By Dr Luke Butler, Lecturer in Law (University of Bristol Law School).
Since privatisation, passenger rail has fallen victim to a complex web of institutional and contractual relations, a matrix of network owners, service providers, regulators and oversight bodies with ever-changing remits. At the risk of oversimplification, rail provision involves the formal separation of Network Rail’s management of the infrastructure (the track etc) from the operation by Train Operating Companies (“TOCs”) of rail services on that infrastructure. The Department for Transport (“DfT”) opens the operation of rail services up to competition through a procurement process and invites qualified TOCs to bid, although some rail franchises may be directly awarded without competition. In turn, TOCs pay to access the network and lease rolling stock. All involve multiple contracts sharing subsidies, premiums and risks.
Post-privatisation, it was predicated that the contractualisation of rail would lead to “government by lawyers”. Yet, I have always been surprised at the relatively limited engagement of legal research on UK rail since. This blog seeks to renew conversation by arguing that there is a high degree of legal and practical uncertainty in the route to effective franchise procurement and which has not been significantly improved by recent reforms.
In 2012, the Government cancelled the Inter-City West Coast (ICWC) franchise procurement process under threat of judicial review. In quick succession, an Inquiry revealed substantial errors in determining the financial model used to guarantee risk capital for a TOC’s bankruptcy as well as unequal treatment of bidders in communicating that model. A Review was also commissioned to examine the overall operation of the rail franchise programme. Whilst ultimately concluding that there was no need for major structural change, the franchising programme was partially suspended pending necessary reform by the DfT. With the dust beginning to settle, the Government has recently announced a revised schedule for the rail franchise programme. However, confidence is somewhat undermined by the consecutive publication of two further recent Reports which offer differing visions for the future of UK rail, from complete reform of franchising to total abandonment. Consequently, this tentative interim period is marked by a profusion of short-term direct awards extending existing franchises. The expectation is that a full programme of competitively awarded franchises will recommence, although the recent Southern Rail fiasco is unlikely to quiet ongoing concerns.
Legal classification and consequences for competitively awarded franchises
The most significant indicator of legal uncertainty is the fact that there is no consensus on the proper legal classification of rail franchises and, thus, the applicable legal regime. Whilst “franchise” connotes a purely private commercial contract, the term reflects an historical tendency in the UK to label processes which involve the granting of public service rights by auction as “public franchises”. Continential counterparts prefer the descriptors “concessions” or “public service” contracts, perhaps, in turn, reflecting a greater sense of precisely what these contracts are designed to do. On the basis that a rail franchise involves a public contract of some description, the starting point must be to discern whether or not it is governed by the EU procurement Directives. However, the Directives exclude from their scope contracts for the provision of public passenger transport services by rail for many reasons, not least the fact that the market is atypical and involves public service obligations uncharacteristic of most procurements. Nevertheless, the tentacled reach of EU procurement law is such that even if the Directives do not apply in full, they may apply in part. Further, even if they do not apply at all, the Treaty principles (e.g. non-discrimination, equal treatment and transparency) may have a residual application.
Faced with this uncertainty, the Government has hedged its bets. In instances in which a decision has been taken to open a rail franchise up to competition, the contract has been advertised as a “Part B” service contract, a residual category of contracts subject to some provisions of the EU public sector procurement Directive, the signifance of which is considered below. More recently, however, the DfT has re-issued its Passenger Services Franchise Competition Guide as part of ongoing reforms in light of the ICWC fiasco. In a section typically reserved for copyright and other disclaimers (!), the DfT’s states its view that the procurement Directives do not apply; rather, the DfT will consider the precise EU law classification of each franchise on a case-by-case basis. The DfT’s general view is that passenger rail franchises qualify as public service contracts and are therefore subject to Regulation (EC) 1370/2007. Regulation 1370/2007 is part of the EU’s three “Rail Packages”, measures designed to liberalise the European rail market. Under Regulation 1370/2007, competent authorities may decide to either award contracts through a fair, open, transparent and non-discriminatory competitive tendering procedure or make direct awards (subject to restrictions on overcompensation).
Of course, in practice, the legal-theoretical classification of a franchise might be considered significant only to the extent that it materially impacts the way in which the procurement process is governed and challenged. The former classification of rail franchises as a Part B service meant that the procurement Directives would not apply in full. Rather a “light touch” regime would apply comprising certain of the procurement Directives’ provisions e.g. on technical specifications, publication of award and EU Treaty principles. However, there have been no major legal challenges to UK rail franchises awarded as Part B services. Further, the ICWC franchise would not necessarily have tested the limits of EU law as clear breaches were apparent. Under Regulation 1370/2007, it is arguable that there are fewer EU law protections because it does not contain the same detailed provisions as apply under the procurement Directives. Notwithstanding, EU Treaty principles do apply. Therefore, it is open to question the extent to which, if at all, classification of rail franchising under one or other regimes appreciably impacts obligations, rights and remedies.
