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| How the west coast mainline bid process was derailed | How the west coast mainline bid process was derailed |
| (6 months later) | |
| It was on Tuesday afternoon that Department for Transport officials realised they were defending the indefensible. | It was on Tuesday afternoon that Department for Transport officials realised they were defending the indefensible. |
| The DfT was preparing to hand over a dossier of evidence to the high court that would explain its decision to shunt Sir Richard Branson out of the rail industry, having declared in August its intention to strip Virgin Trains of the London-Glasgow west coast franchise and hand it over to FirstGroup. | The DfT was preparing to hand over a dossier of evidence to the high court that would explain its decision to shunt Sir Richard Branson out of the rail industry, having declared in August its intention to strip Virgin Trains of the London-Glasgow west coast franchise and hand it over to FirstGroup. |
| Instead, the new transport secretary, Patrick McLoughlin, decided to make a drastic move that would cost the taxpayer at least £40m. | Instead, the new transport secretary, Patrick McLoughlin, decided to make a drastic move that would cost the taxpayer at least £40m. |
| He called Tim O'Toole, the FirstGroup chief executive, at around 10pm to let him know that his company would not be taking over one of Britain's most prestigious rail routes as expected. This was no simple delay – the entire process was being scrapped and restarted from scratch. O'Toole's stunned colleagues said they had had "no inkling" the move was coming. Referring to the anticipated 9 December takeover, one said ruefully: "We take people at their word." | He called Tim O'Toole, the FirstGroup chief executive, at around 10pm to let him know that his company would not be taking over one of Britain's most prestigious rail routes as expected. This was no simple delay – the entire process was being scrapped and restarted from scratch. O'Toole's stunned colleagues said they had had "no inkling" the move was coming. Referring to the anticipated 9 December takeover, one said ruefully: "We take people at their word." |
| An hour later, McLoughlin picked up the phone to Branson in New York, who had a bottle of champagne waiting in the fridge. It was opened soon afterwards, as McLoughlin in effect condoned the tycoon's decision to seek a judicial review of the FirstGroup award. Virgin executives had been tipped off to expect a call, but not of the contents: some senior figures had even gone to bed, little expecting the dramatic news coming down the line. It is understood that Virgin Trains' co-owner, the Stagecoach boss Sir Brian Souter, also received a call from a humbled McLoughlin. | An hour later, McLoughlin picked up the phone to Branson in New York, who had a bottle of champagne waiting in the fridge. It was opened soon afterwards, as McLoughlin in effect condoned the tycoon's decision to seek a judicial review of the FirstGroup award. Virgin executives had been tipped off to expect a call, but not of the contents: some senior figures had even gone to bed, little expecting the dramatic news coming down the line. It is understood that Virgin Trains' co-owner, the Stagecoach boss Sir Brian Souter, also received a call from a humbled McLoughlin. |
| Only after midnight did a government press officer send a release confirming that a 15-month, multimillion-pound bid process had finally been derailed – threatening to take the entire franchising system with it. As one rail industry source said: "One of the most shocking aspects of the whole saga has been to make [RMT union boss] Bob Crow sound reasonable." | Only after midnight did a government press officer send a release confirming that a 15-month, multimillion-pound bid process had finally been derailed – threatening to take the entire franchising system with it. As one rail industry source said: "One of the most shocking aspects of the whole saga has been to make [RMT union boss] Bob Crow sound reasonable." |
| McLoughlin's explanation for junking the process and starting anew, as well as launching an independent review of the entire franchising process, is that his department fumbled the numbers, miscalculating the amount of risk inherent in FirstGroup's staggering £13bn bid. | McLoughlin's explanation for junking the process and starting anew, as well as launching an independent review of the entire franchising process, is that his department fumbled the numbers, miscalculating the amount of risk inherent in FirstGroup's staggering £13bn bid. |
| Under the oft-criticised franchising process the DfT leases out the right to operate trains on specific routes, in exchange for premium payments on the most lucrative lines such as west coast. FirstGroup won the contest with an offer to pay the government £13.3bn over the 15-year span of the contract, a sum underpinned by assumptions about passenger growth and inflation that had been vetted by the department. As a consequence, the DfT asked for a £190m bond from FirstGroup that would be forfeited if it was unable to meet the tough payment schedule. Virgin argued that this was a flawed calculation and the bond should be closer to £600m – a point that McLoughlin now appears to have conceded, while blaming his officials' arithmetic. | Under the oft-criticised franchising process the DfT leases out the right to operate trains on specific routes, in exchange for premium payments on the most lucrative lines such as west coast. FirstGroup won the contest with an offer to pay the government £13.3bn over the 15-year span of the contract, a sum underpinned by assumptions about passenger growth and inflation that had been vetted by the department. As a consequence, the DfT asked for a £190m bond from FirstGroup that would be forfeited if it was unable to meet the tough payment schedule. Virgin argued that this was a flawed calculation and the bond should be closer to £600m – a point that McLoughlin now appears to have conceded, while blaming his officials' arithmetic. |
| However, darker rumours of institutional antipathy for Virgin Trains have circulated the rail industry for years. Those gained further credence with Wednesday's announcement. It stems from a renegotiation of the west coast franchise in 2006 – the consequence of a bungled upgrade of the route – that left the DfT feeling that it had been outwitted and outmanoeuvred, to the benefit of Branson and to the detriment of subsidy-paying taxpayers. Over the past 10 years, the Virgin rail operation has paid out £381.7m in dividends, split between Virgin Group, a 51% shareholder, and Stagecoach, which owns the remaining 49%. One industry source said the about-turn would reignite fears, voiced privately by Virgin, that it was always doomed to lose west coast. | However, darker rumours of institutional antipathy for Virgin Trains have circulated the rail industry for years. Those gained further credence with Wednesday's announcement. It stems from a renegotiation of the west coast franchise in 2006 – the consequence of a bungled upgrade of the route – that left the DfT feeling that it had been outwitted and outmanoeuvred, to the benefit of Branson and to the detriment of subsidy-paying taxpayers. Over the past 10 years, the Virgin rail operation has paid out £381.7m in dividends, split between Virgin Group, a 51% shareholder, and Stagecoach, which owns the remaining 49%. One industry source said the about-turn would reignite fears, voiced privately by Virgin, that it was always doomed to lose west coast. |
