First will not take over West Coast from December

[sprinterguy]

So there are 2 TOC management teams in limbo (VT and the First West Coast team who were poised to take over), plus 3 bid teams (Essex Thameside, Great Western and Thameslink).
That affects virtually all the owning groups (Virgin, First, Stagecoach, NX, Arriva, Abellio, MTR and Govia, plus Keolis/SNCF), and also their partners (consultants, banks, ROSCOs, train builders etc).
That leaves only Serco, I think, as the only owner not impacted by the franchise standstill.
What a monumental waste of senior rail expertise.

I suppose consultation and planning for other franchises can make some progress (eg the future TP/Northern and Scotrail), but with the overall franchising timetable up in the air it won't be long before they are affected too.
At least Network Rail can get on with the day job and its electrification plans.

That's three groups of bid teams, and a total of thirteen individual bid teams affected across the ET, TL and GW franchises! These events have certainly caused huge ructions throughout the rail industry, particularly within the rail franchising sector of course. It really has impacted on pretty much all the players in the business. There are a heck of a lot of individuals affected, and an awful lot of money presently being spent for little benefit due to the uncertainty on what is going to be required from the bid teams next, and when.

 

[ainsworth74]

If the DfT review of its’ processes is not complete until the end of the year, as is expected, then that does not leave very much breathing room if bidders have to alter and re-submit (Or in the case of GW, submit for the first time) their franchise bids for them to then be reviewed by the DfT, the franchises awarded and a mobilisation period provided for within the present deadlines of May and July 2013.

I meant breathing room for the DfT to decide whether to try and go for extensions of the existing franchises (I think quite likely on GW less likely but not impossible on ET) or hand them both over to DOR (in which case there is time for DOR to prepare themselves). Obviously there isn't enough time for the DfT to do it's review, make alterations to the process, submit new tenders, review new bids, and have the winners mobilise.

 

[Holly]

{Context of Backdoor renationalisation.}
Agreed but would need the Railways Act 1993 to be reformed, as it specifically prohibits this from happening. But then I guess, since the franchising system it prescribes is under attack anyway, that's entirely feasible at this moment in time. ...

The DfT could always decide to review its processes. And then review the review. Within a project that never completes never reaches any decisions for action. They could take lessons from the Israelis.

 

[jon0844]

Yup, it's a witch hunt (even the bit where the current Government gave Virgin the lucrative bits of Northern Rock at a "fire sale" price)

I'm on a local forum that is so political that one member has even made up a fictitious conversation he believes went on between David Cameron and the DfT. It basically suggests it was the PM that ordered the DfT to pick First because all Tories do is look after their own.

Clearly, Virgin is seen as some sort of charity then? And the above fact (Northern Rock) with the other fact that Sir Richard was lobbying the Tories just as he was Labour, doesn't count. For some reason, the Tories have it in for Virgin. Maybe David Cameron had a problem with his Virgin Media service, or once got seated next to a screaming baby on Virgin Atlantic? Yeah, that'll be it.

I do hope the full facts come out sooner rather than later, but a lot of people won't believe anything they're told anyway.

 

[sprinterguy]

I meant breathing room for the DfT to decide whether to try and go for extensions of the existing franchises (I think quite likely on GW less likely but not impossible on ET) or hand them both over to DOR (in which case there is time for DOR to prepare themselves). Obviously there isn't enough time for the DfT to do it's review, make alterations to the process, submit new tenders, review new bids, and have the winners mobilise.

Ah, sorry about that, it seems that I missed the point somewhat.

 

[IC225]

Interestingly, DOR have a company now called West Coast Mainline Company (name changed on 28 Setpember 2012).

 

[3141]

There’s a blog by Robert Peston on the BBC News website in which he says that all four bidders for the West Coast franchise were given incorrect information and that, as a result, the amounts they were offering to protect taxpayers would have been insufficient if they had won the franchise but weren’t able to keep up with the premiums they had promised to pay. Therefore when a new round of bidding starts they may have to put up much larger amounts. But as companies may find it very difficult to raise such sums the DfT may have to offer shorter franchises, for which bidders can actually afford to provide an appropriate level of cover.

He has also been on The World At One on Radio 4 making some of the same points.

I know I don’t know much about risk assessment. You identify the risks, and assess how likely each one is to happen, and how serious its effects would be if it did. So you could have something which may well happen, but won’t be too serious, or something that is unlikely to happen, but would be disastrous.

In the last five years of the franchise (from 2021-22 to 2025-26) First was proposing to pay about £4.7 billion. So if it was clear by 2020-21 that they were not going to be able to pay the remaining premiums, and they had to give up the franchise, that’s the amount the government (via the DfT), and therefore taxpayers like us, would not have received.

