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East Coast rail franchise decision investigated by watchdog

The decision to allow two firms operating the East Coast Main Line to cut short the contract is being looked into by the public spending watchdog.

In November, the Department for Transport said Virgin and Stagecoach could withdraw from running the London to Edinburgh service three years early.

The National Audit Office will now investigate the government's handling of the £3.3bn franchise.

Ministers said any suggestion taxpayers would be out of pocket was wrong.

It comes after critics of the decision, including Lord Adonis, former chair of the National Infrastructure Commission, said the move could eventually cost the taxpayer billions of pounds.

In 2014, Virgin and Stagecoach signed a deal to run the East Coast line until 2023, promising the government £3.3bn in premiums.

However Martin Griffiths, chief executive of Stagecoach, which owns 90% of the joint venture, admitted last year that it had overpaid for the contract.  He said the business had been affected by delays in upgrading the UK's rail infrastructure.

David Horne, managing director of Virgin Trains East Coast, also said last week that the delay meant plans to introduce a new fleet of high speed trains on the route by 2019 "were no longer deliverable".

Virgin boss Sir Richard Branson has said the deal had cost Virgin and Stagecoach £100m.

Transport Secretary Chris Grayling announced last year that the deal to operate the line would be replaced by a new model which would be "a joint venture between the public and private sector, operated by a single management, under a single brand and overseen by a single leader".  Mr Grayling said: "It means when things go wrong, there's one team to sort it out."

But the government has been accused of "bailing out" the franchise by Labour peer Lord Adonis, who nationalised the East Coast Main Line in 2009 when its then operator National Express was unable to make its payments.

Mr Grayling said earlier this month: "It's much more complex than that. Lord Adonis is not involved in this; he's got his facts wrong."

The NAO now says it will examine the decision to cut short the contract, as well as the new East Coast Partnership which will take over its running in 2020.  The NAO said: "We expect to examine the [government] department's management of the franchise to date and the implications of its plans for the new partnership."

A spokesperson from the Department for Transport said: "The government has been very clear - no one is getting a bailout and Virgin Stagecoach will continue to meet its financial commitments made to the taxpayer on the East Coast rail franchise, as it has done since 2015.  Premium payments continue to flow to the taxpayer, as they currently do, and any suggestion that the taxpayer will be out of pocket is completely wrong."

Transport Secretary Chris Grayling announced last year that the deal to operate the line would be replaced by a new model which would be "a joint venture between the public and private sector, operated by a single management, under a single brand and overseen by a single leader".  Mr Grayling said: "It means when things go wrong, there's one team to sort it out."

The thing I have found quite astonishing was that Carillion's suppliers were prepared to provide goods and services to them at such rotten terms.

There are always big dominant companies in sectors that it is best not to do business with ...

The thing I have found quite astonishing was that Carillion's suppliers were prepared to provide goods and services to them at such rotten terms. They were in effect acting as their bankers. Between 2012 and 2016 Carillion paid out £217M more in dividends than it generated in cash from its operations, as given in a recent Parliament report and had a ballooning trade credit line.

There are always big dominant companies in sectors that it is best not to do business with and those that did in this case are amongst the biggest losers.

East Coast, West Coast and East Midlands rail franchises
An overview of plans for the East Coast, West Coast and East Midlands rail franchises.

Published 5 February 2018
From: Department for Transport and The Rt Hon Chris Grayling MP
Delivered on: 5 February 2018

On 10 January I informed the House that my department was preparing contingency plans for running train services on the East Coast in the event of the existing franchise failing. Despite delivering significant returns to the taxpayer and having some of the highest passenger satisfaction scores in the country, the lead operator of the franchise, Stagecoach, has been incurring significant losses.

In that debate I promised to return to the House to provide an update statement on the situation, and I am doing so today (5 February 2018).

Since 2015 the franchise has met all its financial commitments to the taxpayer, returning nearly £1 billion to the public purse. But this has come at a substantial cost of nearly £200 million to Stagecoach.

I have already informed the House that the franchise will in due course run out of money and will not last until 2020. But it has now been confirmed the situation is much more urgent. It is now clear that this franchise will only be able to continue in its current form for a matter of a very small number of months and no more.

Last week, following detailed analysis, my department issued the franchisee with notification that the franchise had breached a key financial covenant.

Now, it’s important to be clear with the House, this will not impact on the railway’s day-to-day operations. The business will continue to operate as usual with no impact on services or staff on the East Coast.

But it does mean I will need to – in the very near future – end the contract and put in place a successor arrangement to operate this railway.

