By their tweets shall ye know them?
Here’s our Prime Minister, Theresa May, on the Andrew Marr show on 7 January 2018.
Andrew Marr: Can you give us a guarantee that the British taxpayer is going to get that £3.3 billion from Stagecoach and Virgin for the East Coast line? Thereas May: Of course not. Due to the failure of Network Rail to deliver the planned infrastructure next year it will not be possible to run the planned extra services which would have paid for the increase in premium. Quite frankly, until we know how many extra trains can be run and the journey times and when these will be available, all I can say is that substantial premiums will be generated. And don’t forget Andrew that Stagecoach and Virgin have already paid nearly £1 billion to date.
Meanwhile I have asked my Cabinet Office to review the performance of Network Rail’s executive directors to see what might be done to improve timely delivery of desperately needed infrastructure across the network.
Well, actually, I made that last bit up. In fact, it’s all a work of fiction. This is how it really went: AM: Can you give us a guarantee that the British taxpayer is going to get that £3.3 billion from Stagecoach and Virgin for the East Coast line? TM: Virgin and Stagecoach are still paying money to the Government for the East Coast – AM: That’s not a ‘yes’. TM: – for the East Coast line. But let’s just look – the point you’re making AM: – So the answer is ‘no’ to that. Actually – Lord Adonis is right. The taxpayer has lost out on this deal in big terms and it provides an incentive for other companies to do the same thing.
So given that this column provided a detailed analysis of the financial problems at Virgin Trains East Coast back in August last year, and then updated developments last month, readers might well ask why it continues to be a political cause célèbre in 2018. And the answer lies in one word – ‘bailout’. That, and a nasty case of political dishonesty – although long-term readers of this column should be inured to that
Quite simply, the VTEC affaire is being promoted as the Department for Transport ‘bailing out’ Stagecoach and Virgin from their franchise commitment to pay ‘£3.3 billion’ in premia over the life of the franchise. I had to check back to see where the £3.3 billion came from.
When the franchise was announced in November 2014, DfT said that ‘around £3.3 billion would be paid over the next eight years’. Stagecoach said that committed premium payments would be £2.3 million at 2014-15 prices and discounted using the Government’s real discount rate of 3.5% per annum. So I think we have a case of cash versus Net Present Value.
Anyway, adding up the annual premia at 2014 prices I make the total £2.7 billion. But the important number is the total payable in the last four years from April 2019 when, as we know, the East Coast main line infrastructure upgrade and the new Inter-city Express Programme fleet was expected to transform inter-city services on the route, boosting traffic growth and premium payments.
I put the premium payments for those last four years at £1.6 billion. This compares with the £1.1 billion that VTEC will have paid in the first four years to 31 March 2019. Thus, all this £3.3 billion talk is classic ‘have you stopped beating your wife’ stuff and typical political dishonesty.
Then we come to the great bailout conspiracy. As I’ve been explaining in this column, on social media and radio, the premium payments for the second four years depend on VTEC being able to generate revenue growth from the more intensive, higher frequency, faster timetable which was due to be introduced from May 2019. As the franchise agreement makes clear, VTEC will use its ‘best endeavours’ to deliver the timetable, but it still depends on Network Rail delivering.
At the moment all we know is that the infrastructure to support this timetable won’t be ready by May 2019. What parts of it will become available and when, no one seems to know. And, apart from that, how the phased implementation of the Thameslink timetable will affect VTEC services is another unknown.
So it is pretty obvious that, despite VTEC’s best endeavours, the premium profile is wrecked and there is nothing VTEC can do about it. It has to be said that this is convenient for Stagecoach and Virgin as it gives them an exit from a franchise that is costing them money.
However, in the arcane world of political semantics, being ‘let off the hook’ through someone else’s shortcomings is not the same as being ‘bailed out’.
By chance I sat next to Labour’s Shadow Transport Secretary Andy McDonald at the Rail Freight Group lunch before Christmas. And we discussed VTEC. And I explained how Network Rail’s failure to provide the infrastructure upgrade meant it would be impossible for anyone to support the future premium profile. He nodded sagely, but this was clearly irrelevant to the bailout narrative. So we got this in a Labour press release ahead of a debate on franchising on 10 January. ‘Labour’s Shadow Transport Secretary Andy McDonald will today (Wednesday 10 January 2018) demand that the Secretary of State, Chris Grayling, detail the cost to the public purse of the recent taxpayer bailout of Virgin/Stagecoach on the East Coast, which could reach £2 billion. Labour will also warn that a failure to take services back into public ownership will result in struggling train operating companies demanding similar bailouts in future, potentially costing taxpayers hundreds of millions or billions of pounds’.
