Branson heaps major criticism on NR for end of East Coast franchise

Sir Richard Branson has hit out at Network Rail after the decision to end the Virgin Trains East Coast franchise in 2020 was heavily criticised, with some commentators referring to it as a ‘bailout.’

The Virgin founder said ending the franchise early was a “pragmatic solution” after Network Rail allegedly failed to live up to major promises it had made on infrastructure improvements.

Transport secretary Chris Grayling has come under heavy scrutiny since the decision in December to bring forward the renewal date of East Coast by three years, with critics calling the move a ‘bailout’ because the £3.3bn total that the operator had pledged to give to the government over the entire term would be cut short.

Branson confirmed that the figure was correct, but said that the move was not bringing benefits to either Stagecoach – which owns 90% of the JV – or Virgin. In fact, he claimed that the two parties would be losing more than £100m and had received no dividends.

But the decision to “swallow those losses and simply walk away from the franchise as others have done before” would be wrong, the Virgin boss claimed, and would cause an “abrupt halt to the investment and improvements which are flowing into East Coast.”

Writing about the original franchise bid and alleged upgrade delays, he argued: “That bid was based on a number of key assumptions and a promise of a huge upgrade of the infrastructure by Network Rail that would have improved the reliability of the track and allowed us to run more trains and carry many more passengers than we do today.

“The considerable delays to this upgrade, to new trains, as well as poor track reliability will cost us significant lost revenue (amounting to hundreds of millions of pounds) and torpedoed the assumptions of our original bid.

“As the facts became clear about these issues – (as well as a drop in Britain’s GDP growth) - a discussion with government had to take place and a pragmatic solution was needed to keep delivering improvements and investment in the line.”

Meg Hillier, head of the Public Accounts Committee, said last month that she would be looking into the decision and would potentially bring Grayling and the DfT under investigation for the unusual move.

When a new operator is chosen for the service in 2020, it is expected to run under the public-private ‘East Coast Partnership’ likely to be similar to the model announced for the next South Eastern franchise.

The decision is the first major development on news from June this year that Stagecoach had taken an 80% hit to its profits because of its troublesome dealings with the franchise.

Top image: David Davies

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Frankh   05/01/2018 at 15:53

Pragmatic - "dealing with things sensibly and realistically in a way that is based on practical rather than theoretical considerations". If the next ECML franchise is bid upon in that way it may run it's course. Bid on what there is now, with incremental increases in premiums depending on when improvements are made.

Samir   05/01/2018 at 16:04

Branson has made a fortune from his offshoring of rail industry profits, so any paper losses here are easy to swallow. He doesn't 'invest', he takes over a franchise and takes a percentage of the government and users subsidy, it is a guaranteed handout. The sooner the rail industry is in government hands and we aren't paying a 10% premium for private companies and executives the better

Jerry Alderson   05/01/2018 at 16:48

I am interested in understanding the basis of the "10% premium" that Samir refers to. The 3% of TOC revenue is bandied about by the RDG a lot. I assume Samir is referring to the supposed £1.2 billion additional annual costs of 'privatisation' (actually, fragmentation leading to duplication and costly interfaces inflates costs more than anything) calculated in a report (commissioned by extremely biased organisations - but most reports are). Interesting how management salaries are fair game but paying salaries to other grades (e.g. train drivers) that are well above what is needed to recruit and retain (the approach used in most industries to set salaries) is never included in such costs. That report, like most, add on as many costs as they can think of but never seem to deduct savings. All dividends are assumed to leave the industry and end up in the pockets of fat cats who drink campaign and eat caviar, rather than invest in the industry (or related industries, such as buses).

Jerry Alderson   05/01/2018 at 16:51

Sorry: c/campaign/champagne/.

Neil Palmer   05/01/2018 at 17:18

Samir - are you sure your real name isn't Mick Cash? You seem to be echoing the same sort of nonsense he spouts. And where did you pull that 10% premium out of? TOC's are lucky to earn 3%. Jerry makes much more sense.

Richard   05/01/2018 at 17:21

This is just rich coming from one of the biggest Spivs in Industry who has managed to create this illusion of being an entrepreneur and progressive Business Manager! His successes have mainly come from spotting areas of potential profit and mis-management elsewhere which admittedly he is good at. He spotted the delusional Dft/Railtrack mishandling of WCML Upgrade so got his bids in and raked in when it all collapsed. Similar strategy now with ECML. As Frankh puts it, bids should be based on realism not dreams, especially when taxpayers money is behind the whole exercise. I must also take issue with Jerry Alderson (unusually as normally I find his Posts very informed) but I cannot honestly identify any savings from Privatisation? The duplication and massive additional layers of staff, added to a total weakness in Union containment has devalued the whole exercise in my view. But can you blame Unions for taking advantage of weak and beligerent Management at many levels? A Contractual Railway has much to answer for.

Huguenot   05/01/2018 at 17:46

Oh dear -- a bit too much venom, I fear. R Branson is right that many of the promised NR upgrades haven't happened and that the successful bid assumed that they would, but then VTEC should have got round the table with the DfT and NR and negotiated a reduction in the premium rather than be allowed to walk away. That way the taxpayer would still have got something, even if not as much as originally expected.

