3 Protecting taxpayers' interests
11. The transfer from CSE to SET safeguarded the
passenger rail service, with services improving following the
transfer of the franchise, although this had been due mainly to
improvements in Network Rail's performance. Uncertainty remains
as to whether termination was the most cost-effective option for
the taxpayer. The transfer of the franchise involved considerable
effort and costs amounting to some £6.4 million, including
£557,000 to provide incentives to some managers to remain
with the operation. The SRA also provided subsidies to SET of
some £22 million more than those CSE had agreed. The SRA
nevertheless considered that it had paid SET an appropriate amount.[14]
12. The SRA's costs for investigating the difficulties
with CSE's franchise, monitoring CSE's compliance with the deed
of amendment and the termination included consultants' fees of
£4.6 million. The SRA had employed consultants because it
did not have the necessary resources in-house to deal with the
volume of work and the complex issues that arose. It had sought
extra assurance by engaging two different firms to carry reviews
with some duplication of work to compare their findings and recommendations.
The SRA put this in the context of the scale of the task to transfer
a business with 4,000 employees, £450 million turnover
and 300,000 passengers a day. It nevertheless accepted that in
a similar future situation it would spend less on consultancy.[15]
13. The SRA had spent £300,000 on rebranding
trains and staff uniforms from CSE to SET which was necessary
in their view to demonstrate to passengers and staff that there
had been a change. The Department considered this was not an unreasonable
cost for the size of the fleet of trains involved. The new franchise
agreement with GoVia does not specifically mention rebranding
of rolling stock or uniforms, and GoVia had indicated that service
delivery was a more important priority for them. Rebranding of
stations was required within three years of the franchise term
and would most likely be undertaken as part of general maintenance
rather than as a specific activity.[16]
14. The SRA recovered from CSE £2.8 million
of the £6.4 million costs it had incurred in the termination
of the franchise (Figure 3). Under the terms of the
franchise agreement, the SRA had a contractual right to deduct
from CSE's £19.5 million Performance Bond[17]
its losses, liabilities, costs and expenses incurred as a consequence
of CSE's failure to comply with its obligations. The SRA obtained
independent legal advice on which costs associated with the termination
of the franchise it could recover from CSE. It did not, however,
test the advice given by its internal legal advisers that it had
no contractual right to recover £2 million spent on
consultancy and external advisers in the lead up to the termination
decision.
15. The SRA considered that there were significant
financial and operational risks of CSE's holding company becoming
insolvent if all the costs were recovered. The SRA feared that
insolvency could trigger Rolling Stock Leasing Companies (ROSCOs)
to terminate CSE's leases and claim significant sums in compensation
for early termination, putting the continued availability of the
rolling stock at risk. However, in practice, in October 2003 the
SRA entered into agreements with the relevant ROSCOs under Section
54 of the Railways Act 1993 prior to completion of the franchise
exit negotiations with CSE. The Section 54 agreements provided
the ROSCOs with certainty over the future leasing of their rolling
stock and removed their right to seek termination payments from
CSE. At that point, therefore, there was therefore no potential
liability for lease termination payments which could have pushed
CSE into insolvency.[18]Figure
3: Costs which the SRA had or may have had a right to recover
from CSE under the franchise agreement
| SRA costs recovered from CSE
| SRA costs not recovered from CSE that the SRA appeared to have a contractual right to pursue
| SRA costs not recovered from CSE where the SRA's contractual right to pursue cost recovery was not independently tested
|
| Nature of cost
| £'000
| Nature of cost
| £'000
| Nature of costs
| £'000
|
| Consultancy costs incurred by the SRA in connection with the decision to terminate the franchise
| 2,600 |
Rebranding costs associated with creating South Eastern Trains (SET) and its holding company, SET (Holdings), including new staff uniforms (£274,000) and IT costs (£326,000)
| 600 |
Fees for consultancy reviews of CSE's financial difficulties and the extent of CSE's compliance with the deed of amendment
| 2,000 |
| Media costs associated with the SRA's announcement of the termination
| 106 |
Retention payments to key CSE staff
| 557 |
|
|
| The cost of Network Rail carrying out a dilapidations survey of CSE's franchised stations on behalf of, and paid by, the SRA
| 98 |
SRA staff time spent managing the termination (based upon the SRA's estimate of the additional work involved)
| 500 |
|
|
| 2,804
| | 1,657
| | 2,000
|
Source: National Audit Office summary of SRA information
16. The SRA had a generic contingency plan to enable
it to take over a franchise should a train operating company,
for whatever reason, be unable to continue running train services.
The CSE case showed that the SRA could terminate a franchise and
carry out its role as operator of last resort, protecting passengers'
interests. The handover had been achieved with the vast majority
of staff, including the new Managing Director appointed by CSE,
transferring over to SET and rolling stock maintenance contracts
and purchase agreements for new trains continued on SET's behalf
by CSE. The handover went well. Some deterioration in CSE's operational
performance occurred during the handover period but overall passenger
satisfaction increased. SET improved the financial management
procedures inherited from CSE, including financial forecasting,
and addressed a backlog of station painting and cleaning work.[19]
14 Qq 15, 55, 82, 108, 114 Back
15
Q 101 Back
16
Qq 58, 60; Ev 15 Back
17
A TOC's holding company must take out a Performance Bond with
an insurance company to guarantee that the TOC will comply with
its franchise agreement obligations. In the event of default,
the SRA could retain some, or all, of the Bond. Back
18
Qq 7, 16-18 Back
19
Qq 103, 113, 115-117; C&AG's Report, paras 2.24, 4.5-4.6 Back
|
