East Coast failure.
PHILIP HAIGH examines the background to the Virgin Trains East Coast franchise failure, and concludes that rail companies must absorb the lessons and adjust their future bids accordingly
BURIED within the 619 pages of the Department for Transport’s edited public version of its franchise agreement with Virgin Trains East Coast is a key phrase - “best endeavours”.
It’s one that lawyers use to describe how much effort a company must make in delivering something.
Lawyers Norton Rose Fulbright say: “It requires the party to take all reasonable courses of action to achieve the desired result. This includes those within its power which can achieve the desired result, and which a prudent, determined and reasonable person, acting in his or her own interests, and desiring to achieve that result, would take.”
Walker Morris says it does not include “actions which would lead to its financial ruin, undermine its commercial standing or goodwill, or have no likelihood of being successful”.
The phrase is relevant for the row about Virgin Trains East Coast (VTEC) because it describes the effort the company must take to deliver the improved East Coast Main Line timetable that DfT specified in March 2014 should be in place from May 2020. This timetable is the DfT’s Train Service Requirement (TSR) 2, and is detailed in the table opposite.
The Invitation to Tender explained: “The Department requires a franchise operator whose train services are compatible with the overall capacity of the rail network, taking into account the infrastructure enhancements delivered by Network Rail during CP4 and those to be delivered in CP5.”
TSR2 boosts the number of trains running on the East Coast Main Line (ECML), chiefly by increasing the number of daily Anglo-Scottish trains to London from 21 to 28.
VTEC’s agreement says it shall use “best endeavours to amend and/or enter into such Access Agreements as may be necessary or desirable from time to time to obtain the Additional TSR2 TDR [timetable development rights] Rights.”
In other words, VTEC must use its best endeavours to negotiate the rights it needs to run the extra trains DfT specified. It would need to win the rights from the Office of Rail and Road, and then work with Network Rail to translate these rights into a timetable.
With little spare space on the ECML today, it’s generally acknowledged that NR needs to increase capacity by improving tracks and junctions. VTEC’s deal with DfT doesn’t specify what these improvements are because that’s a matter for DfT to agree with NR.
The best endeavours clause protects VTEC against NR not delivering the improvements. If there’s no space, then no matter how hard VTEC endeavours with NR, it will not be able to run the extra trains DfT wanted from May 2020.
Writing to the House of Commons Transport Select Committee in January 2018, VTEC Managing Director David Horne listed five projects that NR needed to deliver for his May
2020 timetable: North East freight loops; York North throat works; Fletton-Peterborough, Werrington grade-separation; Huntingdon-Woodwalton four-tracking; and King’s Cross remodelling.
VTEC’s bid went to DfT in summer 2014, and DfT announced it as the winner that November. NR published an update to its 2014-19 enhancements delivery plan in June 2014. This noted that NR had a £247 million ‘East Coast Connectivity Fund’ to be spent on developing plans for the route, and listed as “candidate schemes” the projects Horne listed in his letter to the Select Committee.
NR’s June 2014 plan did not include completion dates, and simply said: “The programme will ultimately comprise a prioritised list of infrastructure enhancements. Stakeholder consultation, timetable modelling and economic appraisal will be used to determine which interventions represent the best value for money.”
Contrast this with Horne’s letter to the TSC, in which he wrote: “At the time we submitted our bid all of the above schemes were scheduled to have been completed by the end of the period covered by ORR’s Periodic Review of NR’s finances (March 31 2019), allowing the timetable enhancements we committed to in our Franchise Agreement from May 2019.”
NR London North Eastern and East Midlands Route Director Rob McIntosh also wrote to the TSC in January. He wrote: “At the point the East Coast franchise was bid for and awarded, the East Coast Connectivity Fund was at an early stage of development and funding for delivery had not been committed to individual projects… This was made clear to all bidders in the information provided as part of the bidding process by Network Rail.”
He added: “NR was not asked to endorse the final assumptions used by the successful East Coast bidders at the contract award stage.”
This leaves DfT in an awkward position. It either didn’t know its subsidiary’s plans, didn’t understand them, or ministers and officials ignored them and signed a deal with Stagecoach and Virgin that was impossible to deliver.
NR now proposes to shelve its York North throat works because the cost does not justify the benefits. It is also proposing to defer to Control Period 7 (2024-29) the Northallerton-Newcastle freight loops.
McIntosh’s letter also reveals problems with power supplies for electric trains. NR finished an upgrade on the southern end of the route, covering Wood Green to Bawtry, in August 2017. The scheme to boost power supplies further north to Edinburgh was not included in Control Period 5 (201419) funding, and NR has made no commitment to deliver it. McIntosh said that NR had presented design options to the DfT last October.
