Return to Archive -by date - by topic - Archive 2002.
Even Virgin couldn't cope with a fundamentally flawed industry
Once it became clear that the bulk of the interest in passenger franchising was coming from the unreconstructed bus bandits I found it hard to take the Government's claims for a bright new future for the railways seriously. It seemed unlikely that tycoons whose idea of entrepreneurial flair was to force competitors out of business by flooding their routes with free buses, sell off useful things like city centre bus stations for property development and compete for the lowest paid drivers would add much to a modern railway.
But there were exceptions, notably the two Virgin franchises. I say Virgin franchises, but the visions came variously from consultant Jim Steer and the team at the Office of Passenger Rail Franchising responsible for selling InterCity West Coast.
Steer met Will Whitehorn, Richard Branson's ramrod, and got Virgin enthused. In the case of Cross Country Steer added a touch of magic to an old British Rail success.
In the 1980s under John Edmonds Regional Railways replaced its entire fleet of clapped out locomotive hauled stock with new generation diesel multiple units – the Sprinter revolution. Currently Virgin Rail Group (VRG) is replacing the Cross Country fleet of clapped out locomotive hauled stock with new generation DEMUs.
But the visionary bit was linking this replacement to a new constant interval timetable centred on Birmingham . Even under Chris Green I don't think InterCity would have either replaced trains or totally restructured the timetable. It is a genuine triumph for privatisation.
Similarly, the West Coast franchise began with an old-BR idea, but one that never got off the ground. The APT-based 1980 West Coast modernisation.
OPRAF's Assistant Director for West Coast Alison Ingram put together a deal with Railtrack which produced track access charges based on route modernisation plus Passenger Upgrade 1 (PUG1) which together would allow tilting trains to operate at 125mile/h. During the negotiations, the notional tilting train needed for performance calculations was known as the Ingramino.
Once again Jim Steer added the sex appeal. When considering journey time elasticity – the relationship between journey time and ridership – frequency is usually seen as a surrogate for speed.
What Virgin did to the OPRAF template was jack up the speed to 140mile/h (through PUG2), further reducing journey times and simultaneously cranked up the frequency. This, they reckoned, would double ridership by the end of the 15 year franchise, by which time West Coast would be paying a premium of £250million a year at current prices. Cross Country would also end up paying a modest premium of £12million.
Now obviously old InterCity wasn't mad or incompetent. The reason why it cascaded kit to Cross Country was that Cross Country needed a sizeable subsidy.
Completely reequipping Cross Country was not going to be cheap and Virgin's subsidy profile that won the franchise was quite aggressive. On the other hand, Virgin West Coast's rising premium payments from 2003-04 meant that the subsidy in the initial years could be quite high.
Hence VRG's overall strategy was to use the initial surplus from West Coast to cover the losses on Cross Country until the benefits from the new Voyager DEMUs and timetable kicked in. In June 2002, 125 mile/h Pendolino operation would also boost West Coast Main Line ridership and revenue, followed in 2005 by PUG2 when Jim Steer's moto perpetuo 140mile/h West Coast Main Line would really get the punters travelling.
Clearly, delivery of PUG2 on time and to specification was central to the success of this high risk/high gain strategy. Fortunately negotiating the deal for Virgin was an aggressive young manager called Richard Bowker. He was supported by an equally aggressive young lawyer called Tom Winsor.
Together they ensured that PUG2 was so watertight that if Railtrack defaulted the penalties would be crippling – reportedly £250million minimum on what was a £600million contract.
And it did fell apart. Railtrack screwed up the West Coast Route Modernisation beyond anyone's wildest imaginings. And the famous Hartwell deal (Informed Sources xx 2001) thrashed out compensation for breach of PUG2 as Bowker and Winsor intended. But before the ink was dry on the agreement Steven Byers forced Railtrack into administration.
Virgin was stuffed. Like other TOCs the company had already lost revenue and ridership as the result of the post Hatfield disruption. West Coast faced on-going disruption from 18 weekend blockades south of Rugby this year and next. Alstom would not have 53 Pendolinos in service for the October 2002 timetable. Actually, no Pendolinos would be in passenger service for the October 2002 timetable.