Concerning the substance of the UK’s revised passenger franchise Guide, it sets out the relevant steps in the procurement process in greater detail than in previous iterations, a necessary reform given that previously only TOCs had any real indication of how bidding proceses worked. However, it should be emphasised that the DfT retains discretion to derogate from the process identified in the guide where deemed necessary or expedient albeit that this is a discretion to be exercised “in compliance with applicable law” (whatever law that is!). Further, the Guide states that the documents of an individual procurement take precedence over the Guide in any competition. Therefore, the Guide firmly intends to exclude procedural or substantive reliance on it as a basis for challenging competitively awarded rail franchises. It is, however, noticeable that the Guide contains elements that clearly incorporate certain requirements commonly found in the EU procurement Directives (in turn, deriving from EU case law). For example, there is reference to the Alcatel 10 day “standstill period” which kicks in after contract award to enable a challenge to a procurement before the contract is signed. It is open to speculation whether these references constitute a genuine attempt to attract bidders from other EU Member States, to safeguard the integrity of the procurement process for UK and EU bidders or simply to cover the Government in the event of challenge.
In addition to this uncertainty, the EU has recently proposed a fourth Rail Package which initially indicated that it would require mandatory tendering. However, again, this would only impose broad requirements for tendering to be open, fair, transparent, non-discriminatory and may involve negotiations. More importantly, the proposal has recently been revised to permit a number of exceptions which continue to allow direct awards. Considering that this aspect of the fourth Rail Package is not expected to come into full effect before 2020, serious consideration is required as to how EU law requirements will impact and be impacted by Brexit.
Direct awards without competition
The patchwork of UK legal regulation is further complicated by the fact that domestic law under the Railways Act 1993 (as amended) also provides a statutory power for the Secretary of State to conduct a franchise tendering process, including the possibility of a direct award without competition. Again, reflecting the Government’s attempt to reform franchising through improved transparency and accountability, the Secretary of State recently issued a revised policy statement on how this power might be exercised. Whilst the document is unsurprisingly short and general (the more specifically said the more the potential scope for challenge) the Guidance raises a number of interpretative questions. At its broadest, the Guidance states that the Secretary of State will make a direct award where in his reasonable opinion a competitive procurement would not be conductive inter alia to the fulfilment of government objectives in relation to rail transport. This effectively enables a direct award with little justification. The Guidance does indicate certain factors that must be taken into account in making a direct award e.g. EU treaty principles as well as value for money, affordability and delivery risk. It has been observed that this begins to sound very much like a description of award criteria in a public tender, laying the ground for potential challenge.
However, potential challenges are one thing; actual challenges are another and it is only though actual challenges (that go beyond permission to full judicial review) that we will get any real indication of how effective legal principles are in this area. Whilst, as indicated, there has been a profusion of direct awards recently, there have been few challenges. ASLEF brought a union led high court challenge on grounds which included, among other things, dissatisfaction with the way in which direct awards were being conducted; however, the challenge failed. Further, it may be prohibitive in terms of time and cost to challenge direct awards that have only been extended for limited duration. In addition, the European Commission does not appear to show any particular willingness to challenge direct awards.
Having chuntered along and almost out of steam, this blog has hopefully opened lines of enquiry. There are many others which are not explored here but which are also indicative of uncertainty. For instance, legal questions are being asked as to whether rail franchise procurements continue to remain compatible with EU law (to the extent they ever were) in light of so few bidders now willing to bid. A new EU inspired “pre-qualification questionnaire procurement passport” does not appear to have increased numbers (as if it ever could) by reducing costly administrative requirements for repeatedly demonstrating technical ability, past performance and finances. Further, there has been little consideration of the extent to which, if at all, extensions or modifications to franchises might require the franchise to be reopened to competition in accord with the Pressetext rule. Finally, the legal exercise of the Government’s power to step in on a failing franchise and directly award to another operator poses interesting questions and which has a contemporary significance in light of similar calls in response to Southern Rail’s performance. This procurement discussion excludes the many other legal issues which also arise in relation to the contractual management of a franchise and which will be considered elsewhere.
