Flagship UK East Coast rail line renationalised

  • London-Edinburgh rail line put under state control for third time in 12 years
  • Stagecoach said it had lost £259m on the line
  • Details of future ‘public-private partnership’ unclear

The East Coast rail line between London and Edinburgh will be taken back under state control after collapsing under heavy losses just three years after its last privatisation.

Chris Grayling, the transport secretary, said he would terminate the Virgin franchise on the line on June 24, and would rebrand the line “London and North Eastern Railway” (LNER) under public ownership until a new public-private partnership begins in 2020.

“The route has its challenges but it is not a failing railway,” he said. “Franchises can on occasion fail . . . we don’t and we can’t expect companies to hold unlimited liabilities when they take on franchises, they would not bid for them.”

The government has appointed a partnership comprising engineering company Arup, SNC-Lavalin Transport Advisory and consultants to run the interim LNER franchise as an operator of last resort. The government signed a £616,000 two-year contract with the partnership in November 2015, extending it first by six months and then earlier in May for another two months, presumably in anticipation of its potential use for the East Coast mainline.

The LNER brand was last used before nationalisation of the UK rail network in 1948.

Mr Grayling said he would not stop Stagecoach and Virgin, the 90/10 joint operators of the franchise, from running other routes.

The crisis at one of Britain’s three large inter-city rail franchises will provide more ammunition for the critics of private sector involvement in public services, with the opposition Labour party pushing for widespread nationalisations.

Lilian Greenwood, chair of the transport select committee, said the history of the East Coast line had been a “very sorry tale” and said her committee would examine the government’s failures.

“The secretary of state must take responsibility for this serious repeat failure, if Stagecoach and Virgin got their figures wrong then so did his department and he should apologise to taxpayers and passengers for his failure,” she told the House of Commons.

Stagecoach said that it would lose £259m in the move, including its £165m bond and a one-off charge of £75m.

Stagecoach and Virgin had proposed to continue operating the franchise on a not-for-profit basis if it could not renegotiate the contract. Martin Griffiths, the Stagecoach chief executive, said he was “surprised and disappointed” that government had “chosen not to proceed with our proposals” but promised to ensure a smooth transfer to the publicly-owned operator.

Ellie Harrison of Bring Back British Rail, a campaign for state ownership, said: “We’re over the moon. That’s what we’re fighting for. We had East Coast in public ownership for five years, and it acted as a brilliant benchmark to measure the success of the other franchises.”

Rail line has troubled history

The announcement marked the third time that private companies have walked away from East Coast in just over a decade. Great North Eastern Railway was stripped of the franchise after its parent company became insolvent in 2006. National Express handed back the line in 2009 after financial difficulties.

After it emerged that the Virgin franchise had breached a financial covenant on its eight-year franchise, Mr Grayling was faced with two unpalatable scenarios: another renationalisation or allowing the operator to continue to run the service on a non-profit basis while the government absorbed the risk.

Mr Grayling initially favoured giving the Virgin franchise a management contract but there were concerns in Downing Street about whether there would be a political backlash.

Mr Grayling said that the decision had been “very finely balanced”.

“When judging against my key principles neither option was obviously superior,” he said, arguing that in the end he went for nationalisation because it allowed the “smoothest possible transition to the creation of the new public-private partnership after 2020.”

Prime minister forces decision

The problems on the Virgin franchise became clear in December when the government admitted that it would end the deal three years early — in 2020.

Ministers announced a fresh plan for a long term “public-private partnership” on East Coast between a train operator and Network Rail, which owns and manages rail infrastructure, that would begin in 2020.

But in February the extent of the problems became more stark when Mr Grayling told parliament that Stagecoach had lost almost £200m of its own funds and had breached a key financial covenant. At that point he signalled that a rescue would be needed within a few months.

Andrew Adonis, a former Labour transport secretary, had suggested that letting the operator walk early but continue to run the line was “tantamount to a £2bn bailout”, since payments were due until the original end of the contract in 2023.

But Lord Adonis welcomed the government’s decision to take the line back into state hands, suggesting it had “clearly been forced upon Chris Grayling by the prime minister”.

He added: “I welcome the prime minister at least showing she is strong enough to resist a policy that would not only be cheating the taxpayer but would have been indefensible morally and politically.”

Analysts suggest redesign of franchises

Paul Plummer, chief executive of the Rail Delivery Group, which brings together train operators and infrastructure companies, said safeguards in the franchise system had worked as planned.

In a blog, he wrote: “The current system has functioned as expected to protect the taxpayer: the current operator has paid for the shortfall in predicted passenger revenue through the bond it provided to government.”

One City analyst, who asked not to be named, said there were inherent problems with the franchise system which required rethinking, where companies had “to take massive risks” with thin margins of profitability.

“Maybe they should have smaller franchises or a different type of risk profile with risk on both sides. You might not get the best deal but you’d avoid a situation like [the East Coast] happening.”

Earlier this year, Mr Griffiths blamed financial crisis at East Coast on the government for the way it had structured the franchise.

Mr Plummer pointed out the UK railway network is already effectively a public-private partnership, given the role of state-owned infrastructure operator Network Rail and the promises of £14bn in private investment into the 2020s.

He also urged a new approach to writing franchises, excluding “every detail of the time the first train between two towns should be” and inscribing flexibility for contracts to be revisited “for events outside of the control of franchisees”. He said franchising could be devolved locally too.

Labour used the announcement to call for other parts of the railway system to be taken back into public ownership.

Andy McDonald, shadow transport secretary, said the East Coast rail line’s only successful period in recent history was between 2009 and 2015 “under public ownership, when a billion pounds was returned to the Treasury. It was the best performing operator on the network before it was cynically re-privatised.”

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