East Coast rail: Virgin, Stagecoach and the Transport department blamed for franchise fiasco

The Transport Select Committee has blamed the now-defunct Virgin Trains East Coast (VTEC) train operator for failing to fulfil its franchise – and insists that the Department for Transport shares the blame for the fiasco.

MPs on the committee have criticised the transport secretary, Chris Grayling. They say he lacks “a clear plan and a timescale” for the state-run operator, London North Eastern Railway (LNER), which now runs the line.

In June, VTEC abandoned its franchise on UK’s flagship rail route, connecting London King’s Cross with Yorkshire, Newcastle and Edinburgh. It was the third operator to walk away after hopelessly optimistic forecasts failed to materialise.

The report from the cross-party committee says: “The line went into technical default in January 2018 and the contract was terminated in June after just three years of operation.”

Following those failures, the operation was taken back into public hands.

In March 2015, VTEC – 90 per cent owned by Stagecoach and 10 per cent by Virgin Group – took over the franchise, agreeing under the terms of the franchise “to deliver to the passenger the best railway passenger services that can be obtained from the resources that are available to it.”

But it quickly became clear that the growth in passenger traffic on which the VTEC’s franchise bid was predicated had not materialised. In June, LNER, the new “operator of last resort”, controlled by the Department for Transport, took over.

The committee’s inquiry says that unrealistic benchmarks encouraged over-optimistic bidding by Virgin and Stagecoach, and that the financial stress-testing of the bids was not robust enough.

Labour’s Lilian Greenwood, chair of the Transport Select Committee, said: “Naivety, over-optimistic expectations and a mismanaged bid process all played a role in the failure of this franchise – the third in little over a decade.

“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.”

A DfT spokesperson said: “The Transport Select Committee have concluded that Stagecoach overbid for this franchise and paid the price. We also welcome their confirmation that losses were borne by the company, not passengers or taxpayers.

“We have introduced new measures to deter over-bidding for franchises and improved our financial modelling and stress testing. Bids are now assessed with a greater emphasis on overall value for the passenger.”

“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.”

But the committee warned: “From our inquiry, 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.”

A Stagecoach Group spokesperson said: “We welcome the committee’s endorsement of the high quality of service and investment provided for passengers by Virgin Trains East Coast and the operational success of what it acknowledges was a profitable franchise.

“We’ve operated railways on behalf of the government for more than 20 years and in developing our plans we used the same bold, ambitious and meticulous approach which delivered strong success in the past.

“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.”

Anthony Smith, chief executive of the independent watchdog Transport Focus, said: “However the East Coast is run, passengers will be looking for the quality of current services to be maintained and built on.

“Passengers will continue to judge services by the day-to-day performance, whether it is punctuality, value for money, the cleanliness of the train or levels of crowding.

“Having more stability in the underlying contract between government and the train company will help achieve these things that matter most to passengers.”

Mark Smith, the former British Rail manager who runs the Seat61.com train travel website, said: “The franchise was popular, with high levels of passenger satisfaction, and it made an operational profit, just not enough to cover the required premium payments which had been committed to based on over-optimistic passenger growth which did not in the event materialise.

“A nationalised operator would have been in exactly the same boat in terms of operational profit not reaching expectations, but without the obligation to make premium payments.

“In this case the taxpayer ended up quids in, as Virgin/Stagecoach made its required premium payments using its own money to cover the funding gap between operational profits and the required premium.

“Clearly DfT is at least as much to blame as VTEC, if not more so – they need to avoid overbidding when letting future franchises, and implement better checking of each bid’s financial resilience.”