Intercity East Coast Franchise Contents

3Interim operating arrangements

39.In his statement to the House on 5 February, the Secretary of State confirmed that the East Coast franchise would “only be able to continue in its current form for a matter of a very small number of months and no more.”109 Faced with the impending termination of the VTEC contract, the Secretary of State had the option of either:

a)allowing VTEC to continue to operate services under a “short-term” and “not-for-profit” arrangement; or

b)returning the East Coast franchise to the direct control of the DfT, which in practice meant asking Arup, SNC-Lavalin Transport Advisory (InterFleet) and Ernst & Young to run the services as they were now the ‘operator of last resort’ following the winding up of Directly Operated Railways in 2015.

40.Either option was only intended to be an interim measure until 2020, at which point the East Coast Partnership is intended to be operational. To inform his decision, the Secretary of State commissioned a value-for-money assessment of these options and that the eventual decision would be:

...based on a number of criteria, including which option returns most money to the taxpayer, the risks attached to each, and the value of any improvements in passenger services. I will also have regard to the effect of my decision on other franchises. The decision will be taken in a transparent way; the Department’s assessment of the option will be published and it will be properly validated.110

41.In his statement to the House on 16 May 2018, the Secretary of State informed the House that he would terminate Virgin Trains East Coast’s contract on 24 June 2018 and bring operations back under public ownership via the operator of last resort.111 At the same time, he published the DfT’s Short-term Intercity East Coast train operator 2018 options report.112

42.The options report indicated that the transition to operator of last resort would be slightly more complicated and costlier than the VTEC arrangement. For example, it said that VTEC was better placed to implement the new rolling stock on the network because it had gained embedded knowledge through three years of running operations, infrastructure, control systems and their involvement in the design, testing and optimisation of the new trains.113 In terms of value for money, the report stated that “both options are likely to offer comparable value for money”.114 In terms of premium for the taxpayer, it said that under either option the business revenues were estimated to reach around £2bn over the period of interim operation and the forecast income or premium for taxpayers was estimated at around £250 million.115

43.The balance of operational risks and potential benefits of the options, according to the Secretary of State, was “finely balanced”,116 as was the impact for the taxpayer.117 In oral evidence he explained the rationale behind his decision:118

It was a judgment for me based on two things. The first was that I did not want to be seen to reward corporate failure. This Committee and others would have criticised me for doing that. The other point was that it makes it easier to migrate to the East Coast Partnership, because it can become a process of evolution, not revolution on a single date in 2020. We can start to mesh the two teams together now. We can create joint ways of working. We can begin to plan the railway together, so we can evolve the LNER into the east coast partnership rather than simply waiting for a handover date in 2020, which would otherwise have been the approach. For those two reasons, I judged that it was the right thing to follow the OLR route.119

44.The transfer took place on 24 June 2018 and seems to have gone relatively smoothly thus far, although it is too early to tell what the exact impact the change in management and branding will eventually have on the franchise operations and on passenger growth. It is still unclear exactly how long the current operational arrangements will last and when the new partnership will be put out for tender. The initial expectation was for the partnership to take over from 2020. This always seemed optimistic given that a typical franchise competition, which this is partnership is not, takes between two and two and a half years to run. This includes working out what the specification might be, working out the costs, writing the ITT, receiving the bids, awarding the franchise and then finally commencing the takeover of operations.120 Further, the Government has not yet decided how it will run the tender process for the Partnership.121 The 2020 Partnership start date has now started to shift and according to the Secretary of State, “is now no longer set in stone in the way it was “.122

45.One of the risks with the uncertain interim arrangements is that investment and other initiatives typically undertaken by the private operator may be delayed, particularly if there are complications the East Coast partnership. Delayed investment was a by-product of what happened when the public sector took over after the failure in 2009.123 Directly Operated Railways was initially only anticipated to run for two years but ended up being in place for over five years. In this time, investment was delayed until the ‘more permanent’ operating arrangements were in place. Delays and uncertainty around the future operating arrangements also create unnecessary uncertainty for staff on the network. There is a risk of this uncertainty slowly undermining performance and passenger satisfaction for this franchise, which up until this point had been good. While it is too early to know whether the decision to transfer control to the operator of last resort was the right one, we regret there is a lack of a clear plan or timescales upon which the interim operator will run the franchise. We recommend that the Secretary of State outline the exact timescale for the interim operator and clarify exactly how operational and investment risks will be managed until the longer-term Partnership arrangement is in place. We are not aware of the existence of formal obligations and targets for the operator of last resort for the Intercity East Coast franchise. We recommend that whenever the operator of last resort arrangement is invoked, the DfT should revise and publish obligations and targets for the operation of the failed franchise by the operator of last resort, in order to provide passengers, taxpayers, Parliament and industry certainty of its business plan, strategy and development plans. This should be done within six months of assuming responsibility for a franchise.