Not much connection with reality there. But railway journalists complaining about politicians is like train drivers complaining about low adhesion. I just wish that when a new transport secretary arrives and some of my peers go all goo-goo over their willingness to engage, they should remembers that he, or she, is just another politician.
I can remember when Lord Adonis was just such a flavour of the month. He made a point of phoning up the railway writers, including me, for background chats ahead of policy announcements. I well remember him explaining how cascaded Class 319s would improve the benefit:cost ratio of the Great Western electrification.
And it is Lord Adonis who has given the bailout narrative a new life. Actually, his new role as the Donald Trump of the UK railway twittersphere began slightly earlier.
In November last year Lord Adonis was on a train that was delayed. He tweeted that he was held up by a broken down freight train. Actually, it was an infrastructure failure.
No matter, this tweet was the result: ‘Daytime freight trains take up huge amount of rail capacity & are a major cause of delays & disruption. Time to rethink freight logistics to get best use out of infrastructure, esp with lorry platooning likely soon. Major @NatInfraCom study just starting’
Well, you can imagine how that went down with the rail freight companies. But it got worse.
Don’t forget that Lord A had been appointed Chairman of the National Infrastructure Commission in April 2017. In October 2017 the Commission published its interim National Infrastructure Assessment (NIA) ‘Congestion, Capacity, Carbon: priorities for national infrastructure’. And that had already got the steel wheel freighters exercised.
When the Chartered Institute of Logistics and Transport magazine runs a double page spread with the headline ‘Sorry Lord Adonis, you have got this wrong’, you know things are serious. Author of the article was my old chum and rail freight veteran Julian Worth.
As Mr Worth noted, ‘the NIC dismissed rail freight in two pages as not being a solution worthy of investment with its track capacity better used for more passenger trains and freight diverted on to road where platooning will allow more HGVs to be moved’. Clearly NIC was away with the fairies on this. As Julian Worth pointed out, whether the lorries were driven singly or platooned, there would still be another 3,000 movements a day on the already stressed A14 from Felixstowe.
But it all became academic when on 29 December 2017 Lord Adonis resigned from the NIC Chairmanship. And in his rambling letter of resignation he revealed that he would have been compelled to step down anyway over the Transport Secretary’s decision to bail out Stagecoach and Virgin on the East Coast rail franchise.
‘It is increasingly clear that the bailout is a nakedly political manoeuvre by Chris Grayling,’ Lord Adonis said. He described it as an extraordinary and indefensible move that would cost taxpayers ‘hundreds of millions of pounds, possibly billions if other loss-making rail companies demand equal treatment’.
He added that the bailout ‘benefits only the billionaire owners of these companies and their shareholders, while pushing rail fares still higher and threatening national infrastructure investment. It is even more inexcusable given the Brexit squeeze on public spending’.
Lord Adonis added that the ‘East Coast affair’ will inevitably come under close scrutiny by the National Audit Office and the public accounts committee (PAC), ‘and I need to be free to set out serious public interest concerns’. He added: ‘I am ready to share troubling evidence with the PAC and other parliamentary committees investigating the bailout’.
What this ‘troubling evidence’ is has yet to be revealed. It looks as though we are now into conspiracy theory territory here. Before the cabinet reshuffle Lord Adonis tweeted ‘Sir Richard Branson & Sir Brian Souter praying that Chris Grayling stays in his job. It could be worth billions to them!’
When Chris Grayling was briefly reported as the new Tory Party Chairman, only to remain at transport, you can guess who had successfully lobbied for him to stay in post – yes, really. ‘Sir Richard Branson & Sir Brian Souter rejoicing that Chris Grayling remains Transport Secretary. Billions in it for them in bailouts, new contracts & reduced competition! I will be exposing all this in the weeks ahead #bailoutbritain’
Anyway, must get back to the real world, so let’s just say that for Lord Adonis the VTEC affaire is ‘the biggest transport scandal since the collapse of Railtrack in 2001’. Well he knows of what he speaks, since as Head of the 10 Downing Street Policy Unit at the time, he was in the thick of it, including penning a note to the Prime Minister’s secretary which referred to a fundamental review of Railtrack ‘to look at all viable options including a possible return to the public sector’.