Given the imminent financial pressure the existing franchise is under, I am taking action now to protect passengers who depend on these train services and ensure continued value for money for taxpayers.

And, given the urgency of the situation, I would like to take this opportunity to update the House on my plans.

Our franchising system as a whole has delivered great benefits to passenger:

new private investment totalling £6.4 billion over the last 11 years
passenger journeys on the rail network have more than doubled
The private sector is paying for new trains all round the country.

There has been much misinformation about this franchise so it is worth stressing again at the outset that – because payments to the government have been subsidised by Stagecoach – the taxpayer has still profited financially from this franchise. Passenger satisfaction is high and preparations are well under way to deliver state-of-the-art new trains on the route.

The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price.

Contrary to widespread speculation, no deal has been done and I have not yet made a decision on the successor operator to run the East Coast railway until the long-term plans for the integration of track and train can begin in 2020. There is no question of anyone receiving a bailout. Stagecoach will be held to all of its contractual obligations in full.

As the Brown Review said 5 years ago, this is what you would expect in a competitive franchise system – private businesses risk substantial amounts of their own capital, and if they fail to live up to their stretching targets they lose out, not the taxpayer.

To anyone who thinks that the nearly £200 million that Stagecoach will lose is insignificant, let me put it into some context. The combined profit of every single train operator in the country was only £271 million last year. The loss equates to over 20% of Stagecoach’s total market value. So it is a significant amount of money by any measure, and it should also act as a stark warning to any company tempted to over-bid in future. Moreover the franchising system has been adjusted to further deter over optimism when bidding.

The priority now is to ensure the continued smooth running of the East Coast franchise for its passengers.

I have therefore asked my officials to conduct a full appraisal of the options available to the government to ensure continuity of service until we implement the East Coast Partnership on the route from 2020.

My decision on which option to choose will be made in accordance with the key principles set out in the statement on how I use my rail franchising powers. This includes:

protecting the interests of passengers
preserving the interests of taxpayers, by ensuring value for money
supporting investment and improvement in the railway, including the deployment of the new Intercity Express trains on the East Coast
In order to inform this decision, the department will assess the extent to which each option performs against these principles. Our value for money assessment will be based on a number of criteria, including which option returns most money to the taxpayer, the risks attached to each, and the value of any improvements in passenger services.

I will also have regard to the effect of my decision on other franchises.

This decision will be taken in a transparent way. The department’s assessment of the options will be published and will include be properly validated.

At this stage, one of the options is to consider the possibility of Stagecoach continuing to operate services on the East Coast under a very strictly designed and short-term arrangement. The current management has a strong record of customer service and to rule out their involvement now would go against the principles I set out above.

However, given the circumstances in which the government is having to step in to protect passengers on this line, I am only prepared to consider this option on the basis that the franchise would be operated on a short-term, not-for-profit basis. The only acceptable financial reward for Stagecoach would be received at the end of the contract and only in return for clearly specified passenger benefits being delivered. The company cannot be allowed to continue running this franchise and making a profit given what has happened. They got their sums wrong and they will pay the price for that – not the taxpayer.

The alternative option is that the East Coast franchise would be directly operated by the Department for Transport through an Operator of Last Resort. My department will subject this option to the same rigorous assessment to establish whether it will deliver value for money for taxpayers and protect the interests of passengers. This option is currently on the table and will be selected if the assessment that I have set out determines that it offers a better deal for passengers and taxpayers than the alternative.

In either scenario, the East Coast Mainline is expected to deliver substantial revenue to the taxpayer. The line will also continue to deliver premium payments to the government once the East Coast Partnership is in place from 2020. Let me be absolutely clear: the East Coast franchise will deliver a healthy operating profit for taxpayers. It has over the course of this franchise so far and it will in the future.

Mr Speaker, there will be those who claim that because Stagecoach overbid, it should be excluded from bidding for future franchises. The legal advice on this is clear.

As Stagecoach is meeting its financial obligations to support the franchise, including with the full parent company support, and because it has operated the services on the East Coast successfully, the department has concluded that there are no adequate legal grounds to restrict it from bidding on current and future franchise competitions on this basis.

I will therefore follow that legal advice. But let me be clear – we will keep its eligibility for current and future bids under close scrutiny and constant review.

Mr Speaker, it is vital that we continue to focus our attention on delivering benefits for passengers across the network and secure the benefits of privatisation.

So, in addition to the transparent, rigorous process I have set out for the East Coast, I am making some additional franchising announcements that will deliver benefits to passengers on the West Coast and East Midlands routes.

