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Government
Legal Department
Litigation Group 020 7210 3000
David Pugh Ono Kembln Street
London
WCZB 4T5
wins" Drew ox 123242 Kingsway 
Your rel:
Our ref: Z1622408ISCXICLGA
9 August 2016
Dear Sirs

South Western Rail Franchise ("the Franchise")

reier to your letter oi 28 July 2016, addressed to Mr Philip Rutnam, the Permanent Secretary oi the
Department for Transport ("the Department").

I am instructed to reply on behali oi the Department. This letter is written in accordance with the Pre-
Action Protocol ior judicial review under the Civil Procedure Rules.

Please address any iurther correspondence relating to the proposed claim to me: my contact details
and reierence are as shown at the head and ioot oi this letter.

The proposed claimants

Mr David Pugh -- 31 Silver Trees, Shanklin, Isle oi Wight P037 7ND

Mr Warren Drew -- 7 Fir Tree Close, Shanklin, Isle of Wight P037 7EX

The proposed defendant

Your letter states that the defendant to your proposed claim is Mr Rutnam. The Department's position
is that Mr Rutnam would not be the appropriate deiendant to your proposed claim, which relates to
the content oi an invitation to tender ior a rail iranchise issued by the Secretary oi State for Transpon
pursuant to section 26 oi the Railways Act 1993 ("the Act"). (The Secretary of State is "the
appropriate franchising authority" for the purposes oi section 26: see section 23(3) oi the Act.)

Should you wish to bring the proposed claim, the appropriate deiendant would be the Secretary oi
State ior Transport, whose address is Great Minster House, 33 Horseferry Road, London SW1P
4DR.

In this letter the terms "the Department" and "the Secretary of State" are (except where the context
indicates otherwise) used interchangeably and without distinguishing between them. The Secretary

Wendy Hardaker Head oi Divislon
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of State for Transport is responsible, as a matter of public law, for the actions and decisions of the
Department.
Details of the matter being challenged
I understand the subjects of your proposed challenge to be:
(i)

the inclusion in the Invitation to Tender published by the Secretary of State for Transport in
June 2016 (“the ITT”) of one of the Franchise Objectives as follows:
“…work with the Isle of Wight Council to secure a long-term sustainable solution to the
future of the Island Line during the course of the next franchise that will enable it to
become a self-sustaining business…”
and in particular the reference to “a self-sustaining business”. You suggest that the Secretary
of State included that Franchise Objective in the ITT without taking into account relevant
considerations, in particular the lack of adequate financial data for the Island Line (“the Line”).

(ii)

You also allege that it is irrational to believe that the Line could be better run outside the
Franchise than within it.

