The failure of the Virgin Trains East Coast rail franchise is to be investigated by the government’s spending watchdog.
The National Audit Office (NAO) has launched an investigation into the route, which runs between London and Edinburgh, after transport secretary Chris Grayling admitted the deal with Stagecoach and Virgin will be torn up early.
Grayling’s decision has led to accusations that ministers are bailing out the private operators by £2bn because they will not deliver the full £3.3bn of premiums promised to the government.
Stagecoach, which holds 90% of the contract, alongside 10% partner Virgin, won the eight-year contract in November 2014 with a promise to pay the government £3.3bn to operate it until September 2023, and the option of a one-year extension. The deal is believed to have relied on passenger revenues increasing by 10% every year.
However, the companies have been caught out by a string of problems on the franchise, from state-owned track operator Network Rail failing to deliver upgrades on the line, to weak consumer confidence eroding passenger growth. The latest figures show revenues rising at a rate of just 3%.
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The deal’s premature termination is the third time in 12 years that the route has failed.
Grayling said a new public-private partnership, uniting the track and trains, will run from 2020, instead. It is unclear who will operate the line between now and then. The existing operator may be given a short-term management contract, but that would be hugely controversial as Virgin and Stagecoach would be allowed to make profits without the obligation to pay the mammoth premiums that were initially promised.
The NAO is expected to dig into the Department for Transport’s handling of the franchise and the implications of the new “partnership”.
The East Coast failure could have ramifications for other routes. TransPennine, run by FirstGroup; Northern Rail run by German state-owned company Arriva; Greater Anglia run by Abellio of the Netherlands and Mitsui of Japan are all believed to be struggling.
Andrew Adonis, the government’s former infrastructure tsar, has accused the government of “bailing out” the private companies.
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Virgin and Stagecoach are on the hook for more than £200m of risk capital — a cash buffer in case they did not deliver the promised premiums — and are expected to surrender all of it.