East Coast rail franchise - ongoing discussion

[whole diary]

[Chris from Nailsea]

An update, from the BBC^» (British Broadcasting Corporation - home page):

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^▸ (United Kingdom)'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."

[ellendune]

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."

Is that like Carillion where the private sector take all the profit and the public sector pick up the costs when it all falls apart?

[didcotdean]

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.

[grahame]

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.

Suppliers tend to be caught between a rock and a hard place though ... for many it's either take the business and endure the terms, or let your own business stumble.

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

Agreed.  On the IT training side, there are two big UK^▸ (United Kingdom) organisations (total of around 100,000 employees) that we will only do business with if they pay prior to us confirming acceptance of their order.  Both are names well known to members; neither is primarily rail-based in what they do and our training would not be anything to do with trains!

[TaplowGreen]

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.

Welcome to the World of Construction.

[SandTEngineer]

So what next......
https://www.gov.uk/government/speeches/update-on-the-east-coast-west-coast-and-east-midlands-rail-franchises

Health Warning: Its rather long

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^▸ (Member of Parliament)
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^▸ (The next High Speed line(s)). 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

[JayMac]

The East Coast curse strikes again. Every privatised operator of this line has failed to see out their franchise obligations.

Chris Grayling should not even countenance letting Stagecoach continue, even not-for-profit. They've failed to meet their obligations. If it continues as not-for-profit, the senior managers and directors who are responsible for the failure will continue drawing a salary from the franchise company. That's rewarding failure.

Directly Operated Railways should recruit a new top team and take over at the earliest opportunity.

Oh, and excellent spinning from Chris Grayling there. Was the announcement drafted by Malcolm Tucker? This is seriously bad news for rail franchising as a way to run trains. Yet Grayling has tried diluting the bad with loads of superficially positive spin. No matter how much glitter you put on a turd, it's still a turd.


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

[Chris from Nailsea]

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

Agreed - now done.  CfN. 

[JayMac]

Grayling blames Stagecoach.

Stagecoach Group Chief Executive, Martin Griffiths, responds:

https://players.brightcove.net/1555966121001/default_default/index.html?videoId=5726503939001 or YouTube if that link goes dead when Martin Griffiths realises how conceited he sounds. That's when he's not sounding like a hostage with Brian Souter and Richard Branson pointing guns at him!  https://youtu.be/Znl4gzRYFv8

Nought but 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.

Or just renationalise the lot. That'll hopefully come with the next government.

[ellendune]

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.

I blame them both, Stagecoach for putting their unrealistically low bid in, and DfT^» (Department for Transport - about) for accepting it.  DfT are supposed to assess tenders and work out whether they think they are deliverable. They don't have to give it to the lowest tenderer (provided they have set out their rules correctly in the call for tenders). 

When I did tender assessment we did the analysis to see if the lowest tender was realistic and some used to rule out the lowest bid on principle if it was very far from the next bid. It either meant they dropped a clanger, were so desperate for work they they would go bust, or that they have found a flaw in the tender and were banking on submitting a huge claim to make a profit. 

[JayMac]

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

[grahame]

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

We could discuss what is defined as "high" and "low" ... as this franchise pays a premium to the government, should we be asking "was this the highest bid?"   As an educated guess it was, unless someone else also got it very wrong indeed - and so obviously wrong that they weren't award the contract!

[ellendune]

Sorry by low in this context I mean highest payment to the government.

I have no idea whether Stagecoach was the lowest, I was speaking generically.

[devonexpress]

I find this hilarious because back when First won the West Coast, he said they had overbid, and that Virgin consortium always paid a reasonable price but never overbid, and delivered a good quality service.

Yet the East Coast franchise has lots of delays, people always complaining, and now the franchise will be terminated early because of overbidding!    Branson is an idiot who doesn't like it when he can't get his own way, if it was any other franchise run by Arriva or First, they would be banned from bidding for franchises, yet Virgin/Stagecoach still carry on!

[1st fan]

A friend who works in the industry said at the time that the government was doing a better job than the private sector. Offering the ECML^▸ (East Coast Main Line) up for bidding again was dumb and that it'd just end in tears like National Express. I was sceptical at the time but it looks like he was right.