DfT to run East Coast rail despite inconclusive civil service report on nationalisation

Government will launch new London North Eastern Railway brand to run services after financial failure of operator Virgin-Stagecoach

Virgin East Coast train Photo: PA

By Richard Johnstone

17 May 2018

Transport secretary Chris Grayling has decided to nationalise rail services on the East Coast mainline in response to the current Virgin Trains East Cast franchise not being able to meet their financial commitments.

The move to nationalise the route comes after civil servants completed a review of two options for the future of the line – allowing the current franchisee, a joint venture between Virgin Group and transport giant Stagecoach – to continue operating on a not-for-profit basis until 2020, or for the Department for Transport to take over operations.

After analysing the two options based on three priorities – protecting passenger interests, ensuring value for money for taxpayers and supporting investment and improvement in the railway – officials concluded “neither option was obviously superior”, Grayling told MPs.

However, he had taken the decision to nationalise the line to ensure a smooth transition to the new partnership arrangement between franchise operators and state-owned infrastructure firm Network Rail in 2020. This partnership is intended to improve efficiency by allowing infrastructure and train operators to work closer together.

“Given the finely balanced judgement, I have taken into account broader considerations and decided to use the current difficulties to drive our long-term plans for the East Coast Partnership,” Grayling told MPs. “I have decided to begin the transition process towards creating the new partnership now. This will be in the long-term interests of passengers – as every member of staff on the railway will be solely focused on delivering an excellent service for the future.

“I am therefore informing the House that I will terminate Virgin Trains East Coast’s contract on 24 June 2018.”

VTEC had pledged to pay £3.3bn to run the franchise until 2023 and although it had made all its payments to date, Grayling said the franchise, a joint venture between Virgin Group and transport giant Stagecoach had got their bid wrong and they are now paying a price. They will have lost nearly £200 million meeting their contracted commitments, he said, but could not continue on the line.

The services will be taken over by the DfT’s Directly Operated Railways and badged London North Eastern Railway (LNER) – reviving an iconic rail brand that Grayling said would continue once the partnership is in place. DOR was previously in charge of the line from November 2009 to February 2015, taking over the service because the previous private operator, National Express, had been unable to meet its financial payments to the government.

The DfT report concluded that both allowing the current operator to continue on a not for profit basis or renationalising the services were “likely to offer comparable value for money”.

The review highlighted that renationalising the services through DOR could provide around £13m in premium payments to the department than a short contract with VTEC, this could actually become £19m less for the taxpayer once possible revenue loss from the disappearance of an established brand is taken into account.

However, the overall conclusion was that “the differences identified between the two options in relation to the monetised factors do not clearly favour either option.

“These are relatively small differences compared to the wider business, and are sensitive to assumptions,” the report by DfT officials stated. “The non-monetised factors considered in this assessment could affect value and outcomes for passengers more significantly than the monetised factors, however, the range of factors taken into account are broadly balanced, and there is therefore no conclusive argument that either option is likely to deliver better value for taxpayers.”

Grayling said “the lessons of the financial failure of the East Coast Mainline are already being learnt”, and the DfT would “the lessons of the financial failure of the East Coast Mainline are already being learnt”.

However, he said that official advice was that both Virgin Holdings and Stagecoach continue to meet the DfT’s “fit and proper” requirements for an operator.

“A multi-disciplinary panel has considered the situation and recommended that both companies continue as train operators. They have advised that there is also no suggestion of either malpractice or malicious intent in what has happened,” he said.

“I have been advised that it would not be reasonable to remove or place conditions on their passport [to operate]. This decision is however provisional and will be subject to further to review at the point the Virgin Trains East Coast contract is terminated.”

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