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On Wednesday 10th October 2012, we discussed the latest franchise news sparking some facinating debate on the topic
On Wednesday 10th October, 12 - 2pm, we will be discussing the latest franchise news. This discussion will take place over on Twitter , with our resident expert Phil Marsh. If you would like to get involved, please do join us, and use the dedicated hashtag #railchat.
See below for a taster of what we will be discussing.
The Parliamentary Transport Select Committee (TSC) questioned the protagonists in the West Coast Main Line (WCML) Franchise debacle on September 10. The new Transport Secretary was similarly quizzed 48 hours later.
Rail.co.uk has scrutinised these proceedings and the following report reflects what was said, by who and the implications.
The Virgin team was headed up by Sir Richard Branson, Chairman, Virgin Group Ltd and accompanied by Tony Collins, Chief Executive Officer, Virgin Rail Group Ltd, Martin Griffiths, Co-Chair, Virgin Rail Group Ltd and Graham Leech, Commercial Director, Virgin Rail Group Ltd;
The TSC called in the two rival bidders following the media debate about the award and allegations made by Virgin about the process the Government had followed in making the contract award.
The Hearing was to give MPs the chance to ask the rivals questions and the bidders to explain their comments made in the media. The responses would be debated in Parliament before the contract was signed.
Sir Richard Branson said that Virgin believes the decision would be bad for passengers on the WCML and the UK, a successful WCML franchise was vital for the UK.
He wanted the Department for Transport (DfT) to change the franchise rules as the current franchise system was flawed and the DfT did not follow their own rules. Virgin wants the current rules for franchising reviewed and the WCML franchise award delayed until the review is completed.
Virgin said that the award is a fiasco and is no more than a sticking plaster. The TSC Chair said that these were very serious allegation made by Sir Richard about the DfT.
Sir Richard said that the bid was based on the current rules and we believe the DfT did not follow these rules and that is why we went to Court for a review of the process. Virgin’s Tony Collins said that it was about the DfT have not followed or applied their own rules correctly in this instance.
The DfT evaluates the bids and risk-adjusts them and subjects them to a formula to calculate an amount of ‘risk capital’ required as a bond in case of default. VT believes that the formula was not applied correctly and the size of the bond is too low at £200m. It should be three times larger.
Sir Richard said that FG could make maybe £600m profit before defaulting forfeiting the low bond leaving a big net profit leaving the risk with the taxpayer.
Virgin said that physically, you cannot get 66million passengers on the trains as forecast by First Group in their bid.
The TSC asked if the franchise was profitable. Sir Richard confirmed this and denied he was using his prestige to change the DfT’s and that profit was not a real motive as he had enough money to eat every day.
Virgin said the FG bid was preposterous and they were being taken for a ride. The Virgin bid cost £14m but refused to say how much the Court Case would cost. Sir Richard also said that the FG bid was completely ridiculous to be reminded by the TSC that this was VT’s judgment.
Sir Richard said that it was because FG as a plc has some cash issues so let’s work backwards helping their cash situation in the next 10 years.
The First Group (FG) team was headed up by Tim O’Toole CBE, Chief Executive, First Group plc accompanied by Vernon Barker, Managing Director, UK Rail Division, FirstGroup plc.
FG said that since Virgin have been in revenue support in the last few years, they have had very little incentive to drive growth in this line. FG believes that an attractive fares’ structure will attract the public continue to grow passenger numbers based on our experience with Transpennine Express. This has a similar user base as West Coast and we have managed to drive fantastic growth there and will bring these skills to the WCML.
FG will create a more sensible fares structure and reduce the anytime fare by 15%, by January 2014. Future increases are based on a set rate of RPI and the 22% increase is not a figure FG recognise they said. We will broaden the steps between the highest and lower fares offering additional types of travel.
Mr O’ Toole said that the allegation made by Virgin is flat out wrong and another bad guess they’ve made about our bid, which VT has not seen. He quoted the Great Western franchise which is stuffed to the gills and we are still seeing growth at 8% in the past year.
FG said that they understand the formula the DfT uses but VT does not understand our model as they haven’t seen it and have used the wrong inputs.
When asked about Virgin’s claim FG had cashflow difficulties, Tim O’ Toole said we have steadily paid down our debt and we assume that cashflows will return to what they were with our bus business turnaround.
FG did not accept that their bid was five times more risky than Virgin’s and said they were offering provide more services and to pay more to the DfT than VT. We concede we will build the railway for the whole franchise while VT flatlines for the last three years so there is more risk for obvious reasons.
There is no chance in FG handing back the franchise which would destroy our ability run a rail business in this country FG said. The TSC was told that the 15 year term was DfT policy and that they had no choice in policy.
FG was asked why Virgin had lost four consecutive franchise bids. FG said that the most outrageous claim by Virgin was about the National Express East Coast failure. Mr O’ Toole said that had Virgin won the franchise, they would have gone bust and been crushed by the economic downturn and low growth rates amongst other factors. It doesn’t square with the facts FG said.
The current Pendolino fleet will be enlarged by 66 vehicles (on the Midlands to Scotland route) and funds are there to improve marketing and ticketing methods.
The base timetable is specified to bidders by the DfT and FG added more to the DfT specification as a firm commitment, subject to ORR Approval.
FG would carry out better marketing on peak hour trains, and services close to the end of the peak period to reduce crowding on the first off-peak trains. They would not extend the designated peak hours.
FG said that staff numbers will probably be the same for the first five years and that our plan is growth and it isn’t an option for us to cut and cut. What Virgin suggest will not work, we need the people out there.
The September 12 TSC session was attended by the Rt Hon Patrick McLoughlin MP, Secretary of State for Transport and Philip Rutnam, Permanent Secretary, Department for Transport.
The TSC asked the Transport Secretary if due process had been carried out and if he was looking for a pause in proceedings. He confirmed that he was satisfied it had and that the contract would be signed after the legal challenge.
The rival bids had been considered fairly by the DfT and although the Ministers have changed, the policy hasn’t. He also said that he was content that due diligence was carried out by the DfT. An exhaustive procedure had been gone through and it is our intention to proceed with the contract when we can.
Directly Operated Railways is a DfT wholly owned company which is in place to take over any franchise that defaults, such as the East Coast Main Line.
The company could operate the franchise from December 9 when the Virgin franchise expires. This would ensure continuity of services but cost taxpayers dearly because it would mean in essence, two handovers instead of one.