Jimbo   05/01/2018 at 18:42

Samir - If you read the article, you will see that Stagecoach & Virgin are losing £100m on this franchise, not making 10% profit. A lucky TOC will make 3% which is a pitiful return on investment, and many make less than that. Franchising is not the cash cow that the unions like to pretend which is why private companies are refusing to bid anymore. The DfT encouraged bidders to bid for ECML on the basis of the promised improvements, so when those improvements don't happen, the TOC is rightly a bit peeved. Rather than bailing out the TOC, this sounds more like giving them something to stop them taking the DfT & NR to court for breach of contract. By doing it this way, the DfT are avoiding a hugely embarrassing exposure of how inept they are.

Lutz   06/01/2018 at 12:40

What are the specific infrastructure improvements that are referred to? Should a well managed company have relied on assumptions, or should they have sort out a binding contract of the delivery of those infrastructure improvements as pre-requisite to the higher payments for the franchise? Lessons to be learnt by all TOCs?

Sonning Cutting   06/01/2018 at 15:45

Well said Jimbo. Exactly as I understand the situation. The inept DFT are no doubt relieved not to have this issue dragging on through the Courts for ages. The sooner there is a clean sweep of Grayling and all his idealogues the better!

Andrew Gwilt   08/01/2018 at 01:08

I guarantee that First Group could take over the East Coast franchise if Virgin/Stagecoach Group were to lose the EC franchise. Aswell losing the West Coast franchise to rival bidders.

Pete   08/01/2018 at 08:52

It's a bit rich for Sir Richard to say Stagecoach and Virgin won't be gaining from this and that they're losing money - I don't think anyone is contesting that. The problem is that in letting VTEC end early, the government is basically saving Stagecoach and Virgin from even greater losses they would have incurred after 2020, when the bulk of the £3.3bn was due. It doesn’t say much for privatisation – isn’t it feted as transferring operational risk to the private sector…? It’s no wonder we now have seemingly every foreign and state-owned operator bidding for rail franchises, it’s basically turned into a zero risk game in which If they’re successful they pocket profits and if they’re not they just hand the keys back early before paying any significant money to the government.

Pedr Jarvis   08/01/2018 at 17:38

There are still a few small statutory railway companies in business running their own trains on their own tracks. Dangerous to extrapolate from their experience, which is that they can pay their way on the revenue accounts, but need outside capital for new works. For some schemes, the EU put in 50%; they raised the rest themselves. Now we are leaving the EU, there won't be any more capital from that source.

Frankh   08/01/2018 at 22:28

VTEC were going to increase service levels. With some of the proposed track upgrades now not happening which the increases were based upon are there going to be IEP's to spare.

Martin   08/01/2018 at 22:54

Andrew; 'guarantee' is rather a strong word to use about the success of a hypothetical bidder for a franchise; similarly, in a comment on the recently started Preston-Blackpool electrification project, I'm not sure how you can personally 'guarantee' its completion date.

Frankh   09/01/2018 at 07:02

The Preston - Blackpool project has no excuses for being late. No trains are running for the duration of the works. The poor passengers have bus substitution, one highlight for them is the buses run on days northern staff are on strike.

Paul   09/01/2018 at 08:35

It all too easy to blame NR for your failings, you inherited a aging stock and have failed to keep them reliable and seem to have focused on the new Azuma trains has the next step forward but that is the end of 2018. Train failures, passenger dissatisfaction, high prices are the main reasons, you need to look closer to home to see what went wrong.

Pete   09/01/2018 at 09:11

Absolutely Paul, the typical blame game where it’s always someone else’s fault. Unfortunately the current franchising system means every party can justifiably blame another sufficiently that no one is ultimately held accountable for something that will cost taxpayers dearly. Here everyone is partly to blame: VTEC for a wildly optimistic bid, Network Rail for not actually upgrading infrastructure and the government for propping up a failed system purely on ideological grounds. What betting that under this ridiculous system Stagecoach will be awarded the East Coast Partnership in 2020 with a massive bid…

Frankh   09/01/2018 at 15:04

VTEC have refurbished the HST engines, alternators and cooler groups so Paul you can't say they haven't tried.

Tony   09/01/2018 at 18:02

I much prefer the refurbished HSTs as the seats are much more comfortable than those in the new IEPs. I am sure there is going to be lots of complaints from customers when the Azuma stock is introduced. I just wonder if Hitachi did a customer survey/trial before they designed the new seats.

