August 15, 2012 • 4:02 pm

“Insanity is doing the same thing over and over again and expecting different results. When will the Department for Transport learn?”

Richard Branson, 15 August 2012

Founder of Virgin Group Sir Richard Branson reacted angrily this morning as the Department for Transport (DfT) announced First Group would be taking over the Inter City West Coast rail franchise. Mr Branson branded the decision “insane” and went on:

“This is the fourth time that we have been out-bid in a rail tender. On the past three occasions, the winning operator has come nowhere close to delivering their promised plans and revenue, and has let the public and country down dramatically.”

So does history really bode so badly for Virgin’s rivals?

A point worth bearing in mind first of all is that 49 per cent of Virgin Trains is actually owned by Stagecoach, and several of the previous bids have been made jointly between the two companies.

The DfT doesn’t publish a convenient list of all past bids for the 16 rail franchises in England and Wales, however we can at least summarise the current situation, in terms of who runs what, and when their contracts are due to end.

The Department for Tranport provides an outline of the current franchising timetable, together with the Train Operating Companies in ownership of each line:

Virgin’s past

According to Sir Richard, this is the fourth time Virgin has been outbid. A flick through the history books reveals the previous three Virgin defeats: 

1) East Coast main line 2005: Great North Eastern Railway (won) vs Virgin, First Group, DSB

2) East Coast main line 2007: National Express (won) vs Virgin, First Group, Arriva

3) Cross Country rail 2007: Arriva (won) vs Virgin, First Group, National Express 

So did all these winning operators “let the public down dramatically” as Sir Richard claims? 

This certainly seems to be a reasonable conclusion in the first instance. The Great North Eastern Railway (GNER), owed by Sea Containers Ltd., lost its franchise holding on the East Coast only 18 months after its 2005 victory. The National Audit Office, in a 2011 report, confirms some of the background:

“The InterCity East Coast franchise is a high profile service, operating passenger trains between London, the North East and Scotland. In 2005, following a competition, the franchise was re-awarded to Great North Eastern Railway but 18 months later its holding company, Sea Containers Ltd, faced financial difficulties. In late 2006, the Department negotiated an end to the franchise, allowing Great North Eastern Railway to run the franchise under a management contract until a new operator could be procured.”

GNER’s failure led to the bids in 2007, won by National Express. However this too met a sorry end, when National Express also faced financial difficulties. The Public Accounts Committee reviewed this case and they provided recommendations on how to deal with future franchise bids:

“In 2007, a new contract was awarded to National Express to run the franchise on the basis that it would pay the Department £1.4 billion over seven and a half years…

“As a result of the economic downturn, expected passenger revenues did not materialise and National Express announced in July 2009 that it wanted to opt out of the contract and would not provide the necessary financial support to the East Coast franchise…

“Following negotiations with National Express, the Department terminated the contract in November 2009 and transferred services to a new publicly owned company, Directly Operated Railways, until the franchise could be re-tendered. Although other franchises suffered financial difficulties during the economic downturn, East Coast was the only franchise that failed.”

Of course, while both these cases certainly seem to demonstrate failure on the part of Virgin’s rivals, this doesn’t say anything about the robustness of Virgin’s own bids at the time. The DfT, unfortunately, don’t publish reasons for rejecting the other franchise bids.

So what about the third case? Virgin’s most recent loss (before today) on a rail franchise tender was back in 2007, when it lost Cross Country rail to Arriva. However, it’s difficult to find any evidence yet of Arriva failing to meet its promises, or facing financial difficulties on the scale that hit GNER and National Express.

There is, however, evidence to suggest that Virgin themselves weren’t entirely free from financial difficulties. In their own analysis of historical franchise data, the DfT comment that:

“The original Cross Country franchise was awarded to Virgin in November 1996. It was let as a 15 year franchise. The Virgin bid included innovative proposals to alter the train service by running more frequent, but shorter, trains. However, even before these proposals were introduced, the franchise experienced severe financial difficulties.”

This resulted in a ‘Letter Agreement’ enforced by the Government at the time, in which the authorities:

“acquired the right to terminate the Cross Country franchise early. This was exercised and the New Cross Country franchise was awarded to Arriva in 2007.”

In Arriva’s case therefore, Virgin could be accused of throwing stones in glass houses.

In terms of the original claim Sir Richard could, of course, be referring to previous bids in which Virgin was defeated that we aren’t aware of, but Arriva’s bid certainly constitutes one of the “past three occasions”.

Whether all this past experience makes the DfT “insane” to award the West Coast franchise to First Group obviously remains to be seen, but perhaps the DfT would do well to heed the ominous warning of the Public Accounts Committee back in 2010, when it commented on the National Express debacle:

“National Express promised the largest ever payment for a passenger rail franchise, but then failed to meet its profit forecasts from the start of the contract and, following the economic downturn, quickly started to accumulate losses. Crucially, the Department did not test any of the bids for the franchise against the impact of an economic downturn.”

Update (28 July 2012)

Full Fact is currently investigating evidence to back up Mr Branson’s suggestion that Arriva have “let the public and country down dramatically”. If any readers know of sources that would be of use, please get in touch via our suggestions page.

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