Branson gets lifeline for Virgin Trains after probe
RICHARD Branson was handed a lifeline that may keep him in UK rail after FirstGroup was stripped of Britain’s West Coast intercity route, which it won from his Virgin Group in August. FirstGroup fell as much as 22%. The contest to run London to Scotland expresses was halted because of “serious flaws” regarding the choice of FirstGroup’s £5.5bn bid, according to transport secretary Patrick McLoughlin, who said staff have been suspended and three other franchise tenders frozen. Among errors was a failure to take full account of inflation and passenger numbers.
Mr Branson had said he would exit UK rail following a West Coast decision he reckoned reflected the “insanity” of the franchise system and could end in FirstGroup’s bankruptcy.
The department for transport detected errors only after Virgin argued the award was based on a defective assessment of the relative risks of the bids and was granted a judicial review.
“I am pleased to say that (the department) has looked at all of the facts and found significant flaws in the way its officials handled the process,” Mr Branson said in his blog, adding Mr McLoughlin called him in New York to relay the findings. “They have basically acknowledged that what we had been saying is correct. We are hopeful they will now accept that Virgin Trains should carry on running the West Coast main line.”
Aberdeen, Scotland-based FirstGroup dropped 53.10p to 190.90p, the steepest tumble since a 1995 listing, and was down 19% at 197.50p in London.
That reflects the loss of “significant” short-term cash flow, said Gert Zonneveld, an analyst at Panmure Gordon in London. The shares fell 6.1% on August 15, the day of the contract award, on concern that the bid was too high.
FirstGroup CEO Tim O’Toole said the transport department made clear his company was not at fault.
Virgin Trains is closely held, with Mr Branson owning 51% and Stagecoach Group, which traded up 1.4% at 286.20p, the rest. Stagecoach said yesterday it would hold talks with the department and update the market as appropriate.
Christian Wolmar, a transport historian who wrote Broken Rails, an analysis of the UK’s train network, said they cast doubt over a host of earlier contract awards. “The extent of this catastrophe is breathtaking,” Mr Wolmar said.
“The key embarrassment is not for the civil service but the government, who said the process was robust and fair. What about the past franchises. Have they been evaluated properly?”
The West Coast route, operated by Virgin since 1997, was due to transfer to FirstGroup for at least 13 years on De- cember 9. The decision threatened to exclude Mr Branson from the UK rail industry for the first time since its privatisation. The Virgin founder said he made a “strong and deliverable” offer for the West Coast line, which transports 31million people a year to cities including Birmingham, Edinburgh, Glasgow, Liverpool and Manchester, and was unlikely to ever run a railway again.
Virgin has been outbid for franchises on four occasions, and in three cases the winning operator came “nowhere close to delivering their promised plans and revenue”, according to Mr Branson, who had said the West Coast bid cost £14m.
The transport department said it had already spoken with Virgin, FirstGroup and the other two bidders, French state railway SNCF and Nederlandse Spoorwegen of the Netherlands, and would reimburse their expenses. A fresh West Coast contest will begin “as soon as the lessons of this episode are learned”, and talks would decide who would run the line in the interim.
Labour Party transport spokeswoman Maria Eagle, said the West Coast award had exposed “shambolic incompetence” in the Conservative-Liberal Democrat coalition. In addition to the suspension of the Great Western, Essex Thameside and Thameslink franchise awards, the government should abandon privatisation of the East Coast main line.
Mr McLoughlin, who has been in charge of transport for less than four weeks, said on BBC radio’s Today programme yesterday that while a “terrible mistake” had been made, there would be no effect on rail operations or bookings.
Errors that may have included bidders being given different information came to light only as the department compiled its defence against Virgin’s legal case, which is no longer being contested, Mr McLoughlin told Sky News.
Mr Branson had been keen to develop stations on the 2,670km West Coast network to include innovations such as bank branches after his Virgin Money Holdings agreed to buy Northern Rock last year for £747m.
Britain’s Institute of Directors said the failure of the franchise process was “shocking”. Bloomberg