the ground during the First World War the myriad Victorian era companies were rationalised into the ‘Big Four’ under the Railways Act 1921 but were still set up as joint stock public companies. After a few halcyon inter-war years synonymous with speed record attempts and evocatively named express services ,such as the Flying Scotsman and the Cornish Riviera, the railways were again run into the ground in the Second World War. Post-war nationalisation was inevitable and British Railways (latterly British Rail) came into being under the Transport Act 1947. There then followed nearly fifty years of a much maligned nationalised system, often ridiculed as the ultimate example of an inefficient, strike prone, state owned leviathan synonymous with poor customer service –  as often epitomised by the British Rail sandwich! In fact it is now widely accepted that much of this criticism was unfair and, after a shaky first few years, the organisation had developed into one of the world’s more efficient networks by the end of its existence. Nevertheless, having survived the drive for privatisation throughout the Thatcher Government of the 1980s, it finally succumbed under the Major administration of the early 90s and the passing of the Railways Act 1993.

Those who dreamed of a return to the halcyon days of the 1930s and the resurrection of something along the lines of the Big Four were to be sorely disappointed. It was deemed impractical to recreate the original privately owned system whereby railway companies owned the track, rolling stock and other infrastructure. The track and infrastructure were separated from the provision of services and placed in the hands of a state owned company known as Railtrack (the descendant of which is Network Rail) whilst leasing companies acquired the rolling stock. Market conditions were created by enabling companies to bid for franchises in order to win the opportunity to use the infrastructure and rolling stock to operate services. Since then the franchising system has rarely been out of he news with much adverse comment focused on the bidding process (especially regarding miscalculations in how much to bid), fragmentation of the system, lack of seating capacity on key routes, fare structures and a failure to generate sufficient competition. Moreover there is the insoluble conundrum of, if it is a bad thing for railway services to be operated by the British state, why is it acceptable for overseas state owned companies to bid for services? The debate has finally entered the mainstream quality legal literature with an excellent article by Tony Prosser and Luke Butler in the Modern Law Review.

Whilst much of the article adopts an economic perspective it does examine the legal framework, starting with the Railways Act 1993, which allowed the current system to develop. Their central thesis is that successive governments have never fully trusted the market to deliver and have not been able to resist tinkering and meddling with the system. Franchises now have so many strings attached, in terms of minimum service requirements and so forth, the operator is effectively straitjacketed and has limited scope to make commercial decisions. Moreover, the state has maintained much of the commercial risk in many cases which was antipathetic to the original notion of franchising. They conclude that the franchising system has been used as a means of regulating the industry in very prescriptive and top-down manner which, ironically, has resulted in far less commercial freedom than that enjoyed by the state owned British Rail. As they state in their conclusion:

‘Flexible use of franchise contracts which gives operators space for responsiveness and innovation has simply not proved possible. Instead there has been a crude form of regulation characterised by the highly complex and over-prescriptive franchise agreements, coupled with ambiguity on the centrally important issue of risk transfer.’

The upshot of this is that the distinction between ‘franchises’ and ‘concessions’ has been blurred in a most unsatisfactory manner which very often leaves all parties with the worst of all worlds. In a true concession arrangement the revenue risk remains with the public entity providing the concession which retains responsibility for setting fares and so on. The agreement will specify how much the concessionaire must hand over to the public body and how this is to be calculated (eg whether a fixed amount or a percentage). Such arrangements are possible under section 23 of the 1993 Act which enables the Secretary of State to exempt the arrangement from normal franchising requirements. The London Overground and Merseyrail contracts are operated on this basis as will be the new Crossrail service – or to give it its new name, the Elizabeth Line. Prosser and Butler argue that there is much to be said for this approach, despite the relative lack of commercial freedom when compared to a pure franchise arrangement of the type originally envisaged. Aside from the aforementioned examples in the UK, it is a model which has been widely adopted in other European countries. The clear delineation of risk and responsibilities tends to be conducive to more stable long term relationships between the concessionaires and their clients and from this flows greater trust. From this in turn flows a greater willingness to afford concessionaires more discretion in terms of how they operate services. Transport for London as extolled the Overground Service as a paradigmatic example of the benefits of this type of relationship.

A somewhat less complicated argument focuses on the fact that, although there may be competition in terms of the right to provide services, from the rail travellers perspective there is limited competition at the point of delivery. Open Access Agreements have never really taken off, which means that passengers rarely have a choice as to which company to use on a particular journey.