In December 2016, we set out our plans to award the West Coast Partnership – the franchise that will deliver the first passenger services on HS2. In that announcement, we made clear our intention to agree a short direct award with the incumbent to allow us the time necessary to design the West Coast Partnership.

These negotiations have been completed and we have agreed a direct award with the existing operator, Virgin Trains West Coast.

Let me be clear, the East Coast and West Coast franchises should not be confused. As with the East Coast, the operator is meeting all its financial obligations, but the West Coast franchise has a completely different corporate structure, where Virgin Trains is the majority shareholder.

As set out 14 months ago, this is a sensible bridge between the existing contract and the West Coast Partnership – and once that partnership is ready this direct award will cease to exist.

Virgin has transformed the West Coast from a poorly-performing service requiring a subsidy of over £75 million a year to the franchise with one of the highest passenger satisfaction rates, at 91%, and returning over £200 million per year to the taxpayer.

This has included introducing trains every 20 minutes between London and Manchester and London and Birmingham, hourly services between London and Scotland, installing wifi on all trains, lengthening Pendolinos from 9 to 11 carriages to accommodate growing passenger numbers, and introducing a free at-seat entertainment service.

My decision is also in keeping with the 3 key principles I set out earlier in protecting passengers, ensuring value for money and supporting investment. I look forward to the release of the invitation to tender for the West Coast Partnership in due course and I am confident we will see strong competition for this exciting new franchise, which will help transform rail travel in this country through the delivery of the first HS2 services.

We are also transforming the East Midlands franchise in the coming years, with the biggest investment in the Midland Mainline since it was completed in 1870.

Passengers will benefit from more seats, new trains and dramatically reduced journey times from Nottingham and Sheffield to London. Once complete, there will be almost twice as many seats into London St Pancras in the peak compared to today.

The next operator will be required to deliver many of these improvements so I am today setting out the next step of the competition that will award this new contract.

Abellio, Arriva, Stagecoach (the current incumbent) and a joint venture between First and Trenitalia have all been shortlisted to run the East Midlands franchise that will deliver these improved services.

As I have previously said, the government has no adequate legal grounds to restrict Stagecoach from bidding. But the competition will be run on a fair, transparent basis, including new safeguards against overbidding. Ultimately, the winner will be the firm that offers the best service to passengers and best value to the taxpayer.

Mr Speaker, in a competitive market, franchises will sometimes fail. When that happens my duty is to protect passengers and taxpayers and ensure continued investment in the railway. Stagecoach has paid the price for failure as stipulated in its contract. Passengers on the East Coast Mainline can be assured that services will continue as normal. This government will undertake a transparent appraisal of the options available to ensure passengers and taxpayers are protected.

Passenger numbers have doubled.

We have one of the safest railways in Europe.

Passenger satisfaction is high across the network.

And other countries are now adopting Britain’s model for running the railways.

The plans I have set out today will allow the British public to continue to benefit from an ever improving railway into the future.

Published 5 February 2018

Mod request. I think this Stagecoach/East Coast saga should be split into its own topic. Only tangentially linked to Andrew Adonis.

Grayling blames Stagecoach.

Thinly veiled blaming of HMG.

My take. Both sides are equally to blame. Participants in a system that is not fit for purpose. Concessions on a fixed fee (aka management contract) are becoming far to regular an occurance following failures of franchisees to meet their obligations. Why not make that the model going forward instead of all these flawed franchise awards. The current system is failing.

Do we know that Stagecoach/Virgin's bid was the lowest??

What is being forgotten is that the bids & analysis were done on the basis that NR (a nationalised company, thus HMG really) would upgrade the ECML to allow additional services be run by the franchisee - thus additional revenue would be generated. NR now say this work is undeliverable in the promised timescale, thus it is HMGs default that has led to Stagecoach being unable to deliver promised returns to HMG.

No one can be sure that Stagecoach overbid, as the work needed to be done & the new improved timetable run to see if they did.

Also, Virgin only has a 10% interest in the East Coast - but a majority interest in the West Coast, where they are doing really quite well. I think we ought to be referring to Stagecoach/Brian Souter here, not Virgin/Branson.

What is being forgotten is that the bids & analysis were done on the basis that NR (a nationalised company, thus HMG really) would upgrade the ECML to allow additional services be run by the franchisee - thus additional revenue would be generated. NR now say this work is undeliverable in the promised timescale, thus it is HMGs default that has led to Stagecoach being unable to deliver promised returns to HMG.