NR’s latest enhancements delivery plan makes no explicit link between VTEC’s ambition to run more trains and DfT’s TSR2 specification that calls for more Edinburgh services. Whether or not these extra trains run with today’s Class 91s or tomorrow’s Class 801s, they will need sufficient power from NR’s overhead line equipment.
While ‘best endeavours’ protected VTEC against any failure by NR to deliver improvements for May 2020, it had bid a series of improvements starting in May 2019 (known as TSR1.2). This was over and above what DfT had specified, and would have allowed VTEC to increase services (broadly from five trains per hour to six), attract more passengers, and pay DfT more money.
When VTEC applied to ORR
“This leaves DfT in an awkward position. It either didn’t know its subsidiary’s plans, didn’t understand them, or ministers and officials ignored them and signed a deal with Stagecoach and Virgin that was impossible to deliver.”
“Given factors such as the economy, many companies would be happy to record 3%. Stagecoach’s problem is that it expected higher growth to allow it to pay rising premium payments.”
for these six hourly paths from May 2019, ORR rejected the plan and only granted firm rights from May 2021 with contingent rights applying from May 2019. NR must only honour contingent rights if there’s enough capacity.
The schemes on which VTEC was relying now look unlikely to be delivered before 2021. VTEC’s franchise agreement contains the ability to renegotiate if best endeavours don’t provide the outcome DfT and VTEC wanted. But when the DfT revealed last November that it planned a new East Coast Partnership from 2020 to replace VTEC, it made such a renegotiation pointless.
The feeling of futility strengthened on February 5, when Transport Secretary Chris Grayling told MPs: “It is now clear that this franchise will only be able to continue in its current form for a matter of a very small number of months and no more.”
VTEC’s majority shareholder Stagecoach had said last summer that it was behind its expected passenger numbers and revenue. Grayling told MPs: “The problem is that Stagecoach got its numbers wrong. It overbid and is now paying a price.”
He continued: “To anyone who thinks that the nearly £200m that Stagecoach will lose is insignificant, let me put it into some context. The combined profit of every single train operator in the country was only £271m last year. The loss equates to over 20% of Stagecoach’s total market value.”
In a filmed message on February 5, Stagecoach Chief Executive Martin Griffiths said: “We’ve had the impact of a weak economy, huge political uncertainty, and on the railway itself we’ve suffered from sustained unreliability of the track and signalling our trains use. Across the UK network, growth rates have been among the lowest in decades. A lot has been out of our control but the bottom line is that, in hindsight, we got our forecasts for passenger growth wrong and our business has lost close to £200m from the contract.”
Stagecoach said last December that most recent year-on-year revenue growth for VTEC was 3%, down on the 5.2% growth it reported for the year to April 2016. Given the factors Griffiths mentioned, such as the economy, many companies would be happy to record 3%. Stagecoach’s problem is that it expected higher growth to allow it to pay rising premium payments. Its £276m premium for 2016-17 rises to £342m in 2017-18, a jump of 23%. Its 2016-17 revenue was £820m, making its premium a third of its income for that year.
Grayling now faces a choice of giving Stagecoach and minority partner Virgin a short-term, notfor-profit deal to keep running the East Coast until a full franchise competition decides its operator from 2020, or he can call in his operator of last resort.
This will be politically unattractive for Grayling, because it will be labelled nationalisation despite the operator of last resort being a private company of rail consultants.
Grayling will also be keen to see Hitachi’s new IEP trains put successfully into traffic, and a change of senior personnel at the East Coast operator could make this harder. This makes a deal with Stagecoach the more likely option.
Rail companies must absorb the lessons of VTEC’s failure and adjust their future bids accordingly. They will be busy over the next few months, with teams bidding for South Eastern, West Coast and East Midlands. There’s plenty of pressure on DfT, too, with competitions for CrossCountry and Great Western set to start this year for new operators to take over in December 2019 and April 2020 respectively. Squeezing a new-look East Coast Partnership into this calendar will be difficult.
Since the East Coast award, DfT has adjusted franchise competitions to place more emphasis on quality and less on money. This led to South West going to First and MTR rather than Stagecoach, despite bidding lower premium payments.
Nevertheless, it remains true that bidding for franchises contains an element of a blind auction. Bidders do not know what others are offering. Even if their plans are similar, one might bid more money just to win the deal.
This means companies can fail by bidding too much, as Stagecoach and Virgin have shown with VTEC. Failure is costly and embarrassing, but overall the VTEC episode shows that franchising works, because (so far) it’s never left trains idle and passengers stranded.