A Virgin East Coast train Photo PA
The Department for Transport bears some responsibility for the failure of the Virgin East Court rail franchise as officials set unrealistic benchmarks when putting the service out to tender and then insufficiently stress tested the bids, MPs have said.
The operator of the intercity rail line, a joint venture between Virgin Group and transport giant Stagecoach, was stripped of the franchise in June after passenger revenues fell below the level it had projected in its bid, leaving it unable to make the payments it had promised to the department. The line, which runs between cities including London, Newcastle, Edinburgh and Aberdeen, was taken over by the DfT’s operator of last resort service in June, marking the third franchise failure on the line since 2006.
In their report examining the failure of the franchise, which was let in 2014, MPs conclude that the Stagecoach-Virgin joint was primarily responsibility, as its bid had been naïve and left it unable to withstand normal economic fluctuations. This “suggests that there was very little resilience built into the bid by Stagecoach and Virgin and it bid for the franchise on very optimistic grounds”, according to the Intercity East Coast Franchise report.
However, the committee also said the DfT must bear responsibility for encouraged overbidding by setting “unrealistic benchmarks” in the initial invitation to tender and failing to include boundaries in the bid process that would keep the offers realistic.
In particular, the report criticised the decision to base the franchise tender on a timetable that included improvements that had never been confirmed by the government-owned infrastructure firm Network Rail to the timescale assumed, and the lack of single set of economic assumptions upon which bids could be based. This meant it was left to the bidders themselves to forecast wider macroeconomic eventualities.
Then, once the bids were submitted, the department failed to stress test the bids robustly enough, despite the committee concluding that “in any realistic scenario, the bid the department accepted could not be delivered”.
While it is up to bidders to do their due diligence, the committee said that it was “surprising” that the bid process was constructed in this way given the history of failure on this franchise from over-ambitious revenue projections.
Committee chair Lilian Greenwood said that “naivety, over-optimistic expectations and a mismanaged bid process” all played a role in the failure.
“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.”
Grayling has also announced a plan to develop a new arrangement on the East Coast line from 2020 where the rail operator works in closer partnership with Network Rail in order to improve efficiency.
The proposal has already been dubbed an Alice in Wonderland plan by former transport secretary Lord Adonis, and Greenwood said that “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”.
She also highlighted reports that the prime minister Theresa May had ordered a major review of rail franchising, adding: “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.”
Responding to the report, a DfT spokesperson said the committee’s report showed that Stagecoach had "overbid for this franchise and paid the price".
They added: "We also welcome their confirmation that losses were borne by the company, not passengers or taxpayers.
"We are now preparing for East Coast Partnership – bringing together the operation of track and train to deliver a high quality service to passengers and value for money for the taxpayer.
"We want train companies to have a greater role in infrastructure planning to help them act as stewards for the rail network and deliver the greatest possible benefits for passengers.”
They said the department had also introduced new measures to deter over-bidding for franchises and improved its financial modelling and stress testing. “Bids are now assessed with a greater emphasis on overall value for the passenger."
A Stagecoach spokesperson said: "As the committee makes absolutely clear, there was no incentive to deliberately overbid and there was no taxpayer bailout in the unfortunate premature end to the contract.
"Most importantly, we are pleased the committee has supported our positive suggestions to reform franchising, including more appropriate risk-sharing, making the system more accountable and robust, and ensuring that the customers and communities who rely on the railway see promised infrastructure and service improvements in full and on time."