No one can be sure that Stagecoach overbid, as the work needed to be done & the new improved timetable run to see if they did.

Also, Virgin only has a 10% interest in the East Coast - but a majority interest in the West Coast, where they are doing really quite well. I think we ought to be referring to Stagecoach/Brian Souter here, not Virgin/Branson.

Totally agree, NR can’t be held responsible for this one.

Wonder where this leaves First’s plan for their Open access London-Edinburgh service? Bit risky if you ask me.

 I seem to remember a few year's back, correct me if am wrong, First Group were awarded the
 West Coast mainline franchise.
 
 Was there  an appeal by Branson that First Group's bid was 'unstatainable', or am I incorrect ?

Stagecoach East Coast deal to be probed by MPs

The decision to end the East Coast Mainline rail franchise early is to come under scrutiny from MPs.

The Department for Transport has said Stagecoach and Virgin will withdraw from running the service within months after running into difficulties.

Now the House of Commons transport committee has announced that it will hold an inquiry into the matter.

Lilian Greenwood, who chairs the committee, said lessons needed to be learned from the failure.

Last week, Transport Secretary Chris Grayling said Stagecoach had "got its numbers wrong" and would continue running the London to Edinburgh line only for "a small number of months and no more".

He said the government might step in to run the service, adding that the day-to-day operation of the line would be unaffected.

The National Audit Office has already announced it will investigate the government's handling of the franchise.

The East Coast Mainline franchise was taken into public ownership in 2009 after being run by National Express.

It was re-privatised when Stagecoach and Virgin signed a deal to run the East Coast line from 2015 to 2023, promising to pay the government £3.3bn to run the service.

Stagecoach owns 90% of the joint venture and Virgin owns the remaining 10%.

Ms Greenwood said: "There are serious questions to be asked of the train operator, Network Rail and ministers and the transport committee intends to ask them. The failure of the East Coast franchise has wider implications for rail franchising and the competitiveness of the current system. Lessons need to be learned by all concerned. In the meantime, the Department for Transport must take the right steps to protect passengers and taxpayers. Safeguards must be put in place to restore public confidence in the sustainability of our railways."

Mr Grayling has said he is considering two approaches. One option is to allow Stagecoach to continue operating the franchise on a short-term and not-for-profit basis until a new contract is awarded in 2020. Alternatively, East Coast Mainline could be brought back under government control and be run by the Department for Transport through an operator of last resort.

Mr Grayling told the House of Commons on Monday last week: "The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price."

I think that the RMT should put in a bid for the franchise, and show us all how it should be done !

With no "fat cat" shareholders, just think what huge improvements could be made :)

I'll see your Chiltern Railways and raise you Connex South Eastern.  :P

Puts the growth blame partially on external factors such as fuel prices being lower so people choosing to drive ....

Can't help wondering how much worse GWR has to get, before Graying considers it a prime candidate for DoR

My main issue is will they paint the trains LNER green :P   

If we have an LNER and a GWR ... how long before we have a Southern and a London Midland Scottish?   Perhaps it would be an idea to have just four big franchises to run from 1st January 2023?

We already have a Southern (https://www.southernrailway.com).

The Times reporting this morning that four other franchises could be in trouble, the same four that have been mentioned before:

SWR
Transpennine
Northern
Greater Anglia

Those other 4 TOC's are probably in trouble for financial reasons, i.e. they have overbid and passenger growth has not been as strong as they predicated.
That is different from GWR who 'are in trouble' because they don't have enough trains and/or staff and therefore have not been able to provide a very satisfactory service.

SWR, by contrast are doing better from the passengers point of view. There is always room for improvement of course but as regards the percentage of trains that are short formed/cancelled/part cancelled they are doing better than GWR.
SWR are however reportedly in financial trouble.

Seriously? SWR are majority FirstGroup, no?

With the carriages wrapped in teak-coloured vinyls ...

Would never be allowed, the doors would have to be a contrasting colour under present regulations, thereby ruining the whole effect.

There was silly talk like this back in 2015 with the GWR rebrand, then people slagged off the livery and the grey doors, so it doesn't surprise me its happening again.  I don't think garter blue is a good idea as its too reminiscent of GNER, I think apple green or a similar shade would be better for the IET's, it would be a fresh start and a clean slate considering the LNER brand is now permanent whoever takes hold of the new style franchise.

Although a long-term continuing of the poor provision of service from GWR may at some stage lead to a drop in custom and hence financial issues.

Has DfT actually stated that the LNER brand is now permanent?