Overall the articles shows clearly how, especially in the complex and fraught world of public/private partnerships, it is difficult to legislate for every eventuality and new systems tend to develop a life of their own. The system which has now emerged, whilst it has evolved within the framework of the 1993 Act and relevant EU legislation, may not equate with what was originally intended. As Prosser and Butler also acknowledge, nationalisation of the industry is also back on the agenda of the Labour Party although, in common with many others, they doubt the practicalities of joining all the bits back together again.

Seeing STARS again: Court of Appeal upholds High Court decision

As a postscript to the previous entry on the judicial review arising from the STAR project please note that the Court of Appeal has now upheld the decision of the High Court – albeit with some reservations: R (on the application of London Borough of Enfield) v Secretary of State for Transport [2016] EWCA Civ 480. To briefly recap, Enfield Borough Council sought judicial review of the terms upon which an invitation to tender had been issued in respect of the franchise for the East Anglia Franchise. In short, the Enfield BC argued that the Department for Transport had led them to believe that operators would be required to provide a 4 train per hour (4tph) service for a new station serving the Meridian Water development – a major £2.5 billion urban regeneration project. The communications with the Department for Transport were said to have created a legitimate expectation that this requirement would be included in the franchise agreement and that the failure to include it in the tender documents thwarted this legitimate expectation.

As regards the emails which were at the heart of the dispute the Court of Appeal agreed that they did not create a legitimate expectation for 2 main reasons. Firstly, it was held that the local authority was already firmly committed to the project as evidenced by the fact that it had already invested £70m. Secondly, its actions showed that it had taken a calculated risk in embarking upon the project. Both these factors demonstrated that the requisite degree of detrimental reliance was lacking. However, although it did not affect the outcome of the appeal, the Court of Appeal disagreed with the High Court’s finding that it was unforeseeable that the communications with the STAR working group would be communicated to the local authority. It also found that the emails were clear and unambiguous albeit mistaken. In this respect the Court of Appeal was highly critical of the performance of the Department for Transport in the matter:-

‘Regrettably, this was an inept performance on the part of the DfT, serving to undermine public confidence in its competence and the communications of its officials’ [para 49].

It was also argued that the Secretary of State had acted irrationally in failing to take into account the economic impact of the 4tph requirement and its effect on the regeneration project. The Court of Appeal held that, whilst various documents highlighted potential for local regeneration as a consideration to be taken into account in franchise agreements in so forth, such commitments were expressed with a ‘very high level of abstraction’. In this respect they were not sufficiently concrete to form the basis for judicial review of the decision. Moreover, the Department had adhered to its standard economic modelling practices and complied with the requirements of the Public Service (Social Value) Act 2012, s 1(3).

 

SEEING STARS: RAIL FRANCHISING AGREEMENTS AND LEGITIMATE EXPECTATIONS

The existing Angel Road station. Nigel Cox

The existing Angel Road station.
Nigel Cox.

THE STAR PROJECT

Enfield Borough Council recently sought judicial review of the terms upon which an Invitation to Tender (ITT) was issued for the East Anglia Franchise – London Borough of Enfield v Secretary of State for Transport [2015] EWHC 3758 (Admin) . The franchise includes a hitherto neglected stretch of track from Stratford to Angel Road on the West Anglia mainline to Hertfordshire. This section of line in question is due to be upgraded and stations refurbished as part of the STAR project (a convenient acronym for Stratford to Angel Road). Angel Road is the centrepiece of the development in that it will serve the Meridian Water property development and will be renamed as Meridian Water station to reflect its new purpose; at present the station is little used and has no facilities.

TRAIN SERVICE REQUIREMENTS

The ITT  for the East Anglia Franchise was issued by the Department for Transport on 17 September 2015 but the local authority was dismayed to find that it did not contain a minimum Train Service Requirement (TSR) for Angel/Meridian station. The Defendant is empowered to set minimum service requirements by virtue of section 23 of the Railways Act 1993. Given that the station redevelopment is central to their plans for good public transport links to the new development they considered that a TSR was essential. They had assumed that the ITT would include a TSR of 2 trains per hour (2tph) until May 2018 and then 4 trains per hour (4tph) thereafter following completion of the infrastructure upgrade work.

EMAIL EXCHANGES

The Local Authority sought judicial review of the terms upon which the ITT had been issued on the grounds that they had a legitimate expectation that the aforementioned TSR would be included. This claim centred on two emails sent by an official in the Department of Transport. The first email (dated 29 July 2015) had been sent to the secretary of the STAR steering group. The steering group comprises a number of interested parties brought together to promote and manage the STAR  project. It includes Enfield BC, Network Rail, Haringey LBC, Transport for London, the GLA and the Department of Transport. The second email was a reply sent by the DoT official to a consultant working for the Council. The Council claimed that email confirmed the TSR in unequivocal terms and was described by a a Council official as ‘providing comfort on 4tph.’

