Carry on Franchising? Sir Humphrey says no!

Published 8th October 2012

Department for Transport people, policies or processes at fault?

LONDON - On October 3, the Department for Transport (DfT) announced the cancellation of the West Coast Main Line (WCML) franchise ‘competition’ due to the legal challenge Virgin mounted against the decision. This was to do with the level of financial security that had to be provided to support the franchise operation given the financial risk of default during its life.

Virgin suggested that the level agreed between First Group and the DfT (£190m) should have been tripled as the risk was three times greater than the Virgin bid. This was the basis of the suspensions announced by the DfT – on how the risk was evaluated in financial risk terms.

They said:

The DfT then issued a written statement saying:

“Three officials involved in the West Coast franchise competition were suspended by the Permanent Secretary while the full facts are established. No further details will be issued at this time about the suspensions.”

Virgin also issued a statement saying:

The Secretary of State for Transport announced that the InterCity West Coast franchise competition has been cancelled.

A Virgin Rail Group spokesperson said: “We welcome today's frank announcement by the Secretary of State, acknowledging the flaws in the way the InterCity West Coast competition was assessed and launching a review into franchising more widely.

"We are ready to play a full part in assisting the review to help deliver a franchising system that better serves passengers, taxpayers and the interests of all bidders.

"In the meantime, we will assist the Department for Transport in ensuring continuity of service for the millions of customers who depend on train services on the West Coast mainline."

Richard Branson said that Virgin would be happy to continue to run the franchise for the next couple of years while the current system is reviewed and retendered.

The stock market’s judgement

The announcement triggered an immediate 20% decline in FirstGroup’s share price wiping several hundred million pounds off the company value. Investors were seemingly worried about the effect of cashflow on the company and how this would affect its recovery from other poorly performing parts of its operations.

Stagecoach shares increased by a small percentage reflecting their 49% ownership of the current West Coast Franchise.

First Group said:

We were notified late last night (Oct 2nd) that the DfT has apparently discovered significant technical flaws in the way their franchise process for the InterCity West Coast was conducted and have consequently cancelled the competition for this franchise.

We understand the DfT has ordered two urgent independent inquiries into the West Coast competition and the wider DfT rail franchise programme. Until this point we had absolutely no indication that there were any issues with the franchise letting process and had received assurances from the DfT that their processes were robust and that they expected to sign the contract with FirstGroup soon. We are extremely disappointed to learn this news and await the outcome of the DfT's inquiries.

The DfT have made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT's terms. Our bid would have delivered a better deal for West Coast passengers, the taxpayer and an appropriate return for shareholders.

Who will run the trains from December 9?

The cessation of the WCML franchise award brings the immediate problem of who will operate trains from December 9. There are two choices available to the DfT. Virgin can carry on under a management contract allowing a 2% profit level as agreed previously when franchise extensions have been required. This is understood to be a third of the profit level enjoyed by Virgin so whether they would agree to this or press for more, given their unhappiness, is anyone’s guess.

If, as the whispers from within the Industry are correct, the DfT want to end Virgin’s railway operations, then the DfT will transfer the operation to Directly Operated Railways (DOR), their train company in waiting.

The DfT will have to make a decision very quickly – not something they have been historically good at. Sir Richard has said that it would descend into chaos without his team.

Timetable options

The national rail timetable is planned over a year in advance and agreed around 48 weeks before implementation. This allows network safety validation and alterations to traincrew and train rosters as well as station platform occupancy planning to be agreed and finalised.

The changes planned by First Group would have commenced in December 2013 and spread over a couple of years. Now that these are not going to happen, it throws timetable development into areas never before reached.

Given that any new franchise award is likely to be 18 months away, timetable planning is now going to be coupled to uncertainty which could in turn, lead to a hiatus in investment until a decision is made and implemented.

Train building

The bids made much of ordering more trains to run the extra services to places such as Bolton, Blackpool and Shrewsbury currently not served by the WCML franchise.

The franchise award cancellation throws the train orders into limbo and will the manufacturers and financiers be bringing a claim against the DfT for their wasted efforts over the last year?

Franchising timetable

The problems with the WCML cancellation also apply to the other four franchise competitions underway. These have been placed on hold so the uncertainty now affects Great Western, Essex Thameside, Thameslink and the DOR operated East Coast Trains franchises.

These were due for a start date from April next year onwards so the suspension of any award will mean that expensive franchise extensions will be required on these routes as well.

The incumbent train operators will be in a strong negotiating position to sign beneficial (to them) agreements adding more cost to taxpayers and again, investment will be minimal as no-one can guarantee a return on their money.

And finally:

Just for the record, The Department for Transport’s stated vision is as follows:

"Our vision is for a transport system that is an engine for economic growth, but one that is also greener and safer and improves quality of life in our communities."

Have your say: is hosting a WCML Franchise webchat on Wednesday October 10 between 12 noon and 1400hrs.

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