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VCC is unaffordable and not value for money – official
If I had a tenner for every time some privatisto has argued ‘BR would never have re-equipped Cross Country with a fleet of brand new trains' I would have enough money, oh, to buy a first class return to Manchester. But it is true.
As an integrated state railway, BR had to make the most of its available resources across the network. Major investment was focused on the InterCity Main Lines and traction and rolling stock renewal meant that existing equipment cascaded down to Midland Main Line, Cross Country and Anglia .
Privatisation changed all that. All franchises had equal status and if your business plan could support new trains, then you could have new trains.
Virgin, inspired by consultant Jim Steer, saw the potential to transform Cross Country from a secondary InterCity service into the only national network. When the franchise was awarded on 28 November 1996 the winning bid assumed that by May 2002 all the locomotive hauled stock would have been replaced by 128 DMU vehicles followed in the May 2004 timetable by 24 seven car DMUs in place of the 25 IC125 sets. It didn't quite work out like that, but the result is near enough right.
In fact, Cross Country nearly wasn't franchised. The Office of Passenger Rail Franchising (OPRAF) considered breaking it up into route sections which could be merged into other franchises. This idea was abandoned as too difficult.
Fast forward now to 22 July 2002 when the SRA announced that it had signed an interim agreement with Virgin Rail Group (VRG) which would ‘hold good' the West Coast and Cross Country franchises while long term solutions to their growing financial difficulties were explored. This holding deal is known as the ‘Letter Agreement'.
Under it, new terms were to be negotiated for the West Coast franchise to take effect from 1 April 2003 . If this date was missed, then VRG would run the franchise for a management fee of 2% of revenue until agreement was reached.
In the case of Cross Country the renegotiated franchise terms were to take effect from 1 April 1 2004 . If a deal could be concluded either VRG would run the franchise under a management contract, for a fee of 1% of revenue, until agreement was reached or the SRA could terminate the contract and put the franchise out to tender.
VRG continues to operate the Cross Country franchise under a ‘Letter Agreement' between the SRA and VRG that has been in place since July 2002, and which supplements elements of the franchise agreement which commenced in 1997. The agreement provides for an annual budget for the franchise to be agreed between the SRA and VRG or, if necessary, determined by the SRA, in order that VRG receives no more money than is necessary to operate the services under a defined profit margin.
Thus, for the last two years VRG has been running both franchises to budgets set by the SRA. In parallel it has been negotiating revised franchise terms, as per the Letter Agreement.
And at the very end of July, two informed sources came up with the same story. That the Cross Country franchises was about to be terminated.
VRG's best and final offer (BAFO), was it appeared, not good enough. Or, to be more precise, it was neither affordable nor value for money and the SRA Board had been advised by its Franchising Executive that VRG should be told that its bid had been rejected by 15 August at the latest.
And on 6 July Sir Richard Branson of Virgin and Brian Souter of Stagecoach (which owns 49% of VRG) were called in to the SRA's London offices to be given the bad news by SRA Chairman Richard Bowker . The meeting started at 11.00 and it was not until gone 18.00 that the official statement was released.
SRA Statement 6 August 2004The Strategic Rail Authority (SRA) today announced that it had not received an acceptable offer from Virgin Rail Group (VRG) in the renegotiation of the CrossCountry rail franchise. A Best and Final Offer for a single-tender deal running to 2012 was recently received from VRG, but was significantly too high to pass the value for money test that the SRA undertakes on behalf of taxpayers. As a consequence, the SRA informed VRG this afternoon that it is ending negotiations on the CrossCountry franchise. The SRA's rights, which are designed to protect the interests of both passengers and taxpayers, are contained in a ‘Letter Agreement' signed between the two parties in July 2002. This gives the SRA the right to terminate the franchise should it be unable to reach agreement on a long-term deal. The SRA has informed VRG that it reserves its right to terminate the franchise, and that it will inform VRG of how it intends to take matters forward on the franchise in the near future. In the meantime, the annual budgeting process will continue on the franchise. SRA statement 6 August 2004 |
Working out the finances of the two Virgin franchises is not as straightforward as it seems .
What complicates matters is the change in track access charges from the start of Control Period 2 in April 2001. Not only did track access charges increase, but instead of Railtrack's total income being jam-spread pro-rata across the 25 TOCs, charges were weighted to reflect infrastructure investment.
Thus while GNER and Great Western paid less, the two Virgin franchises paid more. This didn't affect the finances of the franchises since the SRA subsidy payments automatically compensated for the change.