Jerry Alderson   09/01/2018 at 20:30

Richard wrote " I must also take issue with Jerry Alderson (unusually as normally I find his Posts very informed) but I cannot honestly identify any savings from Privatisation?" Thanks for the compliment, Richard. I'm not attempting to quantify savings that elements of privatisation have brought - and I'm not suggesting that that the savings outweigh the costs - but there are quite a few examples. Two key savings are consolidation and alternative remuneration. BR employees didn't own shares and therefore didn't get dividends. If someone gets share options or dividends they may be willing to accept a lower salary. It's not laughable - I've certainly joined a company partly because of share options. Management grades generally do not get paid overtime but profit sharing is one way of incentivising people to work harder and more hours. (One could argue that TOCs today have attracted talent that BR would never have been able to attract because of alternative remuneration, so that reflects a value-add as opposed to cost saving. I personally don't agree with this view, and I can't really name many in today's railway that are up to the quality of BRs Chris Green and Adrian Shooter, for example, both of whom I know.) Re: consolidation. Where a bus company runs a train franchise there is plenty of opportunity for consolidation, resource sharing (people and facilities). I made clear in my first post that fragmentation introduces costs. But the anti-privatisation report would have, for example, added the costs of 20 HR payroll departments versus one in BR Days, but not considered that four of those might ne shared with bus operations. The report chose gross increased costs not net increased costs. In cost comparisons one also has to be very careful where one takes the baseline. If one chose a baseline when Sealink was part of the BR group that might give a different comparisons to 1994, likewise with the introduction of Sectorisation, Many who propose re-nationalisation (and what they mean is a single monolithic organisation) seem to think that there would be perfect integration, and cost would plummet. Although fragmentation creates costs it can also removes levels of hierarchies, and therefore save compensatory costs. An organisation with 1,000 employees might have six levels of hierarchy, but companies with 250 may have only three or four. Going back to the 20 payroll departments. Outsourcing them to a specialist firm may be more efficient, given that they can focus on their core business. There is no rule that can be applied in all cases. But anyone who tries to claim that £1.2 billion can be saved (almost overnight - after one-off restructuring costs) by reintegrating an organisation needs to have their claims challenged. The world is not awash with magic wands.

Neil Palmer   10/01/2018 at 01:20

Paul, That’s rather an unfair accusation about aging stock and failing to keep them reliable. Not only have the HST locos been refurbished as Frankh mentions, but VTEC have also refurbished the interiors of their coaches (which were rather tatty after DOR/East Coast finished with them, because their so called profit was simply a result of not investing anything back into the business but merely returning all the case back the their owners – government). Also the only reason VTEC is getting their overpriced Azuma (alias IEP) trains is because the government dictated that, after DfT spent nigh on a decade procuring them, at WAY more cost than if they’d kept their inexperienced noses out of it and left it to the private sector, who could have done it far cheaper and quicker.

Pete   10/01/2018 at 08:15

Interesting Tony. I must admit the seats on the IEPs look like the sort of lightweight slim line seats we’re seeing being rolled out by airlines in economy, that aren’t very comfortable at all for long journeys. The Azuma certainly has a lot to live up to replacing the comfortable 225s and HSTs.

Jak Jaye   10/01/2018 at 11:52

So the bearded one and Souter could lose 100m,im distraught! and as for the promised infrastructure improvements he mentions,what part of that were Vermin East Coast going to contribute seeing as they dont own anything not even the rubbish IEPs coming on stream. And as for the comment about seats,take a trip on a rancid TL Class 700!

AJ   14/01/2018 at 14:14

This from a bloke who sues the NHS diverting funds from patient care. Branson will do ok out of this no matter what.

Tom Gupta   23/01/2018 at 17:43

Virgin Trains East Coast (which, ironically, 90% owned by Stagecoach) has ordered almost 500 coaches from the Hitachi Intercity Project for use on the ECML. Its not the rail company's fault if the new trains are behind schedule. Additionally there are several points on the ECML which are 'pinch points' such as Newark Flat Crossing or various sections of double track between London and Peterborough. A rail company will typically have a 3% profit margin. So for every pound you spend the railway company will end up with 3p. I think about 48% of the TOC's revenue goes to NR, and most rail companies lease their rolling stock - this accounts for about 11% of their revenue. Additionally improvements, especially major upgrades, can take years to carry out. Virgin stated that they want to run more trains. But its not as simple as snapping your fingers, waving the flag and running more trains by the next timetable change...especially if the correct standard of infrastructure, trains and pathing slots aren't avalaible!

Christopher Burton   29/01/2018 at 16:35

In all of this never forget that one of the prime duties of the DfT Permanent Private Secretary (any PPS in fact), as far is possible, is to keep troublesome things away from the Ministers desk, even when the department is largely responsible for the 'trouble'. And to call Branson "a spiv" is childish as as well as offensive. Both Roger Ford and Nigel Harris have published truly entlightening tracts on the 'real' sources of the VTEC problems, these being as objective as anyone might reasonably expect. I would add that Jerry Alderson is also spot on the button in his comments.

Cliff   30/01/2018 at 08:45

Virgin Trains East Coast has not ordered any coaches from Hitachi,they were ordered by the Government and allocated to the East Coast just like the ones were for the Great Western.Virgin had no say on the matter.They will just pay the rentals on them and will never own them!They were not in a position to say that they wanted to order new Mk5 coaches and a modern version of the proposed Class 93 electric to work them. When they quit the franchise the trains just pass to the next operator. Branson likes to give the impression that he has "invested" in these trains,just like the Pendolinos on the West Coast,which by the way are only rented too. The Pendolinos too will pass to the next operator of the West Coast franchise when Virgin are removed from that franchise too.

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