The latest Intercity East Coast franchise failed because the
revenue projections underpinning the Virgin Trains East Coast
(VTEC) bid were over-optimistic and it simply ran out of money,
says the Transport Committee in a new Report: Intercity
East Coast Franchise, published today.
Despite the successful day-to-day operation of the route -
turning an operational profit and passenger satisfaction ratings
among the highest performing long-distance franchises on the
network - the joint venture between Stagecoach and Virgin was
unable to continue to meet its premium obligations to the
Department for Transport. The line went into technical default in
January 2018 and the contract was terminated in June after just
three years of operation. It was the third franchise failure
since 2006.
Had the Department for Transport conducted appropriate due
diligence and identified the weaknesses underpinning the bid, we
may not have been in this position today. The Committee’s inquiry
concludes that the setting of unrealistic benchmarks in the
Invitation to Tender encouraged overbidding; the bid process
lacked the necessary boundaries to discourage this; and the
financial stress-testing of the bids was not robust enough.
Therefore, the DfT must also take some responsibility for this
franchise failure.
Network Rail does not bear any responsibility for the early
termination of the franchise, says the Report. The Committee
found that the Department’s failure to provide Network Rail with
formal sign-off of the infrastructure assumptions for the route
would have undermined the franchise in future years. However, to
date, Network Rail have provided all the infrastructure upgrades
that it had formally committed to when this franchise was
let.
The Committee’s Report considers what went wrong with the
franchise; the interim operating arrangements; the East Coast
Partnership; and wider franchising issues. Based on the current
financial and regulatory framework, the Committee concludes that
the East Coast Partnership is unlikely to provide scope for the
step-change in performance that the Secretary of State might be
anticipating. Before experimenting with this Partnership, we
recommend the Secretary of State lay out in detail how the new
partnership will work and conduct a proper assessment of its
feasibility.
The Chair of the Transport Committee, MP, said:
“Franchises should be able to withstand normal fluctuations
in the economic cycle. Naivety, over-optimistic expectations and
a mismanaged bid process all played a role in the failure of this
franchise – the third in little over a decade.
“The Secretary of State pointed the finger at Stagecoach
and Virgin for getting their bids wrong, but the Department is
not blameless. Even now, there is no concrete plan, nor
timescales, for the interim operator of this franchise. 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.
“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.”
