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17.07.18

DfT said East Coast bid was ‘low-risk’ despite very ambitious growth targets

Stagecoach and Virgin’s original bid for the failed Intercity East Coast franchise was “ambitious” and not fully believed by the DfT to succeed, MPs have been told.

Speaking to the Commons Transport Select Committee yesterday, Stagecoach chief executive Martin Griffiths said his organisation and Virgin put together a plan aimed at providing passengers with a transformation of the East Coast Main Line (ECML), but spoke of “disappointment and regret” that the franchise was forced to go under government control.

“It’s disappointing that the franchise terminated early— we put together an ambitious plan. It was ambitious. It was about transformation for the ECML driven by more passengers and more revenue,” he explained.

“Clearly it’s disappointing, and we regret that the passenger numbers that we forecast haven’t materialised. We used the best economic indicators that were available to us at the time.”

Griffiths noted there has been a “whole series” of factors that have come together since the bid, which was expected to create over £3bn in revenue over the eight-year contract that began in March 2015. But he said that there was “no incentive at all to overbid” for the contract from Virgin and Stagecoach as it was based on a number of assumptions aimed to drive the premium.

Committee chair Lilian Greenwood hit back: “It almost sounds like you don’t accept any responsibility for what the outcome was.

“You were responsible for meeting the revenue and the passenger growth. That’s why it’s in the public sector.”

But the Stagecoach CEO went on: “The premium that was offered was an important part. There is no incentive to overbid. The reputational and financial damage has been very, very significant. On this contract alone Stagecoach lost £200m, which is a fifth of current market capitalisation.”

In the same inquiry, which took place yesterday, Simon Smith, the DfT’s director for policy, operations and change, told the Transport Committee: “We thought Virgin Stagecoach’s bid was quite ambitious at the time we received it. We expected at the time that we evaluated their bid that revenue would be lower than they forecast.

“They had attributed quite ambitious growth to certain initiatives including things like their marketing and pricing strategy, and so on. We thought they would get some of that, but we didn’t think they would get all of that.”

Yet Griffiths claimed that the government felt that the bid from the two transport giants was “one of the best they had seen, and a financially low-risk decision.”

Polly Payne, the DfT’s director general of rail group, said: “We want ambitious bids because they maximise the revenue we get for the taxpayer, but we also want to ensure that if things don’t work out as we and the franchisee hope, then we make sure both passengers and taxpayers are looked after.” 

Since its collapse earlier this year, the East Coast franchise has been taken over by the London North Eastern Railway, albeit running under the same staff as before. Major progress has also been made on the ECML for its introduction of the new InterCity Express Program

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