East Coast problems apparent soon after the franchise win
STAGECOACH Group Chief Executive Martin Griffiths says potential problems in meeting revenue growth targets for Virgin Trains East Coast were realised “a few weeks after we got in”, after winning the franchise.
Speaking at the Public Accounts Committee (PAC) hearing into rail franchising on February 26, Griffiths added that the company has been in discussions with the Department for Transport “for over two years”.
Explaining why the franchise is unable to meet its financial commitments to government over its full duration, Griffiths told the committee that the industry has been subjected to the lowest growth rates in UK rail since privatisation, but also said no risk share was put in place to recognise changes in macro-economic factors.
He denied that the franchising process encouraged overbidding, saying: “Nobody approached these bids with the intention of trying to overbid or overestimate what they might achieve. The forecasts were put together based on the best economic outlook data that was available from the Government and the OBR [Office for Budget Responsibility] at that time.”
Asked whether VTEC will be profitable by 2019, Griffiths replied: “No.” But he strongly denied that the company is “throwing in the towel”, and pointed out that Stagecoach and Virgin acquired East Coast as a company rather than the more usual operating contract let by franchises.
“By the time we got hold of it and opened the lid up, the revenue base that we thought we were inheriting was actually lower than we had assumed when we started,” he added.
He told the PAC that bidders had been told to assume that a new fleet of trains and infrastructure upgrades would be provided and funded.
However, Network Rail Chief Executive Mark Carne said: “We have delivered all the infrastructure that was required so far and, as Mr Griffiths said, the failure of this franchise was entirely down to their inability to predict the revenue forecasts.”
He claimed NR delivered the power supply upgrade “bang on schedule”, and that “we have delivered all the projects that we said we would deliver”.
VTEC Managing Director David Horne was unable to tell the committee when the company will run out of money, but Griffiths said that it would breach its ‘forward-looking ratio analysis’ “at some point in the next 12-month period.”
DfT Permanent Secretary Bernadette Kelly argued that the franchising system has not failed, saying: “We are not seeing franchise failure elsewhere in the system… so I don’t think it proves that the system as a whole has failed. I would say it is a significant challenge in this particular case, but I do not think it is proof of system-wide failure.”
DfT Managing Director, Passenger Services Peter Wilkinson says the Department has new tools that can help to evaluate whether a franchise can survive under “quite a severe downside scenario”, technology that he says was unavailable in the franchise design process before 2015.
He added that the low cost of petrol “has undoubtedly had an impact on longer-distance travel”, which may have affected revenue growth on the East Coast Main Line.
DB Cargo 67012 hauls the 0540 Edinburgh Waverley-London King’s Cross past Peterborough on February 28, running 203 minutes late. The train was terminated at Stevenage. Stagecoach Chief Executive Martin Griffiths told a Public Accounts Committee that potential revenue problems were identified only weeks after winning the East Coast franchise.