You can see this in Chart 1. The blue line is the original VCC subsidy profile, while the red line is what the SRA actually paid. It is slightly less than the contractual subsidy because of performance penalties.
In 2001-02 the track access charge (green line) increases and the SRA's net payment cover the extra cost. Then things start to go wrong.
All things being equal, you would have expected net payments to follow the dotted line. But, instead they go on climbing. Virgin had got their numbers badly wrong, compounded by the gamble on PUG 2.
Virgin expected the 140 mile/h high frequency tilting West Coast service to he hugely profitable. At the end of the 15 year franchise, if ridership projections were fulfilled, Virgin would be paying a premium of £10 per passenger to run the franchise.
Some of the West Coast profit would be available to cross subsidise Cross Country. But not only did PUG2 prove an upgrade too far, the introduction of the full Pendolino fleet tilting at 125mile/h, planned for the May 2002 timetable also slipped - by nearly three years.
Which is why the Letter Agreement was needed and why support for VCC has soared. Chart 2 shows the grim tale. If you discount track access charges, from 1999-00 onwards VRG was paying a premium to run Cross Country, yet oday the TOC is being subsidised by nearly £70million a year on top of track access charges.
Worse, what the chart doesn't show is that in 2001-02 VCC made an operating loss of £34m. This roughly equals the premiun to the SRA (£36 million) when track access charges are discounted. In 2002-03 losses increased to £41.7m, but with SRA now providing additional support to restore break even.
Under the Letter Agreement SRA committed to providing additional funding so that the franchise broke even up to the 2004-05 financial year. For 2003-04, the first full year of the Agreement, SRA had to calculate the support needed for VCC to break even.
This meant making assumptions on Virgin's ability to control costs and increase revenue and cut into the previous year's £41.7m operating deficit. In fact Virgin bettered these aspirations, both for cost and revenue, and made a profit of around £30 million on the SRA's break-even budget.
As a result, the support for the franchise in the current year (2004-05) has been cut to just over £200 million.
Which leaves the question of where the additional costs have come from. For a start, the introduction of the new trains to a more intensive service pattern has required more staff.
In 2001-02, VCC employed 1122 staff plus 110 managers. In 2003-04 this had risen to 1586 and 144 respectively, adding around £15million to the paybill.
Then, despite the wonders of indifference pricing, replacing IC 125s and loco hauled Mk 2 stock with high performance diesel electric multiple units doesn't come cheap. In 2001-02 the rolling stock leasing bill was £79million. It is now around £120million.
So these two items alone account for some £65 million. And with CP2 increasing VCC's track access charges to around £165 million you are not far from the £200 million or so support expectedthis year.
But, with cross subsidy from VWC no longer possible, this level of support cannot be sustained. Even though First Great Western and GNER pay two thirds of VCC's track access charges, their subsidy per passenger kilometre is 1.2p and -0.6p respectively compared with 9.2p for VCC.
Virgin reckoned that their BAFO would see 90% of subsidy paying for track access charges. But it was not enough. After the announcement an SRA spokesman was quoted as saying ‘ They (VRG) have made three submissions and they're not going to get anywhere near the right price'.
But could anybody else deliver the existing service for significantly less subsidy? Track access charges are fixed, although fewer trains would reduce the variable component. Train leases have to be paid.
On the other side of the balance sheet the ability to increase revenue is doubly constrained. With four and five car multiple units, plus a timetable on the limit of present day frequency, VCC has run out of seats at the popular times.
With demand exceeding capacity, the service is clearly under-priced. While the VRG BAFO included an option to increase fares, the key Saver ticket prices are regulated to RPI+1% a year: SRA rejected this politically unpopular option.
So something has to change before the Cross Country franchise can be re-tendered – when VRG will be back with a vengeance. According to Informed Sources SRA intends to ‘remap' the franchise before inviting new bids.
Now remember that OPRAF considered breaking up the business. Add to this, muttering from other TOCs that over typical journey lengths (Table 1) Cross Country services duplicate their own along the lines of route.
Cross Country Journey Length (miles) |
||
1993/94 |
2002/03 |
2003/04 |
Might not ‘remapping' be a euphemism for either breaking up the franchise altogether or else truncating it? Look at the map and the duplication is obvious. North of York you could write extra capacity into the replacement InterCity East Coast franchise. Ditto Greater Western for West of Bristol .
But what about the surplus Voyagers? Well they would put back the need for HST replacement by a few more years.
Meanwhile, at the time of going to press, VRG had yet to receive the 12 months' notice of termination of the franchise agreement and it is business as usual, working to the SRA determined budget.