| The west coast reversal unwinds a process that, for all the blaming of officials, began when the Conservatives were in opposition and called for longer franchises that would leave more room for commercial flair and, hopefully, higher revenues. Industry observers speculated on Wednesday that DfT civil servants had fallen foul of implementing a franchise policy that made it impossible to vet far-reaching revenue assumptions with any certainty. | The west coast reversal unwinds a process that, for all the blaming of officials, began when the Conservatives were in opposition and called for longer franchises that would leave more room for commercial flair and, hopefully, higher revenues. Industry observers speculated on Wednesday that DfT civil servants had fallen foul of implementing a franchise policy that made it impossible to vet far-reaching revenue assumptions with any certainty. |
| The consequence is a list of rail franchises due for renewal over the next few years that is as crowded as a peak-time service into Euston. The franchising timetable up to 2015 shows that the Great Western contract, owned by FirstGroup, expires in April 2013, followed by the London-to-Southend Thameside route in May, the FirstGroup-controlled Thameslink franchise in September and the prestigious London-to-Edinburgh east coast line in December. Four separate bids for Thameside went in to the DfT last week and they are now held in limbo, while the expensively assembled bidding teams sit idle and rack up mounting daily costs. In total, there are 13 franchise bids – running at a combined cost of tens of millions of pounds – waiting as a consequence of McLoughlin's decision to "pause" the franchising process. | The consequence is a list of rail franchises due for renewal over the next few years that is as crowded as a peak-time service into Euston. The franchising timetable up to 2015 shows that the Great Western contract, owned by FirstGroup, expires in April 2013, followed by the London-to-Southend Thameside route in May, the FirstGroup-controlled Thameslink franchise in September and the prestigious London-to-Edinburgh east coast line in December. Four separate bids for Thameside went in to the DfT last week and they are now held in limbo, while the expensively assembled bidding teams sit idle and rack up mounting daily costs. In total, there are 13 franchise bids – running at a combined cost of tens of millions of pounds – waiting as a consequence of McLoughlin's decision to "pause" the franchising process. |
| Given the scale of the crisis revealed at the DfT, it seems unlikely those routes will be tendered out in time. This leaves the government with the option of handing them to its state rail arm, Directly Operated Railways, which already has its hands full running east coast, or handing unilateral extensions to the current owners. The latter option could add many millions of pounds to the cost of the west coast debacle, because the government is now in an extremely weak bargaining position. | Given the scale of the crisis revealed at the DfT, it seems unlikely those routes will be tendered out in time. This leaves the government with the option of handing them to its state rail arm, Directly Operated Railways, which already has its hands full running east coast, or handing unilateral extensions to the current owners. The latter option could add many millions of pounds to the cost of the west coast debacle, because the government is now in an extremely weak bargaining position. |
| What next for the key players? | What next for the key players? |
| Tim O'Toole | Tim O'Toole |
| The chief executive of FirstGroup must decide whether to bid again for the franchise. Having seen nearly £250m wiped off his company's value, he will be thinking about claiming compensation from the government. Investors are worried that the indebted firm may struggle to pay its dividend, having banked on the failure of Virgin's legal challenge. | The chief executive of FirstGroup must decide whether to bid again for the franchise. Having seen nearly £250m wiped off his company's value, he will be thinking about claiming compensation from the government. Investors are worried that the indebted firm may struggle to pay its dividend, having banked on the failure of Virgin's legal challenge. |
| Sir Richard Branson | Sir Richard Branson |
| The Virgin tycoon had vowed to quit the rail business if the government did not reform franchising in the wake of the west coast decision. Branson has won that argument resoundingly and Virgin Trains is now widely seen as front-runner when the London-Glasgow contract process is re-run. In the meantime, Virgin is expected to keep operating the route. | The Virgin tycoon had vowed to quit the rail business if the government did not reform franchising in the wake of the west coast decision. Branson has won that argument resoundingly and Virgin Trains is now widely seen as front-runner when the London-Glasgow contract process is re-run. In the meantime, Virgin is expected to keep operating the route. |
| Justine Greening | Justine Greening |
| The former transport secretary was in charge when FirstGroup got the contract and her judgment will now be questioned - even though it seems she had worries about the process, and the outcome, before she was reshuffled to the Department for International Development. Nonetheless, Greening was staunch in her defence of the process at the time. | The former transport secretary was in charge when FirstGroup got the contract and her judgment will now be questioned - even though it seems she had worries about the process, and the outcome, before she was reshuffled to the Department for International Development. Nonetheless, Greening was staunch in her defence of the process at the time. |
| Patrick McLoughlin | Patrick McLoughlin |
| Promoted from chief whip to transport secretary in the reshuffle, McLoughlin was expected to oversee a painful U-turn on airport expansion. He now has to juggle an overhaul of rail policy with a backlog of franchise renewals. The former miner now has an unexpected opportunity to nationalise the railways as a consequence – but is unlikely to take it. | Promoted from chief whip to transport secretary in the reshuffle, McLoughlin was expected to oversee a painful U-turn on airport expansion. He now has to juggle an overhaul of rail policy with a backlog of franchise renewals. The former miner now has an unexpected opportunity to nationalise the railways as a consequence – but is unlikely to take it. |
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