National Express, which was struggling to pay the £1.4 billion in premium payments to the Department for Transport in exchange for the right to run the trains, walked away and the route was re-nationalised, leaving taxpayers to pick up the pieces.
That was bad enough. But the new firestorm engulfing the West Coast tendering competition could see far wider ramifications, with the immediate future of the flagship route now in considerable doubt, three other rail franchises in England put on hold, and confidence in the entire system shaken to the core.
It also bodes badly for the Coalition Government, which came to power promising to overhaul the franchising process, which it claimed had been damaged by micro-management under Labour, by giving rail companies longer franchises and far greater freedom in how they ran services.
Instead of delivering the promised improvements for passengers, the reforms appear to have made matters worse, with the Department for Transport, under new Transport Secretary Patrick McLoughlin, presiding over the worst financial debacle to hit the rail industry since privatisation in the 1990s.
West Coast passenger services will now almost certainly be taken over on December 9 by Directly Operated Railways, the state-owned vehicle set up to manage East Coast in 2009 while the UK Government works out how to get out of this mess.
Tens of millions wil be paid back to the four companies who submitted bids and the whole process will have to be re-run following a review.
There appear to be two obvious causes to this mess. One is a competence issue at the DfT, which has seen austerity-driven staff cuts at a time when its franchise department was log-jammed with franchise renewals.
The other is a more fundamental issue to do with the franchising system, and one that is probably more difficult to solve.
The legal challenge by Virgin Trains, which has operated West Coast passenger services since 1997, to the award of a 13-year franchise to First Group was based on the degree of risk inherent in the latter bid.
First had promised to pay £5.5bn to the government over the duration of the franchise, £700m more than the bid tabled by Virgin. That’s in today’s prices – the real value of the payments taking into account inflation and other factors would have risen to more than £10bn.
The reason Virgin bid less was that it was not confident of delivering the same level of passenger growth during the new franchise as it had seen in the previous one, when it had benefitted from the introduction of tilting Pendolino trains and a £9bn upgrade to the West Coast Main Line.
Much of the company’s uncertainty, as rail guru Roger Ford has pointed out, came from the disruption at London’s Euston station starting from 2019, when work on the new high speed rail line (HS2) would have limited platform availability. First were more bullish about the performance risk.
As a result, Virgin argued in its legal submissions, the DfT miscalculated the risk involved in First’s bid. Had the sums been done properly, First should have paid around three times the £190m subordinated loan it had put in place in case the franchise collapsed, Virgin claimed.
A key difficulty, and one inherent to the franchising system, is the crystal-ball gazing involved in predicting how the railway will perform in the future.
Virgin boss Sir Richard Branson has claimed the same over optimistic forecasts which lay behind National Express’ East Coast bid were repeated in First’s bid - and he can claim some vindication in today’s decision by the DfT.
Stagecoach, which has a 49% stake in Virgin Trains, observed in a statement to the market in August that the DfT’s new franchise structure increased the level of risk to private companies.
The situation is markedly different in Scotland, where the ScotRail franchise is notoriously micro-managed by government agency Transport Scotland, and where ministers faced criticism for leaning towards a shorter franchise duration than that preferred by the industry (they eventually opted for a compromise of 10-year ScotRail franchise, with a five-year break clause).
With both the East and West Coast main lines now back in government hands and little clear direction over how they will be returned to the private sector, Scottish ministers will no doubt be far more confident in the relatively cautious approach they have adopted.
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