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Sir Alastair versus Gordon Brown – now there's a contest to get the audience standing on their seats
Silly me! I thought that in the ten days or so between last month's column leaving the computer and appearing in print, the Government would have endorsed the Strategic Rail Authority's selection of Sea Containers to retain the InterCity East Coast franchise. No such luck.
Instead, it became the subject of a power struggle within Government, with the concommitant spin and counter spin. And, despite the recommendation having been submitted to Deputy Prime Minister John Prescott on December 4 last year, a decision was still awaited two months later. So what is happening?
Last month's column was written after the original leak to the Financial Times reporting that Sea Containers had won. But then the Guardian obtained copies of official correspondence which, apparently, revealed that the SRA had recommended the Sea Containers bid despite the Virgin/Stagecoach offer having a superior Net Present Value (NPV) over the 20 year franchise, of between £750m and £1.5bn .
What is more, the decision to recommend Sea Container's more expensive offer was attributed to SRA Chairman Sir Alastair Morton. Informed Sources, suggested that he has reservations about the long term management of Virgin Trains – in other words will there be life after Green - and the financial strength of the two partners.
Now, while franchise renewal is all about customer focus, unlike first time round when the subsidy profile with the lowest NPV won, the Treasury – which pays out the subsidy – might think that if the SRA overrides a billion here and a billion there you could soon be talking serious money. And Chancellor Gordon Brown is reported to be taking a close look at the basis of the SRA recommendation.
Time for counter-counter-spin, then, with the Financial Times reporting ‘a person close to the SSRA' confirming that the Virgin/Stagecoach bid was ‘marginally better' financially but that the Sea containers bid was ‘technically better'. According to this insider, these technical issues included the service commitment, the reliability of the service being offered and the improvements promised.
So, while some SRA Board members would have short-sightedly chosen the Virgin/Stagecoach bid, in the end the Board ‘overwhelmingly supported' the decision on the recommendation which was attributed to Franchising Director Mike Grant. Since the SRA still does not have a formal process for evaluating non-financial factors in franchise bids, it would be interesting to see the basis of the recommendation.
Last month, I thought the choice was obvious – the SRA was comparing Sea Container's orthodox East Coast Main Line upgrade with Virgin/Stagecoach's high-risk, high speed line based offer. Not so.
When the SRA asked both bidders to put forward revised proposals based on the Railtrack upgrade, Virgin/Stagecoach came back with three options, a refined version of the original high speed line proposal, a bid based on the ECML upgrade only and a further offer covering the possibility that funding would not be available for the ECML upgrade. Given Railtrack's soaring level of debt, this latter proposal seems prescient in the extreme.
So, the NPV advantage applies on a like-for-like basis, although Virgin/Stagecoach doesn't share Sea container's enthusiasm for tilting trains on the East Coast race track. But even this comparison is cloudy.
According to Informed Sources, bidders were not allowed to commit to enhancements beyond 2007, which ruled out the Welwyn Viaduct quadrupling. Virgin/Stagecoach sought to use the Hertford Loop to provide additional capacity and it was this that gave the maximum NPV advantage.
Railtrack is said to be happy with one InterCity train an hour round the loop. But if the path isn't available the NPV advantage falls to the £750m figure.
Do these NPVs sound feasible? Well, Sea Containers told me a while ago that in the bidding for the InterCity West Coast franchise in 1996, Virgin's NPV undercut them by £1billion on the 15 year franchise.
So what happens next? Well, if the Treasury lets John Prescott accept Sir Alastair's, oops, Mike Grant's, recommendation, Virgin/ Stagecoach are almost certain to call for a judicial review. Then look for the sparks to fly because no one I know is that impressed by the SRA's handling of its franchise replacement programme (sic)