Obviously the amount First had been asked to put up was too low because of the DfT’s mistakes. But even if they had been asked for three times as much it would still have been well below £4.7 billion. The only way to be sure of getting the £4.7 billion, if First couldn’t meet its obligations over the last five years, would be to get it to put up that amount to start with.

No company is likely to be able to set aside £4.7 billion in case it cannot meet its obligations for a rail franchise. So what might the implications be:-

1) Shorter franchises (as Robert Peston has suggested).
2) The DfT takes a much more cautious approach, regarding very large bids as too risky, and only accepting bids for which the bidder can put up a matching level of cover.
3) Bidders spread their premiums more evenly across the years. That might mean that in later years the profits would be bigger, so there’d need to be a mechanism – a “robust” one, as they say – for sharing profits above a certain level with the DfT.

Actually none of those ideas looks particularly good. Perhaps we’ve reached a stage where the DfT is expecting too much from franchises and bidders are prepared to offer too much to get them.

 

[AndyLandy]

I felt it was a bit off too - Virgin bid for and won Cross Country and West Coast in the 90s without any existing presence; and there's a precedent for two groups placing joint bids with no existing co-presence (TransPennine Express) if he's referring to the Virgin Trains partnership.

Certainly it's quite possible for companies to enter the rail franchising arena as a new entrant or a new co-presence. I don't think that's the crux of the matter though.

The argument will be that the goalposts have been moved in a way that's detrimental to Virgin's ability to re-bid. The point they are making is that they believe their bid is the most deliverable and that a screw-up at the DfT generated incorrect results. By suspending Virgin's rail operation now, the DfT will be biasing the next set of bids against them. I don't think turning around and saying "tough luck" will be adequate. I'd expect more legal action from Virgin if the DfT goes down the DOR route.

 

[PR1Berske]

Interestingly, DOR have a company now called West Coast Mainline Company (name changed on 28 Setpember 2012).

Can you find proof for that? Google comes up with nowt.

 

[WillPS]

Can you find proof for that? Google comes up with nowt.

http://wck2.companieshouse.gov.uk/ae879372ee4eeda2e12e26ad81120069/compdetails

 

[Solent&Wessex]

Certainly it's quite possible for companies to enter the rail franchising arena as a new entrant or a new co-presence. I don't think that's the crux of the matter though.

The argument will be that the goalposts have been moved in a way that's detrimental to Virgin's ability to re-bid. The point they are making is that they believe their bid is the most deliverable and that a screw-up at the DfT generated incorrect results. By suspending Virgin's rail operation now, the DfT will be biasing the next set of bids against them. I don't think turning around and saying "tough luck" will be adequate. I'd expect more legal action from Virgin if the DfT goes down the DOR route.

But it could quite reasonably be argued that Virgin lost the original bid, and hence would have no rail presence then either, once First took over. Now the whole process has been declared void is there any evidence that Virgin would have won - no. In fact, all the evidence so far, including the latest writings from Robert Peston indicate that all the bids were too risky as they were all using duff info from Daft. Thus you could say that Virgin's bid was too risky too and hence they shouldn't have won either - and are in a similar boat to First. The fact that they have no other franchises is by the by. Interestingly, of course, only since it came fairly apparent that Virgin were NOT just going to be handed another extension and pots of money on a plate have they started going on about how this issue of them not physically being able to bid and having to disband.

 

[IC225]

http://wck2.companieshouse.gov.uk/ae879372ee4eeda2e12e26ad81120069/compdetails

Cheers was just about to paste !

 

[HH]

Would Stagecoach look to form another partnership with Virgin? The rumbles all seem to be that Stagecoach would prefer to go it alone on EC etc.

Rumours say that Stagecoach people hate Virgin people...

 

[khib70]

Rumours say that Stagecoach people hate Virgin people...

This is the very forum for them, then........

 

[HH]

There’s a blog by Robert Peston on the BBC News website in which he says that all four bidders for the West Coast franchise were given incorrect information and that, as a result, the amounts they were offering to protect taxpayers would have been insufficient if they had won the franchise but weren’t able to keep up with the premiums they had promised to pay.

I think Peston has put two and two together and made six.

There is a document called the Franchise Evaluation Process, which contains several flowcharts showing the process. Chart 3 shows how the revenue is risk assessed, but in very general terms, e.g. it talks of DfT creating a revenue comparator assessment (benchmark), but has absolutely no details of how to so do. Chart 4 shows that DfT then checks whether the risk of insolvency is too high, and if so, asks whether bidder's parent company is willing to inject additional funds. Neither of the models needed for the above (revenue comparator, or solvency assessment) were part of the template given to bidders.

Unless, of course, one bidder did get access to these models. That would be most un-DfT like in my experience.