By this time it seems that the Council had spent £70m on the project although must be emphasised that most of this expenditure had already been incurred and was not predicated on the email exchanges at the centre of the dispute. At one point it was claimed that the minutes of a STAR steering group meeting held on 29 May 2014 indicated the defendant’s support of a 4tph service following completion of the development; although this does not appear to have been relied upon in support of the claim.

After the current proceedings were under way the defendant wrote to the Council and stated that it had commissioned a new study into the business case for increasing the frequency of services calling at Angel Road. The conclusion was that, despite the substantial property development, there would not be sufficient demand to merit the TSR desired by the Council.

In short, the Council claimed that the emails from the DoT, especially when read in the light of other emails and evidence, afforded the Council a legitimate expectation that the TSR would be included in the ITT.

LEGITIMATE EXPECTATION

The law on legitimate expectation was summed up by the judge, Mrs Justice Laing, at paragraph 72 of the judgment thus:

‘A public authority may create a legitimate expectation (substantive or procedural) if it makes an unambiguous and unqualified promise on which it is reasonable for the promisee to rely.’

Moreover, a number of  authorities were cited to the effect that, even where a prima facie legitimate expectation has been created, it is not necessarily set in stone. The decision maker must be given some leeway to change his mind in the light of overriding public interest considerations or simply to correct miscalculations. The pattern which emerges from the case law is that the courts are slow to find that an irreversible legitimate expectation has been created where the issue has ‘multi-layered effects’ involving ‘wide-ranging issues of general policy.’ [para 75]

As regards the case at hand the judge considered whether the two emails relied upon by the claimant were sufficient to satisfy the aforementioned criteria. As regards the first email of 29 July 2015 the judge regarded it as significant that the Department of Transport official was dealing with a member of the STAR steering group as rather than directly with the Council. She rejected the notion ‘that the Defendant is to be fixed, by some process of ineluctable inference, with knowledge that this email would be transmitted to the Council, still less, that the Council might or would rely on it.’ [para 83]. Moreover, the Council could not ‘legitimately expect’ that they would be given a ‘reliable private insight into the ITT specification’ ahead of its publication [para 84]. In addition, she found that the Council had no reason for believing that the DoT official in question had any authority to make such binding promises regarding the content of the ITT. [para 84]

As regards the second email of 5 August 2015 from the DoT official to the consultant working with the council, the judge noted that there was a note of equivocation in the questions put by the consultant to the DoT. Thus he ‘asked a tentative question “I wonder if you could confirm…” ‘ and whether the DoT ‘could confirm the expected position.’ [para 85] In other words there was an element of seeking an opinion or a belief as opposed to a firm commitment. Once again the judge reiterated the point that the Council had no reason for believing that the DoT official had the requisite expertise or inside knowledge for making such promises. Also, she was confident that all parties knew that the Council’s request for greatly improved services on the line was ‘a huge challenge’. Thus, the Council should have treated any statements regarding the contents of the ITT with circumspection. In conclusion ‘it was unreasonable for the Council to rely on an “informal” email promising this great prize, elicited in the way that it was from the person from whom it was elicited.’

DETRIMENTAL RELIANCE

The judge then turned to the issue of detrimental reliance, an ingredient of legitimate expectation in most cases, and prefaced her findings on this issue by suggesting that the Department of Transport official had ‘got it wrong’ in terms of communicating the official position of the Department of Transport to the various parties involved [para 88]. He may have misunderstood the position or others in the organisation may have failed to make the position clear to him. In any event, the judge asserted that ‘I should be slow to fix the Defendant with the consequences of such a mistake.’ Thus, she would only be prepared to do so if there was clear evidence of the Council having acted to its detriment. On this point she concluded that the Council had in fact taken ‘a calculated risk’ and had already taken certain crucial steps towards the completion of the development ahead of the email correspondence at the heart of the dispute.

PUBLIC INTEREST CONSIDERATIONS

Having decided that no legitimate expectation had not been created in the first place the judge did not deem it necessary to dwell on the issue of whether the Department for Transport had been entitled to depart from it in the light of overriding public interest considerations. She concluded that they would have been entitled to do so given the fact that the scheme in question forms just one small part of the WAML and must be balanced against by the much larger public interest considerations arising therefrom.

 

The matter has now been appealed to the Court of Appeal.