HS2

12.09.18

East Coast fiasco: MPs decide who is to blame for ‘overoptimistic’ franchise

Virgin, Stagecoach and the DfT all share blame for the quick failure of the East Coast franchise earlier this year – with the first two drafting up a financially risky bid with very little resilience, and the latter setting unrealistic benchmarks in the ITT document and encouraging overbidding.

These are the findings of MPs in the Transport Committee, which today set out the conclusion of its investigation into the service’s collapse – the third time in just over a decade this has happened, and yet another blemish in the franchise’s troubled history.

MPs accepted that the Virgin Trains East Coast (VTEC) franchise had successful day-to-day operations, reflected in the high rates of passenger satisfaction which ranked it amongst the top-performing TOCs in the country.

But the operating surplus generated was not enough to fully cover the premium obligations it contractually had with the DfT. To cover revenue shortfalls, VTEC had to forego the £165m parent company guarantee it committed to the DfT when the deal was let; by the end of January this year, the last parent company support was drawn down and the franchise went into “technical default.”

VTEC’s role: prime responsibility

“The latest ICEC franchise therefore failed because the revenue projections underpinning the VTEC bid were over-optimistic and it simply ran out of money,” the report said. “Revenue fell short of expectations from day one and passenger growth that was anticipated never materialised.”

The committee argued that franchises should be able to withstand normal fluctuations in the economic cycle; the fact that VTEC didn’t is indicative of the fact that Virgin and Stagecoach built very little resilience into their bid, with “wholly inadequate” assessment of risk.

“This was naïve, and it should have been more aware of the financial risks involved, particularly given the history of this franchise and Stagecoach and Virgin’s long history of bidding for and running franchises in this country. We conclude that Stagecoach and Virgin bear prime responsibility for the failure of this franchise,” the report stated.

The DfT’s role: complicit

The department must also take responsibility for the fiasco, MPs said: it encouraged overbidding by setting unrealistic benchmarks in the ITT document, and the bid process itself “lacked the necessary boundaries to temper overoptimistic bidding.”

In stark contrast to what was said during the inquiry, the DfT’s financial stress-testing of the bids was not robust enough, the report said, adding: “If the DfT had conducted appropriate due diligence and identified weaknesses in the assumptions underpinning the bid, it may not have been in this position today.”

The committee’s chair, Lilian Greenwood MP, commented further: “The secretary of state pointed the finger at Stagecoach and Virgin for getting their bids wrong, but the department is not blameless.

“Following the failure of the East Coast line, there is talk that the prime minister has ordered a major review of rail franchising—we await more details. However, if this or any other future partnership arrangement is truly going to deliver a step-change in performance for the passenger, more fundamental reform of our railways is required.”

165 Chris Grayling c. Dominic Lipinski, PA Wire

Network Rail’s role: in the clear

In contrast to what Sir Richard Branson claimed, the Transport Committee determined that Network Rail does not actually bear any responsibility for the franchise failure.

To date, the organisation has provided all of the infrastructure upgrades that it had formally committed to when the franchise was let, the report argued. Other upgrades were assumed to occur by the DfT and VTEC in order to deliver an enhanced 2019 timetable, but there was no formal funding commitment to this.

“While Network Rail’s performance in managing the ECML had not been up to standard, and this clearly undermined franchise performance, it was not on a scale that led to VTEC defaulting on their contract,” MPs commented.

East Coast Partnership

Regarding the East Coast Partnership – what Chris Grayling has called “the first of the new generation of long-term regional partnerships bringing together the operation of track and train” – the committee said plans are unlikely to deliver everything the DfT is expecting.

“Even now, there is no concrete plan, nor timescales, for the interim operator of this franchise,” explained Greenwood. “From our inquiry, we cannot be sure, and cannot reassure passengers or public, that the arrangements for the East Coast Partnership will more successfully overcome the systemic difficulties presented by the current set-up.”

While greater joint-working and clearer lines of accountability does have the potential to improve services, the mechanics and complexity of the current financial and regulatory environment “has meant that all previous attempts to establish deep alliances have not worked.”

“This proposal also risks adding an additional layer of complexity to this part of the network. Passengers will ultimately bear the risk if this proposal goes wrong,” the report concluded.

Organisations react

In response to the report, a Stagecoach Group spokesman said the company has operated railways on behalf of the government for more than 20 years using the same “bold, ambitious and meticulous approach which delivered strong success in the past.”

“As the committee makes absolutely clear, there was no incentive to deliberately overbid and there was no taxpayer bailout in the unfortunate premature end to the contract,” he noted.

“Most importantly, we are pleased the committee has supported our positive suggestions to reform franchising, including more appropriate risk-sharing, making the system more accountable and robust, and ensuring that the customers and communities who rely on the railway see promised infrastructure and service improvements in full and on time.”

A DfT spokesperson added that the department has introduced new measures to deter overbidding and improved its financial modelling and stress-testing. “Bids are now assessed with a greater emphasis on overall value for the passenger,” they continued.

Anthony Smith, chief executive of Transport Focus, told media that having more stability in the underlying East Coast contract between government and the train company will help achieve the things that matter most to passengers: the quality of services and the day-to-day performance, "whether it is punctuality, value for money, the cleanliness of the train or levels of crowding.”

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