Cap and collar returns in West Coast direct award

‘AS CLOSE to a management contract as could be without actually being one’ is how industry insiders characterise the Virgin Trains direct award for the West Coast route.

The deal, intended to cover the period from 1 April until the start of the new West Coast Partnership franchise (p12, last month), sees a return to the ‘cap and collar’ arrangement with regards to revenue targets. The first year requires a premium payment from Virgin Rail Group in the region of £205 million, with any extension adjusted to reflect revenue growth but understood to be ‘of the same order’. With the deal including an option for a second year at the Secretary of State’s discretion, industry sources are suggesting that they expect at least six months of the additional year to be taken up by DfT.

The Department for Transport is seeking passenger growth of 7% in the first year, which will be challenging but more realistic than the 9% growth it is understood to have required initially, despite this demand having been made at a time when the industry was starting to see a slowing down in passenger growth.

With some uncertainty as to whether the target and the premium can be delivered, DfT is to bear risk for 90% of any shortfall but will also take 90% of any revenue over the agreed target. Industry sources report that in the initial negotiations there was no awareness within DfT of the £50 million increase in annual track access charges for the West Coast franchise in the first year of the direct award, and reluctance to reflect this in the premium figure is one key reason for the cap and collar agreement.

One senior insider also noted ‘DfT is desperately short of cash, hence the challenging target, but the operator would have to work exceptionally hard to make any additional income worthwhile. The incentive is to deliver exactly the agreed premium as Virgin’s downside exposure is so small whilst the upside potential is likewise so small.’ Insiders at Virgin indicate that the new agreement gives VRG a margin of approximately 2.75%, set against the commitments in the direct award that take the promised investment to over £10 million. Tony Miles

Challenging target: a Virgin Pendolino at Docker, forming the 11.40 Glasgow to Euston service on 16 November 2017. Tom McAtee