While VRG received £91million post-Hatfield compensation from Railtrack, that was small change compared to the effect of the collapse of the WCRM on the West Coast franchise plan. Life for VRG was suddenly one long unknown.
How would the blockades affect ridership? When might the Pendolino fleet be in service? How would Operation Princess perform in September when the new regular interval timetable hits Birmingham New Street ?
Compounding the problems was the Strategic Rail Authority's current review of capacity allocation on the WCML in the light of the Bechtel report on the WCRM. SRA Chairman Richard Bowker says that the conclusions will go out to consultation in September. It seems unlikely that the definitive version will be available much before the end of the year.
Until then V RG does not know how many trains it will be able to run long term, and remember Cross Country uses the WCRM too, or to what timetable. It doesn't know what journey times will be possible when the WCRM is completed. And can only guess at the years of disruption ahead.
Meanwhile VRG was losing serious money. Clearly someone had to provide more support for the businesses and eventually the SRA got the job of sorting it out.
Which was a bit of a hospital pass given that the SRA Chairman had but relatively recently left Virgin. Since Richard Bowker is as straight as they come, this must be affecting his ability to make things happen.
Then on July 22 I got this weird press release from the SRA which began ‘The SRA welcomes the signing of an agreement with VRG regarding the WCML and Virgin Cross Country franchises'. At the bottom of the press released it said that details of the agreement were announced by Stagecoach Group to the London Stock Exchange at 07.30 that morning'.
For heavens sake, this is our money which the SRA is disbursing and it can't be bothered to give us the details? Worse, the details were announced as part of a dire set of preliminary results which sent Stagecoach shares downward again. And Stagecoach is the minority(49%) shareholder in VRG
Is it just me or this ‘nothing to do with us Gov' approach on a par with Neville Chamberlain welcoming the declaration of war with Germany, details of which had been given by the German foreign Minister in Berlin that morning?
And it got worse, because the vagueness of the SRA ran head-on into the detail of Stagecoach.
SRA Chief Operating Officer Nick Newton said that the ‘interim' agreement would ‘hold good the business while long term solutions are explored by the SRA and Virgin Rail Group together. ‘Explored'? That sounded suspiciously like ‘Here's something on account while we sort out the mess'. Which would be quite reasonable, all things considered.
Nick was clear that ‘this specific interim agreement makes passenger sense and taxpayer sense and is bound by stringent terms and conditions. It delivers stability while the SRA works with VRG to identify and secure the best future for passenger service and delivery on those routes'.
There was a cryptic envoi. ‘Significantly, this agreement focuses on service delivery, now and in the future, rather than remonstrating about past problems'. I had to check ‘remonstrate' in this context: it means to make a forcefully reproachful protest. As in ‘You sold us this useless track access agreement, what are you going to do about it', I imagine.
But when the detail emerged from Stagecoach, or rather the Stagecoach version of the detail, the air was thick with remonstrations.
First, the number of the day was £106million. This is the sum being provided by the SRA to VRG to support the two franchises up to the end of the current financial year on March 31 2003 . That is agreed by both parties
Sadly, most of the daily press categorised this as ‘£100million given to Virgin'. Sir Richard Branson was moved to write to the Evening Standard explaining that ‘not a penny will be taken out by shareholders or individuals'.
Quite true. The £106million is needed to cover the losses at the two franchises over and above the £91million compensation from Railtrack.
Stagecoach statement* Both WCML and XC to be run under SRA support until March 2003. *WCML franchise to be renegotiated with Virgin Rail Group from March 2003. *If no agreement, VRG will run the franchise under a management contract for a 2% fee of revenue until an agreement is reached. *XC franchise to be renegotiated with Virgin Rail Group from March 2004. If no agreement, VRG will run the franchise under a management contract for a 1% fee of revenue until an agreement is reached, or alternatively the SRA may put the franchise out to other bidders. *Once both franchises are renegotiated, they will operate on the basis of a normal railway franchise risk with an appropriate rate of return.
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Note that the Stagecoach statement didn't actually give any figures for the support needed. And according to Informed Sources, the SRA commitment is to make the two franchises break even until renegotiated. If revenue falls or iron termites attack the rails stopping services, the SRA will make up any additional shortfall.