It appears that you believe that the Secretary of State has, by issuing the ITT, effectively taken a
decision, or otherwise somehow pre-determined, that the Line should not form part of the Franchise.
Response to the proposed claim
Summary
As explained in more detail below, the Department considers that your proposed claim is based on a
misunderstanding of the ITT and its legal consequences. The position at the present time is that the
Secretary of State has not taken any decision to remove the Line from the scope of the Franchise.
Nor has the Secretary of State come to any view as to whether the Line should, in the event of any
separation from the Franchise, operate without subsidy or other State financial support, or as to the
amount of financial support to be provided for the Line.
The reference in the seventh Franchise Objective to “a self-sustaining business” in table 2.1 of the
ITT is to be read in the context of the ITT as a whole, including the other paragraphs of the ITT
referring to the future of the Line: see in particular paragraphs 5.6.4 and 5.6.6(g) of the ITT; and see
also paragraphs 5.72 – 5.80 of the Stakeholder Briefing Document (“SBD”) published alongside the
ITT. The use of that phrase does not signify that the Secretary of State has at this stage decided that
the Line should cease to be the responsibility of the Franchisee or should become self-sustaining
without any State financial support. Rather, what is meant by that phrase is that the Franchisee
should work to secure a sustainable future for the Line, including by establishing the Line as a
separate business unit within the overall Franchise operation so that transparent financial and other
data is available to assist the Franchisee, the Isle of Wight Council and the Department in
considering options for the future development and operation of the Line (which currently has the
oldest rolling stock in standard service of any railway in the country and would benefit from
investment and modernisation).
The Secretary of State, in deciding to proceed that way, took account of the submissions received to
the stakeholder consultation relating to the Franchise (as discussed at paragraphs 5.72 – 5.80 of the
SBD). The Secretary of State has deliberately not taken any decision now as to whether or not the
Line should remain part of the Franchise in the longer term, and has instead specified the Franchise
in such a way as to enable the Isle of Wight Council and other stakeholders to work together to
identify and consider the various options.
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 The Department regrets the misunderstanding that appears to have arisen from the phrasing of the
seventh Franchise Objective and has therefore decided to amend the wording of that Franchise
Objective to remove any scope for confusion, and has notified all intending bidders of this change.
Fuller response
The Department has made clear throughout the process of re-letting the Franchise that it regards it
as most important that the Line should continue and flourish. As stated in the SBD at paragraph 5.76:
The Department understands that the Island Line provides important transport for residents
and visitors to the Isle of Wight, and that there should continue to be the provision of
passenger transport services on the island.
Exploring options and obtaining financial data: however as you recognise in your letter, the Line
is currently loss-making and faces the need for costly infrastructure upgrades. You also recognise the
lack of reliable data as to the financial position of the Line.
It is because of these factors that the Department has made clear the need for the new Franchisee to
explore all options to meet the financial challenges facing the Line and, as a first step in that
exercise, to generate reliable financial data for the Line by establishing a separate business unit for it
(SBD, paragraph 5.77):
With the view to securing a more sustainable, long-term solution, the next franchisee will be
required to work with stakeholders, including the Isle of Wight Council, Network Rail, and the
Department to explore options for the future provision of services that meet the needs of
passengers, the local community and the taxpayer. This will also include establishing a
business unit for the Island Line, which will provide separate financial and operational data to
inform the consideration of potential options.
These aims are reflected in the ITT (paragraph 5.6.4):
The Department requires a Franchisee who will work with the Isle of Wight Council and other
stakeholders to help develop a sustainable future for the Island Line
and in the provisions in the draft Franchise Agreement (section 5 of Schedule 6.1) which will require
the Franchisee to create a separate Island Line Business Unit.
Giving effect to the exploration of options: in the context of a rail franchise which is planned to
last for at least 7 years and in which the Franchisee is required to explore with stakeholders options
for the Line, it is important for the Department to retain the flexibility to give effect during the period of
the Franchise to any option which emerges and meets the approval of stakeholders. It is conceivable
that such an option could involve someone other than the Franchisee running the line. For this
reason the Department has included provisions in the draft Franchise Agreement which, in such an
event, would facilitate the Secretary of State bringing about the transfer of the Line to another
operator.
However another operator running the Line is only one possible outcome of the exploration of
options; and the draft Franchise Agreement expressly recognises that such a step would require a
variation to the Franchise Agreement. At this stage the reason for making contractual provision for
such possible future developments is simply to avoid artificially restricting the options for the Line
during the life of the Franchise, but rather to leave open the opportunity for the next Franchisee to
provide innovative and cost effective solutions and the Department’s ability to implement them. The
draft Franchise Agreement does this, whilst at the same time ensuring the continued provision and
improvement of passenger services on the Line. As you will know, the Department is proposing an
annual £50,000 Customer and Communities Improvement Fund which will be available from the
second year of the franchise for investment in improvements to facilities and services on the Line.
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 For these reasons it is not irrational to require the Franchisee to work with the Isle of Wight Council in
exploring options. The Council has a strong interest in securing a sustainable, long-term solution for
the Line and can be expected to engage actively with the Franchisee in developing options to secure
that.
“Self-sustaining business”: You have drawn attention to the reference in one of the Franchise
Objectives in the ITT to “work[ing] with the Isle of Wight Council to secure a long-term sustainable
solution to the future of the Island Line during the course of the next franchise that will enable it to
become a self-sustaining business”.
It is important to note that the Franchise Objectives are not included as such in the draft Franchise
Agreement. Rather, the ITT requires bidders to fulfil the Franchise Objectives by meeting the
requirements as to bid submissions in the ITT. The relevant requirement in this case is paragraph
5.6.6(g) of the ITT, which requires each bidder to explain in its bid how it will work with the Isle of
Wight Council and other stakeholders to help develop a sustainable future for the Island Line. I am
sure all parties will agree that a long-term sustainable solution for the Line is needed and that it is
necessary for the Franchisee to work with the Council to achieve that aim.
In relation to the reference in that Franchise Objective to “a self-sustaining business”, it appears from
your letter that (as I have already set out above in the ‘Summary’ section of this letter) you may have
interpreted that phrase in a way that differs from its intended import (as reflected in the SBD and
paragraphs 5.6.4 and 5.6.6(g) of the ITT). Nevertheless, the Department is keen to avoid any scope
for misunderstanding, and has therefore amended that Objective to:
“Work with the Isle of Wight Council to secure a long-term sustainable solution to the future of
the Island Line during the course of the next franchise that will enable it to become a more
sustainable business.” (emphasis added)
This amendment brings the wording of that Objective more clearly into line with the questions in the
original Consultation document which referred to “a more self-sustaining business” and the SBD,
which referred to “a more sustainable, long-term solution”. I hope this change of wording resolves
your concerns on this point.
Conclusion: I trust this letter answers the concerns expressed in your letter. For the reasons I have
explained, it appears that the proposed claim may arise out of a degree of misunderstanding which is
resolved by this letter and by the change to the wording of the seventh Franchise Objective. For
completeness, however, I make clear that the Department does not consider the proposed claim to
be well founded and will therefore resist any such claim in full.
ADR
The Department shares your wish that this matter can be resolved without court proceedings and the
Department has therefore sought to resolve your concerns as set out above.
Your letter sets out a specific proposal that the Department amend the Franchise Objective so as to
refer to the long-term sustainable solution for the Line to be “wholly delivered within the wider
franchise model”. The Department’s amended wording of that Franchise Objective differs from your
proposal in that it does not seek to pre-determine the future operational arrangements for the Line by
precluding certain options from being considered. The Department does not agree that it would be
appropriate to rule out any options at this stage, or that it is legally required to rule out consideration
of any options which may involve the Line being operated by anyone other than the Franchisee. As I

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 have explained above, no decision has been taken as to whelher lhe Line will. or will not, cominue lo
be pan of lhe Franchise in the long--lerm.

Yours lallhlully

Stephen Cromie
For the Treasury Solicitor

+44 (0)20 7210 3555
+44 (0)20 7210 3012