East Coast Main Line–What happened and what happens next? - Supply Management
©Alamy Stock Photo
©Alamy Stock Photo

East Coast Main Line - the contract challenges

It's the third time in just over a decade the government has brought the running of this route to a halt.

In 2016 a £4.2m project to bring the Flying Scotsman back to life was completed. Built in Doncaster almost a century before, the legendary locomotive was the most powerful engine used by the railway and the first to be unveiled by the then newly formed London and North Eastern Railway (LNER).

Since that time Britain’s railways have been nationalised, privatised, and in some cases temporarily renationalised (before being re-privatised) by the government of the day.

The LNER name vanished in 1948, but on 18 May this year, transport secretary Chris Grayling announced he was to “recreate” (or rather resurrect) this “iconic” rail brand.

Grayling said the government would use “the current difficulties” on the East Coast Main Line – Virgin and Stagecoach (Vtec) no longer being able to meet payments in the £3.3bn, eight-year deal – to drive “long-term plans for the East Coast Partnership”, starting in 2020 (a timetable industry experts describe as “challenging”). This public-private partnership will manage infrastructure and the operation of the rail route under one management and a single brand, overseen by a single leader.

In the meantime, from 24 June the government’s ‘operator of last resort’ (OLR) became responsible for ensuring services continue “uninterrupted” on the London to Edinburgh route. The Department for Transport (DfT) was not forthcoming about arrangements, but engineering company Arup is understood to be leading a consortium including Ernst & Young and SNC-Lavalin. Any consortium would act under the control of the DfT’s OLR Holdings Limited, owned by the Secretary of State, which in turn wholly owns new operator LNER. So it is essentially a temporary renationalisation where the government is advised by the private sector.

The mechanics of a change saw staff being transferred from the outgoing to incoming operator and essential goods and services continuing as a result of direct agreements already set up with the DfT. Key contracts covered by these agreements include property leases, rolling stock, station maintenance, track and infrastructure upkeep, breakdown or recovery arrangements, computer systems, staff training, train dispatch and passenger services.

Responding to the announcement that the route is to be temporarily renationalised, Stagecoach, which had a 90% shareholding to Virgin’s 10%, said they were “surprised and disappointed”. This probably put it mildly. There was no evidence of malpractice or malicious intent. Instead of making a healthy expected profit, the companies lost nearly £200m meeting their contracted commitments as well as paying a reputational price. They have, however, retained the right or “passport” – the industry’s version of a pre-qualification – to bid for such deals in future.

So what went wrong?

Problems on the East Coast route aren’t new. Of the 48 franchises let to date, only four have ended early, three of them on this line. Yet Grayling maintains it is not a failing route: “It continues and will continue to generate substantial returns for the government, and the most recent figures show passenger satisfaction at 92%.”

In Virgin/Stagecoach’s case, the premium they agreed to pay the government over the course of the contract was largely based on what they expected to make through passenger numbers, but those were not nearly as high as expected. Virgin founder Richard Branson said in January assumptions that the bid was based on were “torpedoed” by delays to an infrastructure upgrade by Network Rail, holdups to the delivery of new trains and poor track reliability – as well as a drop in Britain’s GDP growth.

While commentators say Network Rail has a role to play in the success or failure of lines, planned improvements were not yet to have taken effect. However, Branson says his business had already spent millions in investments, many more in fees and “not received a penny in dividends”.

Other challenges include the Brexit effect, competitive air travel costs and a drop in passenger numbers on trains coming into London across various parts of the network due to fears of a terrorist attack.

“Everything you do in these kinds of bids leads to things you have to assume and take risk on,” says one industry CPO. “Some deals are nine-to-15 years long, so we’re talking about guessing what’s going to happen way into the future.

“You have to say you’re going to do all these amazing things to win, but you can’t realistically do them all.”

Rail consultant Michael Lee, a former project director for rail franchising at the DfT and director at the Office of Rail Regulation, says the franchise failed because rail passenger revenue growth has collapsed across the network in the past few years. “The east coast franchise – because of the timing of its award and its high revenue gearing – was particularly exposed to this risk,” he says.

Mark Thackeray, director of Visual Management Consulting, which works with rail clients among others, agrees the award of the franchise lacked the due diligence required to verify predicted passenger numbers, but added that unions are holding the industry back from improving and there is a lot of waste and inefficiency.

SM understands the tender’s weighting was disproportionately in favour of the commercial instead of operational side of the deal, putting a higher priority on return than service and customer satisfaction.

Rail Delivery Group chief executive Paul Plummer says more flexible contracts able to cope with changes in the external environment and a focus on delivering outcomes –such as passenger satisfaction, rather than outputs – would help improve the current system.

Ultimately if suppliers can’t make the money they will no longer want to bid for these deals and the government should accept at least some responsibility for the early collapse of this latest contract.

“As we always say,” says one industry CPO, “you want your suppliers to be financially healthy and sustainable. This is an example of a government as a client that awarded a contract that was simply not sustainable for the suppliers.”  

Off the rails

The historic route has had more than its fair share of operators…

1923 LNER begins operating route, introducing the Flying Scotsman to run between London and Edinburgh

1948 LNER disappears, and East Coast route becomes publicly owned

1996 GNER wins contract to run East Coast route for seven years, then extended to 2005

2005 GNER renews contract for 10 years

2007 GNER loses contract through financial difficulty. National Express subsidiary NXEC takes over with contract to 2015

July 2009 NXEC loses contract. Government takes route under public control, operating under East Coast name

March 2015 Government privatises route, giving Virgin Trains East Coast and Stagecoach eight-year deal

Nov 2017 Government announces termination of VTEC contract in 2020, three years early

18 May 2018 Government announces it will take route under public control

24 June 2018 Government’s Operator of last Resort takes over route, as LNER

2020 East Coast Partnership PPP, including Network Rail and a private train operator to take over route.

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