The Virgin East Coast rail franchise failed because the government accepted an “overambitious” bid, the transport secretary admitted yesterday.
Chris Grayling said that the Department for Transport would take a “more sensible approach” to future rail franchises after the financial failure of the intercity operator.
Addressing MPs on the commons transport committee, he also appeared to acknowledge that the Treasury would ultimately fail to receive the full amount originally promised because the line was not “making as much operating profit as was forecast”. The comments were made as Mr Grayling was questioned by the cross-party committee over his handling of the affair, in which the rail operator — 90 per cent owned by Stagecoach — is about to walk away from the deal three years early.
It had promised to pay the government £3.3 billion over eight years when it took over the line in 2015.
However, its forecasts were based on passenger numbers growing by about 50 per cent over the course of the deal. Numbers have increased but not by nearly enough, leaving the network in financial trouble. Mr Grayling announced last November that Virgin Trains East Coast would be replaced by a public-private partnership in 2020, before £2 billion worth of franchise payments are delivered, prompting claims from critics that it constituted a bailout of Stagecoach.
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The new operator will continue to make payments to the taxpayer into the next decade but they are likely to be far below the levels previously promised.
Speaking yesterday, Mr Grayling said claims that £2 billion would “disappear is simply not right” because the taxpayer would continue to receive money. However, he admitted that the amount would not be “as much as was originally forecast”.
“The early forecasts of how much Virgin Trains East Coast could drive up revenue in the short term have not yet been fulfilled and that’s why the business is struggling,” he said.
Mr Grayling acknowledged that the original bid, which was tabled before he became the transport secretary, was “overambitious in what they thought they could deliver”.
However, he insisted that the DfT, led at the time by Sir Patrick McLoughlin, had little alternative but to accept the highest offer.
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Since then, the government has “looked to take a more sensible approach to the risks in the franchise” process, he said.
He told MPs how the contract for the South Western line, which was awarded to Firstgroup last summer, was not the highest bid.
Analysts have warned that other lines could also be in financial trouble after optimistic bids were accepted. These include the Greater Anglia franchise, run by Abellio, and TransPennine Express, operated by Firstgroup. The companies have denied that they are in trouble, insisting that they will deliver on contracts signed with the government.