Indeed have they said this of the GWR brand?

Whilst I would hope for a smart livery, this is a long way down my list of concerns.
Higher priorities are on board facilities and comfort.
Restaurant
Buffet
Luggage space
Leg room
Tables
Windows
Air conditioning that works
Toilets that work, including the emptying of retention tanks and filling of water tanks
Comfortable seats
Gangwayed throughout
Peak fares high enough to deter overcrowding and off peak fares low enough to make best use of the trains

External livery can hardly be seen once on board so is a LONG way down my list of preferences.

Whilst I would hope for a smart livery, this is a long way down my list of concerns.

External livery can hardly be seen once on board so is a LONG way down my list of preferences.

Announcments / screens that inform you of the real time running of connections (will they / won't they) to other trains and buses

Ever-faster WiFi connections that work even between Dean and Mottisfont

Whilst I would hope for a smart livery, this is a long way down my list of concerns.
Higher priorities are on board facilities and comfort.
Restaurant
Buffet
Luggage space
Leg room
Tables
Windows
Air conditioning that works
Toilets that work, including the emptying of retention tanks and filling of water tanks
Comfortable seats
Gangwayed throughout
Peak fares high enough to deter overcrowding and off peak fares low enough to make best use of the trains

External livery can hardly be seen once on board so is a LONG way down my list of preferences.

The London North Eastern Railway website went live overnight. Ahead of the official handover this Sunday 24th June 2018.

www.lner.co.uk

Theresa May prepares UK rail franchising shake-up
PM seeks to improve the railways without abandoning the use of private operators

Theresa May is drawing up plans for what Downing Street is billing as the biggest review of the UK’s rail franchising system since the 1990s privatisation in the wake of the collapse of the East Coast main line earlier this year.

The prime minister is understood to have authorised a major review — likely to be headed by an external figurehead — to examine how to improve the railways without abandoning the use of private operators. The consultation is expected to last until well into 2019.

The plan was raised in a meeting at Number 10 on Tuesday morning hosted by Gavin Barwell, Mrs May’s chief of staff, and attended by ministers from various departments. One person familiar with the situation said the plan was being driven by Chris Grayling, transport secretary, with the authorisation of Downing Street.

Mr Barwell also said at Tuesday’s meeting that the government would take action on rail fares as soon as possible, an official said.

However, the review still needs approval from the Treasury, which is not entirely supportive.

The proposals would be the second major review of the franchise system in five years. The government-commissioned “Brown Review”, triggered by problems with the West Coast franchise, reported in 2013 that the system was “not fundamentally flawed”.

That conclusion was jolted in May when the government was forced to take back control of the East Coast franchise after it collapsed for the third time in 12 years — prompting fears that other operators could walk away from contracts.

The opposition Labour party plans to nationalise the entire rail system, although the 25 private franchises would only return to public hands as they come up for tender.

Number 10 will not countenance following suit, although it is understood to be otherwise open-minded about the review. A Department for Transport official confirmed the plan was “being looked at” but declined to comment further.

Stagecoach and Virgin Group had only been operating the London to Scotland line for two years when they breached a key financial covenant.

Mr Grayling originally supported an alternative plan that would have allowed the two private companies to keep running the line under a management contract. Instead he stripped them of their contract five years before it was due to end, in part because of Number 10’s fears about a potential public backlash.

The government had run the line from 2009 to 2015 after a previous operator, National Express, walked away from the contract.

Mrs May has also expressed frustration about mass delays and cancellations of rail services across the country in June following the botched introduction of new timetables, describing the disruption as “absolutely unacceptable”.

East Coast rail line failure leaves Chris Grayling with stark choices
Meanwhile the public accounts committee of MPs issued a report in April warning that the rail franchising system was “broken” at the expense of customers. The PAC accused the DfT of failing to learn the lessons from previous failures when it allowed Stagecoach and Virgin to overbid for East Coast.

The May government has already sought to overhaul the railways by trying to bring the running of trains and track much closer.

Under those reforms, announced at the end of 2017, there will be greater collaboration between private train operators and state-owned Network Rail, which maintains infrastructure, in an effort to make services more reliable.

The rail industry has said it would prefer power and responsibility to be devolved to regional “routes”, potentially with concessions lasting two or three decades, rather than franchises for seven years, allowing for long-term investment.

The railways were first privatised by the John Major government in 1994, when the track was spun off into the now defunct Railtrack and train operating companies competed to run the trains. Network Rail, which took over from Railtrack, was subsequently renationalised.