 

[Buspilot]

He makes a very valid point though about 15 year franchise lengths being too long and the financial risk to the State/tax payer of the incumbent going bust in the latter years of such a lengthy franchise.

 

[AndyLandy]

But it could quite reasonably be argued that Virgin lost the original bid, and hence would have no rail presence then either, once First took over. Now the whole process has been declared void is there any evidence that Virgin would have won - no. In fact, all the evidence so far, including the latest writings from Robert Peston indicate that all the bids were too risky as they were all using duff info from Daft. Thus you could say that Virgin's bid was too risky too and hence they shouldn't have won either - and are in a similar boat to First. The fact that they have no other franchises is by the by. Interestingly, of course, only since it came fairly apparent that Virgin were NOT just going to be handed another extension and pots of money on a plate have they started going on about how this issue of them not physically being able to bid and having to disband.

I think the point is that if the franchise process had been run fairly in the first place, this possibility would never have arisen. The objection is that because of the delay, this complication now exists.

Whether or not it's a fair consideration is another matter. It could be argued that Virgin had an advantage over the other competitors in this failed first round and that this would now be eliminated.

 

[Lampshade]

He makes a very valid point though about 15 year franchise lengths being too long and the financial risk to the State/tax payer of the incumbent going bust in the latter years of such a lengthy franchise.

Chiltern?

 

[ainsworth74]

He makes a very valid point though about 15 year franchise lengths being too long and the financial risk to the State/tax payer of the incumbent going bust in the latter years of such a lengthy franchise.

Though the point of longer franchises is of course to try and encourage investment in the franchise (à la Chiltern) something that's been distinctly lacking in the shorter seven year franchises that have become the norm since the mid 2000s. It strikes me as being swings and roundabouts. If it's longer it's risky but you'll probably get more investment, on the other hand, if it's shorter then the risk is less but there probably be little or no investment.

 

[HH]

There are ways to make the risk reasonable, and ways to get investment. The problem is the DfT does not seem able to embrace the solutions that could make these work.

Note that the key driver of risk is the economy, and this is considerably down to government. In a normal business you also have various ways that you can respond in such circumstances. The highly specified nature of franchises, preclude those solutions however.

 

[jon0844]

I'd have thought you'd have a 15 year franchise that is carefully watched throughout - either every year or every 3-4 years.

If a company falls below a certain standard, they could be put on early notice that DOR will step in - even if they haven't yet defaulted.

Surely the risk is then massively reduced as DOR can step in before any major harm is done - like years and years of no investment because the company is struggling.

I thought that everyone on here agreed that longer franchises were going to be good - yet the longer they are, the less anyone can realistically predict what will happen.

 

[YorkshireBear]

Although evergreen 3 is now on the network rail credit card i believe?

 

[Buspilot]

If it's longer it's risky

Especially if the bid is back end loaded.

There need to be some restrictions put into the bidding format to ensure bids are not submitted in this way...in other words....upfront or a reasonable spread is acceptable, back end loading is not.......and as jm0844 says, with reviews and step in points. .

 

[jon0844]

Could we not put ALL debt on the same card? Then the Government can get it all off the books and - hey - end of downturn.

Meanwhile Network Rail can just get a new credit card, perhaps with Virgin's new bank?

 

[3141]

I think a few of the earliest franchises were for 15 years such LTS/c2c and Connex South Eastern. Chiltern got their 20-year franchise when there was a deliberate policy to do that as a means of encouraging investment by the TOC.

Connex was terminated by the SRA after they had needed to be bailed out and failed to reform their financial controls. c2c have done well; in the next round the DfT will no doubt expect to get much more money over the next 15 years than they have over the past 15. In that first round, where everyone was feeling their way, you could win a franchise with a bid that today wouldn't stand a chance.

Chiltern have invested a lot. In effect, instead of big cash payments which the government can do as it wants with, the company has made specific investments into its rail services.

If Chiltern was bing retendered now, how much would companies be prepared to offer, I wonder, and how would those amounts compare with what Chiltern has actually put in - including, of course, the effort and time of its staff in developing its schemes.

It's much easier for the DfT to award the franchise to the highest bidder, than to try to compare several different investment proposals.

 

[The Ham]

Though the point of longer franchises is of course to try and encourage investment in the franchise (à la Chiltern) something that's been distinctly lacking in the shorter seven year franchises that have become the norm since the mid 2000s. It strikes me as being swings and roundabouts. If it's longer it's risky but you'll probably get more investment, on the other hand, if it's shorter then the risk is less but there probably be little or no investment.

