A “mismanaged bid process” contributed to the failure of the East Coast Main Line franchise, according to MPs.
In a report the Transport Committee said “unrealistic benchmarks in the invitation to tender encouraged overbidding” and the bid process lacked the “necessary boundaries to discourage this”. Financial stress-testing of bids was “not robust enough”.
Committee chair Lilian Greenwood (Labour) said: “Naivety, over-optimistic expectations and a mismanaged bid process all played a role in the failure of this franchise—the third in little over a decade.”
Virgin Trains and Stagecoach (VTEC) were awarded the contract to run the line in 2014 with services beginning in 2015. It was due to run until 2023 and deliver more than £3bn to the taxpayer in the form of premium payments to the Department for Transport (DfT).
The report said the revenue projections underpinning the VTEC bid were “over-optimistic” and despite making a profit “the operating surplus generated did not fully cover the premium obligations it had with the DfT”.
The franchise failed after three years of operation and MPs said this suggested “Stagecoach and Virgin built very little resilience into their bid”.
Bidders were able to propose an “additional parental guarantee”, made up of payment from a parent company, to support revenue assumptions and MPs said it was “encouraging” that this figure is now capped in franchises, which “puts a cap on how ambitious bidders can be about revenue”.
“We conclude that Stagecoach and Virgin bear prime responsibility for the failure of this franchise,” said the report.
“The DfT must also take responsibility for not managing the bid process effectively enough.
“If the DfT had conducted appropriate due diligence and identified weaknesses in the assumptions underpinning the bid, it may not have been in this position today.”
The report said Network Rail bore no responsibility for the early termination of the contract because it had delivered the infrastructure upgrades it had formally committed to when the franchise was let.
MPs were doubtful plans for an East Coast Partnership would improve performance and said other vulnerable rail franchises meant “the government has not found the right balance between the risk of franchise failure and return they might obtain from encouraging ambitious bids”.
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