Franchise flashpoint puts DfT under pressure

How many times have you heard the warning ‘buyer beware’ or been cautioned ‘if a deal looks to good to be true, then it is too good to be true’.
I’m finding it hard to escape either as I think about the deal the Department for Transport signed with Stagecoach for Virgin Trains East Coast. Not only did it promise huge sums for the government – £3.3 billion – but it also relied on network improvements that Network Rail had not committed to delivering.
The warnings apply to both sides. I daresay Stagecoach and 10% minority partner Virgin protected themselves against NR but I’m left wondering how thoroughly the Department for Transport checked the deal. It must surely have known that its subsidiary’s enhancement plans were in turmoil amid missed deadlines and rising costs? Surely it knew that enhancements the deal assumed were happening had no delivery dates?
Much of the heat around Chris Grayling’s decision as transport secretary to cut the final three years of VTEC’s deal has surrounded the money the government will now not receive. No surprise, given that the lost money is nearly half the total VTEC promised. Shine a light into this murky story and I think other factors become visible.
Yes, Stagecoach can saunter away from a deal that wasn’t working for the company but I think it’s more relevant to see this as a deal that DfT could not enforce. Had it been able to then Stagecoach could only have escaped by handing the keys back and suffering the loss of reputation that struck National Express in 2009 when it walked away.
It would have been much harder for Stagecoach to then say it planned to throw its hat back into the ring to bid for DfT’s new-look, integrated, track-and-train East Coast Partnership.
Perhaps Stagecoach’s bid was so far ahead of others in terms of the premium it offered that DfT could not ignore it. Very likely, but don’t forget that DfT sets the rules. Having set them, it couldn’t change them. Having encouraged bids including high premiums, it couldn’t change its mind. Stagecoach and Virgin had shown themselves to be litigious when they threatened legal action after they lost West Coast in favour of First in 2012. DfT reversed this decision and probably worried that if they didn’t award East Coast to the pair then m’learned friends would soon be involved.
DfT has since changed the rules. In the most recent franchise competition, for South West services from Waterloo, DfT placed a much higher emphasis on the quality of a bidder’s plans, such that a better plan can win over a higher premium. That’s what apparently happened when First and MTR beat Stagecoach.
What of other deals signed by DfT around the same time as East Coast? Arriva won Northern and First won TransPennine Express with both starting a year after Stagecoach took over East Coast. Lord Adonis took to Twitter to suggest that First was talking to its lawyers amid talk that TPE was losing money. RMT repeated them as it took full advantage of the DfT’s crisis – although I can’t see that a government crisis is a good reason for nationalisation.
First certainly put together an ambitious bid for TPE. It sees rising premium payments, such that it will be paying DfT £179 million in its final year. Whatever it’s thinking behind the scenes, in public First is saying it’s not called in lawyers but does admit that passenger numbers are behind projections. At this point, regular peak passengers might be wondering where any more people could be carried.
However, TPE expects its growth to come from bringing new fleets into service with more coaches and more seats. Filling these extra seats will be key to First making the figures work. Given how busy today’s trains are and how busy the M62 is, filling them shouldn’t be impossible. There’s demand the railway can’t yet satisfy.
First’s test will come in a few years when it has its extra trains. Until then, it’s wise to concentrate on delivering its franchise.
Northern has its own new fleets on the way and will need to fill the extra seats that result. It also has problems because it’s embroiled in a bitter dispute with the RMT about how it plans to deploy staff. Not that it’s revealed much about these plans, nearly two years after it took over. Under its relatively new MD, David Brown, it needs to be much more open. It will not convince people by keeping quiet.
At DfT’s behest, it must introduce driver-only trains. DfT specified that from 2020 at least half of Northern’s passenger mileage should run without the need for a second member of staff on board. I hear but don’t yet have concrete proof that Arriva bid on the basis of a much higher proportion of driver-only trains. It can’t blame DfT for this.
The RMT portrays its DOO battle as political. This raises an interesting question for Grayling: Does he want to be beaten by a left-wing trade union? If he doesn’t, then he may well have to help Northern. But if he has to help, then he’ll be admitting that franchising has some glaring flaws.
Chief of them is that franchising appears to be a one-way deal. Doubtless, there are bidders, even winners, that carefully examine what DfT wants, carefully consider how to deliver this and bid accordingly. There are also bids that go gung-ho to win at any price. They can get away with this because the DfT usually changes its mind once a franchise in underway. Change invites renegotiation and renegotiation changes premiums and lets foolish franchisees off the hook. Once again, I can’t see that nationalisation will help solve the problems DfT causes when it changes its mind.
Now it seems that Grayling is to throw all the pieces into the air with future deals based on joint working with Network Rail. This will be interesting because I can’t help thinking that NR interprets the phrase ‘joint working’ as ‘our way’. I can see sparks flying when this buts against the commercial world.
I’d be more convinced if DfT could point to any successful alliances between NR and train operators. There was one for South West Trains but it collapsed amid financial arguments. With NR now under even tighter government financial control, and subject to annual spending limits, there will be even more scrutiny and less room to manoeuvre. Any hint that NR’s public money has crossed internal walls within an alliance to train operators will be frowned upon.
Grayling’s rail strategy points to Scotland as the example of alliancing success. Here ScotRail has just introduced electric trains to its main Edinburgh-Glasgow route but it had missed two deadlines already after NR failed to complete electrification on time. These electric trains are very welcome although ScotRail is temporarily using Class 380s in place of Class 385s which have not arrived soon enough.
Performance is improving but has a way to go to reach its target for the end of the year. For all this, Scotland is more likely to make an alliance work than is an East Coast Partnership. That’s simply because the geography is simpler. Only two lines cross the boundary and its funding and network specification are set locally by Scottish ministers. ECP will have complex boundaries and the East Coast TOC will be a minority operator along many sections of the route.
That’s not to say the idea won’t work but it will be complex and difficult. What sounds great in Whitehall may yet translate into a headache for those trying to run the railway. I’d even hazard a guess that Stagecoach will see its VTEC franchise extended beyond 2020 as DfT struggles to turn Grayling’s idea into a workable invitation to tender. Not least because it has plenty of other franchise competitions in the queue and they keep slipping right.

This article first appeared in RAIL 842, published on December 20 2017. Postscript: Stagecoach lost its East Coast franchise later in 2018 when government nationalised East Coast.

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Philip Haigh

Freelance railway writer, former deputy editor at RAIL magazine - news, views and analysis of today's railway.

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