But questioned at the Stagecoach Preliminary Results press conference Graham Eccles, old BR to his socks and now Stsgecoach board member responsible for rail, said that the total support would be between £231million and £465million. The latter figure was a doomsday scenario.
Let's consider where the £231million comes from. The SRA is definitely supporting both franchises on a break even basis up to 31 March 2003 . The additional funding needed is roughly £40million for West Coast and £66million for Cross Country – total £106million.
In theory, the West Coast franchise will be renegotiated with effect from 1 April 2003 . This will include a new subsidy profile which may get into premium around 2008-09 but don't hold your breath.
Note that the Cross Country franchise is also to be renegotiated, or put out to tender, but from 1 April 2004 . In other words Cross Country will have to be supported at break even for 2003-04.
Now if it is costing £66million for the remaining eight four weekly accounting periods of the current year and if its losses continue at present levels throughout 2003-04, the SRA support needed to break even for another year will be 66 divided by 8 multiplied by 13 equals £107. And £106million for 2002-03 plus £107million for Cross Country during 2003-04 equals £213million. Which close enough to Graham Eccles' £231million if losses are increasing.
Now, if the SRA is asking the Treasury for more money for VRG, you might imagine that the Treasury, based of long and bitter experience of cost over-runs might ask the Department for Transport ‘yes, but what's the maximum damage likely to be'?
According to Informed Sources this is where the doomsday scenario came from. It threw in the financial effects of even more delays to WCRM plus other possible nasties between now and March 2004. Hence the £465 million figure.
When the press got hold of this £231-465million estimate for the total cost of the rescue, the SRA went nuclear. In the Independent, an SRA spokesman described the figures as ‘nonsense'. An SRA ‘source', believed to be the same spokesman, was quoted as saying the Stagecoach figures were ‘as close to a lie as you can possibly get'. The Guardian's SRA source described the £465million doomsday figure as ‘fiction', adding ‘I have read my daughter more credible bedtime stories'. Another journalist was told that the figures were based on no conversation the SRA had ever had with Stagecoach.
So here was the SRA accusing Stagecoach, which is currently negotiating the replacement SWT franchise and owns 49% of Virgin Rail Group, of making at statement during a major financial announcement that was ‘as close to a lie as you can possibly get'. This is as close as you can possibly get to accusing someone of lying.
Yet my quick and dirty analysis above suggests that the £231million total support to April 1 2004 is about right, unless Cross Country can suddenly find an extra £100million revenue from somewhere. And I cannot believe that the SRA said ‘Here's £106 million up to the end of this year, we'll work out support details for Cross Country later.
Surely the Department for Transport and the Treasury must have asked how much it was going to cost to keep the franchises going next year? SRA must have had detailed negotiation with VRG over subsidy profiles and support, and demanded details of revenue and cost analyses before handing over £106million of our money. And surely that would have shown that more would be needed in 2003-04.
In effect the £106million moves the subsidy profile back in time. For example, West Coast was supposed to pay a premium of around £5million this year – it will now get £40million subsidy. Cross Country was supposed to get a subsidy of £57million, it will now get an extra £66million, roughly the subsidy level of the first year of the franchise.
Note too, the hopelessly optimistic timescale for renegotiating the West Coast franchise. Can anyone seriously believe that the SRA can turn the Bechtel study into a new costed programme for the WCRM with firm timescales, get the associated capacity review through consultation and then re-negotiate the West Coast franchise with VRG, including new revenue and cost lines and a commercial rate of return appropriate to the new situation, all by 31 March next year.
Tell you what. To give everyone a real incentive to get the deal done, if a new franchise agreement has been signed and comes into effect on 1 April 2003, as an act of penance I will walk from St James's Park tube station to the SRA headquarters in Victoria Street wearing my personalised Alstom overalls and carrying a placard round my neck with text of the SRA's choice.
But I digress. If this timescale really is unattainable, VRG will then run the franchise for a management fee of 2% of revenue until agreement is reached. I calculate the fee will be around £7million. This means that in the case of West Coast, if a new franchise agreement is not in place by April 2003, the SRA will have to maintain support, forego around £50million in premium and pay a management fee.
In the case of Cross Country if a deal cannot be concluded by April 2004, in addition to the 1% management fee there is the option for SRA to invite someone else to have a go. I reckon my old chum Michael Schabas at GB Railways would be up for it.