To encourage investment, why not copy the Chiltern pattern, of having a "short" franchise of 7 years, but with extensions built in if certain investment projects are met. With then rather than having a fixed payment in each year having a profit share mechanism (for instance a percentage of profit being used for "repaying" the investment and the rest split between the Government and the company until the value "repaid" reaches say 110% of value of investment and then all the profits get split thereafter). On franchises where profits are not expected, cost savings (from the expected loss) are used instead with a bonus if the franchise does return a profit (of between 1% to 5% of what the government would have been paid at break even over the term of the franchise), such a bonus would be based on how likely it is to achieve break even.

If the investment doesn't bring the returned results over the time frame there is some protection to the Government as the company would have already funded the some of the target projects but it may lead to the company being less willing to invest in the next target project and so the franchise does not run for as long and can be re-let. However if the projects do much better then estimated then everyone gets more money and the franchises run to the full 15 years.

It is likely to result in a lot of easy to do projects being committed to and undertaken, but that is probably no different than what would happen under the current system anyway, but does not fix the payments to the government in actual terms so the risk over the longer term is lower. If the Government funds a project (such as would be the case for the bigger more complex costlier projects, they would take a "repayment" share in a similar way as if the company had funded the project (although perhaps a smaller amount over a longer time frame).

 

[tbtc]

Obviously the amount First had been asked to put up was too low because of the DfT’s mistakes. But even if they had been asked for three times as much it would still have been well below £4.7 billion. The only way to be sure of getting the £4.7 billion, if First couldn’t meet its obligations over the last five years, would be to get it to put up that amount to start with.

No company is likely to be able to set aside £4.7 billion in case it cannot meet its obligations for a rail franchise. So what might the implications be:-

1) Shorter franchises (as Robert Peston has suggested).
2) The DfT takes a much more cautious approach, regarding very large bids as too risky, and only accepting bids for which the bidder can put up a matching level of cover.
3) Bidders spread their premiums more evenly across the years. That might mean that in later years the profits would be bigger, so there’d need to be a mechanism – a “robust” one, as they say – for sharing profits above a certain level with the DfT.

Actually none of those ideas looks particularly good. Perhaps we’ve reached a stage where the DfT is expecting too much from franchises and bidders are prepared to offer too much to get them.

For me the best answer would be:

5) Franchises include local and longer distance services.

Instead of having some lucrative franchises that should generate big premiums/ big profits (WCML, ECML) and some which need massive subsidies (Wales & Borders, Northern), why not combine the two types of operation into one?

That way you'd probably have every franchise requiring a low subsidy/ paying a low premium (rather than some requiring large subsidies and some paying premiums) which means a lot less risk of the TOC walked away during a franchise.

At the moment it's meaningless to have some TOCs paying big premiums whilst others take big subsidies - the overall cost/benefit to the UK is what matters.

The fact that this coincides with my general view of operation (that it's much more efficient to co-ordinate services and to give the longer distance operator an incentive to connect with local branchlines etc) is pure coincidence of course

GA/ SE/ SN/ SWT/ FGW and FSR all seem to work well like this. It avoids a "two tier" workforce (allowing natural progression in the company, rather than Unions playing one TOC off against another). It encourages a stable use of stock/ paths/ investment.

The problem is that it would mean franchises were no longer so attractive to the likes of Branson, who only seem to want to lend their brand to the exciting/ fast services, but is that really a reason to keep the current situation?

 

[Eagle]

Chiltern?

Merseyrail? (A 25-year franchise.)

 

[YorkshireBear]

For me the best answer would be:

5) Franchises include local and longer distance services.

Instead of having some lucrative franchises that should generate big premiums/ big profits (WCML, ECML) and some which need massive subsidies (Wales & Borders, Northern), why not combine the two types of operation into one?

That way you'd probably have every franchise requiring a low subsidy/ paying a low premium (rather than some requiring large subsidies and some paying premiums) which means a lot less risk of the TOC walked away during a franchise.

At the moment it's meaningless to have some TOCs paying big premiums whilst others take big subsidies - the overall cost/benefit to the UK is what matters.

The fact that this coincides with my general view of operation (that it's much more efficient to co-ordinate services and to give the longer distance operator an incentive to connect with local branchlines etc) is pure coincidence of course

GA/ SE/ SN/ SWT/ FGW and FSR all seem to work well like this. It avoids a "two tier" workforce (allowing natural progression in the company, rather than Unions playing one TOC off against another). It encourages a stable use of stock/ paths/ investment.

The problem is that it would mean franchises were no longer so attractive to the likes of Branson, who only seem to want to lend their brand to the exciting/ fast services, but is that really a reason to keep the current situation?

Yeah never thought about it that way. It makes it much more rewarding to hvae local and long distance services connect into each other.

 

[WillPS]

Isn't Merseyrail effectively a concession, like London Overground?