Posted 29th January 2018 | 8 Comments

Probe launched into early scrapping of East Coast

THE official spending watchdog has launched a probe into the circumstances behind the decision to allow the Virgin Trains East Coast franchise to end three years early, after its major shareholder Stagecoach Group admitted that the £3.3 billion bid had been too high.

Transport secretary Chris Grayling revealed that the present franchise will be replaced by an 'East Coast Partnership' with a single management during a speech at the end of November,

The news sparked a controversy over the potential cost to taxpayers, which former transport secretary Lord Adonis claimed could be 'billions'. While he had been in office under the last Labour government he had nationalised the Intercity East Coast franchise in November 2009, after the last private sector operator National Express Group had also admitted defeat on the route.

Transport secretary Chris Grayling has disagreed with his Labour Party predecessor, saying: "Lord Adonis is not involved in this. He's got his facts wrong."

Stagecoach and its minority partner Virgin Trains had undertaken to pay £2.3 billion in premiums at 2015 values between then and 2023, equivalent to £3.3 billion when allowing for inflation.

Stagecoach chief executive Martin Griffiths alleged that the East Coast business had been affected by delays in upgrading infrastructure, while Virgin founder Sir Richard Branson said the early exit would cost the two companies £100 million. Plans to introduce Intercity Expresses on East Coast may also now be put back.

The National Audit Office will now investigate the details of the DfT's decision. It said: "We expect to examine the Department’s management of the franchise to date and the implications of its plans for the new ‘Partnership’."

The DfT meanwhile, has denied the claims by Lord Adonis and others that the early termination amounts to a 'bailout'.

It 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."

Reader Comments:

Views expressed in submitted comments are that of the author, and not necessarily shared by Railnews.

  • Andrew Gwilt, Basildon Essex

    Or why not let Jeremy Corbyn take over the EC franchise. I think he’ll do a fabulous job.

  • Tony Pearce, READING

    I think that a more serious problem is that the period of continuous growth in Passengers is over, and no amount of 'special offers' will get any more.
    [No. Far too soon to know. The number of season ticket holders did indeed drop in Q1 and Q2, but that could be attributed to Southern's problems and London Bridge. The number of other types of tickets bought has continued to rise. We will need at a full year (at least) of 'normal' services before the real nature of the trend becomes apparent. Interestingly, Q1 showed the main fall, and the reduction rate had almost trailed off in Q2 (0.4%). For more, see Hot Topic in the February edition of Railnews, published tomorrow.--Editor.]

  • Melvyn Windebank, Canvey Island, Essex

    While it seems Virgin is getting an extension to its WCML franchise !

    You couldn't make it up , well unless your Chris Grayling

  • cheamcharmer2@gmail.com, surrey

    Yet another example of the privatised railway gravy train hitting the buffers!
    Branson and Souter must be laughing all the way to the bank

  • Chris Jones-Bridger, Buckley

    History shows that the East Coast Main Line inter city service developed through a process of incremental infrastructure enhancements combined with the introduction of progressive generations of rolling stock until full electrification was achieved. When the route was privatised it included some of the highest yielding services in the BR Inter City portfolio. Under the franchise model the DfT has been compliant with encouraging successive private operators to sweat the preexisting assets in return for the promise of high premium payments. Perhaps now the point has been reached where this model is shown to be flawed & unsustainable?

    Hopefully the report from the latest inquiry will highlight & underline the cost of a fragmented railway where infrastructure investment & operator aspiration have not been aligned? While the DtT & Treasury have been happy to retain the premiums at what cost has this been in terms of running franchise competitions & re letting the business? A cost burden the industry can ill afford to carry & adding no value to the travelling public as well as poor value to the taxpayer.

    While operators have come & gone many promised enhancements still remain unfulfilled. GNER, National Express & Virgin/Stagecoach have all promised expansion beyond the core ECML routes .Irrespective of operator the introduction of the IEP fleet should allow a generational change in operation. However will the service enhancement proposed by Virgin/Stagecoach survive the latest hiatus?

  • Tony Pearce, READING

    Nice to know that the Taxpayer is Quids in with the private firms running the franchise. However there is no point bankrupting a Firm who seems to have made a Big Mistake. They seem to be £100 Million down already so they are not getting any fat profits. Having been in Business I always worked out what I thought something would really cost and then add on 10% for profit. A job wouldn't be done properly unless there was something in it for Firm. Cut their profit margin too much and they cut corners. Not working out the true cost before they started meant you often were over-charged.

  • david c smith, Bletchley

    To me, it seems yet another instance of the slow "coming apart" of the passenger rail franchising model.
    Do we need to apply a uniform "one size fits all"model to the considerable diversity of operations ?
    On a privatised railway, shouldn't we be looking to exploit its inherent strengths, rather than trying to suppress them ?
    Shouldn't accountability be acheived as directly and as close to customers and taxpayers as feasible, rather than via Whitehall / Westminster ?

  • Chris Neville-Smith, Durham

    Okay, I've tried doing the number-crunching here and got stuck.

    In the final year of East Coast (2014-2015), it paid 267m to the Government. The last available year of VTEC (2016-2017) has a payment of 272m, No surprise there, it's almost the same service (apart from a few Newcastle services being extended to Edinburgh), you'd expect the figure to be about the same.

    Multiply 272m over 8 years and you get 2.17 bn, not far off the 2.3bn at 2015 prices. One would think the shortfall would be covered by the increased business once Azumas are introduced.

    But - hang on, where does this 3.3 bn allowing for inflation come from? That's a hike for 43% over 8 years. That's way more than you'd expect from inflation alone. Am I missing something here?

    (And just to check: we're not mixing up inflation allowance and present value here, are we?)

    [The 2.3bn is npv. The formula used by the DfT includes inflation but also other Treasury-approved factors, which get complicated to boil down in a few words. To quote from a typical DfT document: "We used a factor of 1.61 to uprate the price and discount base year from 2002 to 2010, to ensure comparability with analysis in other government departments." Or, to put it another way, net present value is determined by calculating the costs (negative cash flows) and benefits (positive cash flows) for each period of an investment. Simple!--Editor.]