In Table 1 I have made a quick and dirty stab at estimating costs of the two VRG franchises for the next three years.
| Franchise | 2002-03(1) | 2003-04 | 2004-05 |
| West Coast | £40m | £80m(1) | £80m(2) |
| Cross Country | £66mm | £107m | £120m(3) |
| Premium foregone | £4m | £60 | £63m |
| Total cost | £110m | £247m | £263m |
1) Eight accounting periods
2) Estimate, Assumes increasing losses plus 2% management fee
3) Estimate Assumes increasing losses plus 1% management fee
This is all very messy and all the result of the SRA not making a clear, detailed statement of the contractual arrangement reached with VRG.
But there was one moment of light relief. The Rail Passengers' Council comes under the SRA for pay and rations. But it speaks up for the consumer.
When RPC Chairman Stewart Francis read about £106million being ‘handed over' to Virgin he decided enough was enough and called for a public inquiry into the whole WCRM issue.
By chance the RPC was releasing its Annual Report that week and Stewart was clearly miffed by the lack of detail on the deal. I quote the section from his speech on the subject
Stewart Francis' speechMonday's news about the down payment to keep Virgin out of the courts over the West Coast upgrade was deeply worrying. It underlined the scale of the failure of the West Coast upgrade. £100 million now with more to come? The announcement, coming from Stagecoach – not the SRA or the Government, will have shaken passengers and raises many more questions than it answers:
• What is the passenger benefit being purchased here and how has it been quantified? • What further payments may be made? • Virgin has already received compensations payments from Railtrack – have these been taken account of in the deal? • Does Railtrack's share price really reflect this extent of liability or is this another hidden part of the Network Rail deal? • Where is the public accountability in all this? What has happened to the money?
For all we know this deal is good value for passengers but we do not know. The new deal clouds accountability for what has gone on under a guise of commercial confidentiality that I am today writing to the Secretary of State for Transport demanding that a public inquiry is held into the whole issue. This inquiry should look right back to privatisation, the then Office of Passenger Rail Franchising deal with Virgin, the West Coast upgrade agreements, why earlier intervention with Railtrack was not ordered when the scale of problem and overcommitment became clear, the role of the Regulator in allocating capacity and the current deal. We are not interested in blame – we want to learn the lessons and make sure we do not repeat the mistakes. Only by this method do we feel that some adequate explanation be given for what has happened to passengers and taxpayers money. Failing an inquiry, we have our own powers under the Transport Act 200 that we can use to carry out our own investigation with which we would expect all parties to assist.
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All very reasonable for a public watchdog, Real Gwynneth Dunwoody stuff. And, of course, as the civil servants say ‘very unhelpful'.
And soon after came a press release from the RPC saying that following a meeting with Richard Bowker Stewart Francis, had dropped his call for a public inquiry into the circumstances surrounding the WCML upgrade. Francis said that at the meeting on July 27 Bowker explained the ‘timing and the realities behind the SRA decision' to provide additional support for the West Coast and Cross Country franchises.
According to Francis, ‘it is now clearly a time to look forward rather than back, particularly with the establishment of Network Rail'. A group led by Brendan O'Friel, chairman of the RPC's Virgin Joint Sub-Committee, will now meet with SRA ‘to inform their forthcoming consultation on the WCML Route Strategy'.
There will also be presentation by the SRA Chairman to the next RPC general meeting on September 11, on rail industry matters including the WCML. And at his own suggestion Richard Bowker will take part in four passenger forums organised by the RPC network around the country to discuss the SRA's fares consultation and its forthcoming consultation on capacity utilisation.
So the RPC will not press for a public inquiry ‘at this time'. ‘We will continue to work hard with the SRA to ensure that passengers' views are represented and taken into consideration when making any further decisions about the WCML'.
Let that be a warning to all of us. I know I couldn't withstand the ‘special treatment' in the SRA's cellars, where they give you copy of the Strategic Plan to read and at the hint of a smile make you start again from beginning.
Sorry, a touch of the Pagliaccis, there. The future of the WCRM is probably the most important issue on the railways. It needs to be discussed on the base of either hard figures or informed estimates, free from remonstrations.