May 16, 2018

British government takes direct control of East Coast franchise

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BRITAIN’s secretary of state for transport, Mr Chris Grayling, has told Parliament that he has decided to take back direct control of the InterCity East Coast franchise from the Stagecoach-Virgin joint venture which currently operates the service as Virgin Trains East Coast (VTEC). This is the third time the franchise has been taken back under state control.

The current franchise will be terminated on June 24 and handed over to the government’s “operator of last resort” which has been set up during the last few months by the Department of Transport (DfT). The new operator, London North Eastern Railway (LNER), will take over on June 25. Grayling says the DfT will then “begin the task of working with Network Rail to bring together the teams operating the track and trains on the LNER network.”

“I am creating a new board with an independent chair to oversee the operation of the LNER route which will work with my department on building the new partnership,” Grayling told Parliament on May 16. “It will have representatives of both the train operating team and Network Rail (NR), as well as independent members who will importantly ensure the interests of other operators on the route are taken into account. I will appoint an interim chair shortly, and then begin the recruitment process for a long-term appointment.” However, Grayling stressed that he wants the partnership to be between state-owned NR and a private operator.

The Stagecoach (90%) - Virgin (10%) joint venture was awarded an eight-year contract in November 2014 to operate inter-city services between London King’s Cross, Leeds, Newcastle, Edinburgh, Aberdeen and Inverness. VTEC’s bid was based on a premium payment of £3.3bn over the duration of the franchise.

However, Stagecoach told investors in February that VTEC’s four-weekly premium payments had been 30% higher than those made by its state-owned predecessor East Coast (which replaced National Express when its franchise failed), despite “a challenging economic environment, increasing political uncertainty, significantly lower rates of growth across the British rail network over the past two years and sustained poor performance by NR.”

A key element of the VTEC franchise bid was the expansion of services from 2019 onwards based on the delivery of new trains (currently under construction) and a programme of infrastructure enhancements on the East Coast Main Line (ECML). However, much of the work required has been delayed. Stagecoach has been trying to negotiate an amendment to the franchise agreement, including premium payments to reflect these “materially changed circumstances.”

Grayling admitted in February that the franchise has met all its financial commitments since it began operating 2015, making premium payments of nearly £1bn. However, this has cost Stagecoach around £200m, which is equivalent to nearly 20% of its market value.

“In February, I said that I was considering two options to continue delivering passenger services in the run-up to the creation of the new East Coast Partnership,” Grayling told Parliament on May 16. “The first was to permit Stagecoach to continue to operate the railway on a not-for-profit basis until 2020, and to permit them to earn a performance-related payment at the end of their contract. The alternative was to implement an Operator of Last Resort.

Grayling says an analysis of these options suggested the case was very finely balanced, with some elements favouring a contract with the existing operator and others favouring the Operator of Last Resort.

“I have decided to use the current difficulties to drive our long-term plans for the East Coast Partnership,” Grayling told Parliament. “I have decided to begin the transition process towards creating the new partnership now.”