I am particularly keen to speak to lawyers working in the rail sector on these issues (confidence assured). Please contact me at: Luke.Butler@bristol.ac.uk or through the blog space.
 There has been some academic discussion which is not rehearsed here. A masterful overview of some of the more important isses can be found in C Harlow and R Rawlings, Law and Administration (2009 CUP 3rd ed), Chapter 9.
 This forms part of ongoing research with Professor Tony Prosser which examines UK rail franchises in comparative perspective and as a legal model for procurement and contract management.
 Report of the Laidlaw Inquiry: Inquiry into the lessons learned for the Department for Transport from the InterCity West Coast Competition, 6 December 2012 : https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/29866/report-of-the-laidlaw-inquiry.pdf
 The Brown Review of the Rail Franchising Programme, January 2013: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/49453/cm-8526.pdf.
 Rail franchise schedule, 18 May 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/523791/may-2016-rail-franchise-schedule.pdf.
 The Shaw Report, The future shape and financing of Network Rail: The recommendations, March 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/510179/shaw-report-the-future-shape-and-financing-of-network-rail.pdf; Competition & Markets Authority, Competiton in passenger rail services in Great Britain, A policy document 8 March 2016: https://assets.publishing.service.gov.uk/media/56ddc41aed915d037600000d/Competition_in_passenger_rail_services_in_Great_Britain.pdf.
 G Topham and M Weaver, ‘Take Southern rail franchise off operator, urges Sadiq Khan’, The Guardian, 12 July 2016: https://www.theguardian.com/uk-news/2016/jul/12/take-southern-rail-franchise-off-operator-urges-sadiq-khan.
 This issue may only get progressively worse as examples emerge of contractual arrangements that do not take the form of the conventional rail franchise agreement (e.g. Merseyrail). Further, Brexit now raises the question of how a possible domestic model of rail franchise regulation might develop.
 TV broadcasting and the lottery being other examples.
 Directive 2014/24/EU (public sector); Directive 2014/23/EU (concessions); and Directive 2014/25/EU (utilities), as implemented in the corresponding UK Regulations (see, for example, Public Contracts Regulations 2015).
 See, for example, the Inter City West Coast Franchise: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/4195/ojeunotice.pdf.
 Department for Transport, Passenger Services Franchise Competition Guide, January 2016: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/496844/franchise-competition-guide.pdf.
 Regulation 1370/2007 on public passenger transport services by rail and by road 013 P 96-108.
 C-81/98 Alcatel Austria AG & Others, Siemens AG Österreich and Sag-Schrack Anlagentechnik AG v. Bundesministerium für Wissenschaft und Verkehr  ECR I-7671, as referenced in Passenger Services Franchise Competition Guide, p.37.
 These exceptions include where direct awards are justified by the structure and geographical characteristics of the market and network and if it would improve the quality of services or cost-efficiency. See Council of the European Union, Outcome of Proceedings , 1277/15, TRANS 317 CODEC 1308, 12 October 2015. I am grateful to Professor Tony Prosser for observations on this point.
 Statement of policy on the exercise of the Secretary of State’s power under section 26(1) of the Railways Act 1993, March 2013: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/243471/9780108512322.pdf.
 See C Wolfenden, ‘Hold the line…-an operator will be with you directly, 13 May 2013, providing a very useful overview of the issues and which that author hoped would become a point of legal academic interest: http://www.osborneclarke.com/connected-insights/publications/hold-the-line-an-operator-will-be-with-you-directly/.
 See R (RMT, ASLEF and TSSA) v. Secretary of State for Transport, July 2014. I cannot find the full judicial record of the decision by Mr Justice Cameron. Any copy would be greatly appreciated. As a news feature, see Rail unions refused franchise review, 11 July 2014: http://www.bbc.co.uk/news/uk-28270341.
 Railways: Franchises Written question – HL6724: http://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Lords/2016-03-07/HL6724/.
 Claire Perry MP, Transport companies that have been successful in their pre-qualification questionnaire (PQQ) passport application, 15 December 2015: https://www.gov.uk/government/speeches/rail-franchising-pre-qualification-questionnaire-pqq-passport-award.
 Case C-454/06 Pressetext Nachrichtenagentur v Austria  ECR I-04401.
 M Leftly, ‘Government accused of ‘contracting out’ emergency train franchises to private firms’, The Independent, 18 January 2016: http://www.independent.co.uk/news/business/news/government-accused-of-contracting-out-emergency-train-franchises-to-private-firms-a6818436.html.