The return of the East Coast franchise to Government control on 24th June 2018 followed an inability of Virgin Trains East Coast (VTEC) to sustain the level of premium payments contained in a contract that started on 1st March 2015. The event emphasised the importance and difficulty of revenue forecasting over the franchise term, compared to operating costs where there is greater certainty.
The premium payments agreed by VTEC started at £276 million for the first year of operation and rose to £585 million by 2022/23 in the final year of the contract, bringing the total to £3.3 billion over the length of the franchise. This was more than £900 million above the payment offered by two alternative bidders; First Group and a consortium made up of Eurostar and Keolis.
The winning bid required compound annual revenue growth of 8%, a big uplift from the 2.2% figure recorded by Directly Operated Railways in 2014/15. It was only in the final three years of the VTEC contract that the market benefit of new IEP trains was factored into the forecast, with an assumption that growth would be possible in the early years using the legacy fleet.
The widely different expectations about the ability to pay premiums to the DfT has been a feature of the economic outcomes for other franchise bids.
Economists who advise bid teams offer different interpretations of the end result from exogenous growth that is due to influences outside the control of a train operating company such as national economic performance, employment levels, and any impact from the regulatory framework that influences the market. Endogenous growth reflects decisions within the control of the bidder such as an improved timetable and journey experience, investment in new trains, and management’s capability to improve the product and influence operating costs.
The current East Anglia franchise commenced 16th October 2016, which was retained by Abellio who had held a previous short contract from 5th February 2012. It is continuing to use the Greater Anglia brand adopted during the earlier franchise agreement. For the 10-year contract the Dutch National Railway subsidiary offered a premium of £3.7 billion which was later disclosed (under Freedom of Information provisions) to be £600 million greater than an offer from First Group, and £1.2 billion above that tabled by National Express.
The content of the Abellio bid included the replacement of the entire fleet currently in service, which on average was 26 years old. In total 1,043 new vehicles.
The Northern Franchise award to Arriva is another ambitious contract which commenced on 1st April 2016 for a period of 10 years and contains a £1 billion investment programme that includes the introduction of 281 new vehicles. There is a commitment to remove outdated Pacer trains that do not conform with regulations for carrying Passengers with Reduced Mobility within 3 years and to establish a new inter-urban network to improve connectivity with an improved timetable.
There is also a station improvement programme where staff will return to 45 unstaffed stations, and staff availability will be extended at a further 54 locations.
Support payments have been required since privatisation for the operation of franchised services in Northern England but Arriva Trains North has contracted to reduce these from £275 million in 2016/17 to £39 million in 2025/26.
FCP has developed a long-standing capability to produce delivery plans associated with franchise and concession bidding and provide expertise for contract mobilisation. We are well placed to respond to change as a result of the Williams Review which it is anticipated could include a move to a greater number of concessions managed by devolved agencies under the control of Elected Mayors and Combined Authorities.
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