Meanwhile, back in 2018, on 10 January there was a debate in Parliament on rail privatisation where Chris Grayling gave an update on VTEC. ‘I am not agreeing to early termination of a contract in 2020’ he began, adding ‘no one has asked me to’.
VTEC is paying a ‘huge premium’ to the taxpayer and continues to do so. However, the franchise is not delivering the profits the operator expected ‘and is at risk of not making it as far as 2020’.
On money, Mr Grayling explained that VTEC is generating a ‘healthy and growing operating surplus that is providing a much greater return to the taxpayer than when it was in the public sector’, 20% higher than when being run as East Coast by DfT subsidiary Directly Operated Railways.
However, Virgin and Stagecoach ‘got their numbers wrong.’ And have been losing money steadily. According to Mr Grayling the franchise has now lost ‘the best part of £200 million in the past three years’. ‘Despite that, I am holding them to their full financial obligations, taking every last penny of the £165 million guarantee that we insisted on when they took on the franchise’, Mr Grayling concluded.
Now obviously DfT wants to appear rough and tough as it weathers the bailout storm. But I don’t think the numbers can be that bad.
For a start, in the first year of the franchise (2015-16) the VTEC premium was £6 million less than that paid by East Coast so they can’t have lost money that year against 4.5% ridership growth the previous year. The big increase in premium came in 2016-17 to £271 million and in 2017-18 and 2018-19, to around £330 million. Stagecoach has made £84.1 million provision for losses in these two years.
But in 2019-20 the premium actually drops back by about £35 million. And 2019-20 is when VTEC goes to DfT, franchise agreement in hand, and says, ‘look, we both signed up to this, Network Rail hasn’t delivered, this is the best timetable we can cobble together, we’ve spent millions on getting ready for IEP, how much is that worth off the premium?’
And that’s not the only financial consideration. Virgin inherited from East Coast a claim against Network Rail for sustained poor performance. This was due to go before the Access Disputes Resolution Committee last year. Quite sensibly, it was withdrawn by the Department for Transport since it would have been claiming the money from its own subsidiary.
But according to informed sources, VTEC is processing its own claim against Network Rail for sustained poor performance. This could be worth not far short of the provision made by Stagecoach.
It’s worth noting that one of Lord Adonis’ written questions asked: ‘What assessment had been made of the extent to which delays by Network Rail undertaking infrastructure improvements on the East Coast main line were a legitimate basis for the existing East Coast franchise operator to seek to reduce premium payments contracted under that franchise; and by what amount that franchise will be reduced in each year until 2023?’
To which Baroness Sugg replied: ‘the contract includes an enhanced East Coast timetable from May 2020 – reflecting the anticipated Network Rail enhancements to the line – and a process for revising premium payments from that date if the Operator, despite its best efforts, is unsuccessful in obtaining all the rights it needs. The exact adjustments to the premium depend on the extent of the enhanced services which the Operator is able to run from May 2020’.
She added that from 2020 the Government intends to let the East Coast Partnership as one of the first of a new generation of integrated regional rail operations. The written answer concluded: ‘it is therefore not possible to specify what amount the current East Coast franchise will be reduced in each year until 2023, as it will be superseded by the East Coast Partnership’.
Well, letting the East Coast Partnership and having it up and running by April 2020 has to come under the ‘heroic aspiration’ category. And here is an interesting thought from a recent Sir Richard Branson blog on VTEC:
‘We could swallow those losses and simply walk away from the franchise as others have done before. That would be easier. But it would also be wrong. It would bring an abrupt halt to the investment and improvements which are flowing into East Coast. It would mean more disruption to passengers, communities and our people.
‘Yes, improvements never happen as quickly as any of us would like. But we have a track record of achieving great success in difficult circumstances. It took years to turn the West Coast main line around, but we persevered and with new trains, new track and our incredible team, today millions more people want to travel on our trains than ever before and we consistently top customer satisfaction tables.
‘We have almost trebled passenger numbers to 37 million a year and a similar transformation is underway on East Coast. We should not endanger this now. The current system can certainly be improved, and we want to continue to work with the Government and Network Rail to bring about improvements for the benefits of our passengers. I hope and believe the East Coast Partnership is a step in that direction.’
This one could run and run.