National Express East Coast franchise

Statement by:
Rt Hon Lord Andrew Adonis, Secretary of State for Transport
Date delivered:
01 July 2009
Statement type:
Oral

My Lords, with leave I will make a statement about rail services on the East Coast main line.  The House will understand that, because of the imperative for the Government to respond immediately to the trading statement made by National Express when the markets opened this morning, it was also essential for me to make a Written Ministerial Statement earlier.

For some months now National Express have been seeking to renegotiate the terms of the franchise agreement to operate services on the East Coast main line between London, West Yorkshire, the North East and Scotland which they signed in 2007. My position has been consistently clear – that the Government does not renegotiate rail franchises. That remains the position today.

This morning, National Express Group announced that they will not provide the further financial support necessary to ensure that their subsidiary, National Express East Coast, remains solvent. As a consequence, National Express East Coast is no longer able to continue operations to the full term of its franchise, and expects to become insolvent later this year.

The decision of National Express to break their contract is regrettable and disappointing. All other rail companies are fulfilling their contracts, despite the economic downturn. It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging.

My first and overriding obligation in this situation is to ensure continuity of service to passengers, with no disruption or diminution of service standards.  When the Government has had to step in to protect rail services in the past, there has been no such impact on passengers.

I have therefore established a publicly owned company, which will take over this franchise from the point at which National Express East Coast ceases to operate.  We will agree an orderly handover with National Express.Until that date, National Express will operate services on the current basis; after that date the new public company will do so. There will be no interruption of services. Existing operational staff – who continue to provide a good service – will transfer to the new East Coast Main Line company; so will the assets necessary for the continuation of the service.  I can assure the travelling public that services will continue without disruption and all tickets will be honoured. I have today appointed Elaine Holt, until recently managing director of First Capital Connect, a major train operating company, as chief executive designate of the new East Coast Main Line Company.

The failure of National Express East Coast obviously entails the loss of some future premium payments to which the company was contractually committed. However, while the franchise is under public control, the Government will receive the full revenues of a business which continues to make an operating profit. We will also gain the benefit of any premium payments from the new franchise once it is re-let. This represents a far better deal for the taxpayer than the only alternative course of action, which was to renegotiate the franchise in an exclusive manner with National Express, with no recourse to what is a highly competitive market for rail franchises. The cost of re-letting the franchise will be met from the performance bond of £32 million, to which the company is contractually bound in the event of termination.

National Express also operates rail services on the East Anglia main line and associated commuter routes. The company has said that it does not intend to default on its obligations in respect of these franchises. Notwithstanding this, the Government believes it may have grounds to terminate these franchises, and we are exploring all options in the light of the Group’s statement this morning. In the meantime, we expect National Express to meet its obligations on these franchises in full. 

The Department’s procurement procedures test a company’s track record and their ability to deliver a franchise and to demonstrate value for money in so doing. It would clearly be reasonable not to invite a company to bid for future franchises in circumstances where it had recently failed to deliver on a previous franchise. A company which had defaulted in the way National Express now intends would not have pre-qualified for any previous franchises let by the Department.  I note that the parent groups of previous franchise failures are no longer in the UK rail business.

It is the Government’s intention to tender for a new East Coast franchise operator from the end of 2010. The specification of the new franchise will reflect my concern to secure better passenger services and facilities. In particular I will be seeking to secure significant further improvements to service quality, including to station security, bike and car parking facilities at stations, bus interchange facilities and train catering. This will ensure a step change improvement for passengers from a new East Coast franchise. I intend to consult fully on the new franchise specification, including with passenger groups, parliamentarians and the Scottish Executive.

My Lords, I have explained the action I have taken to ensure that passengers are not affected by the decision of National Express Group, and the consequences for that Group of their decision.

Let me also put these events in a wider context. No other train operator has defaulted on its franchise or indicated to us any intention to do so. Nor has any other company sought to renegotiate their franchise. Today’s events do not represent the failure of the system, but the failure of one company. The rail franchising system was examined by the National Audit Office last year. It was found to deliver good value for money. The National Audit Office also concluded, and I quote: “The Department’s arrangements for identifying and managing risks, including handling the failure of a train operator, are well planned and follow good practice.” It is that good practice which we are following in today’s announcement, and I would welcome a further examination by the National Audit Office once the franchise is re-let.

In respect of rail services at large, they are steadily improving. Passenger numbers are at their highest levels since the 1940s, punctuality is over 90 per cent and overall passenger satisfaction is rising, as shown in the latest independent National Passenger Survey, published yesterday. Moreover, the revenue from rail franchises is enabling us to make record investment in upgrading the network and services on it.

We saw this as recently as last month in the award of the new South Central franchise for services on lines through south London, Surrey and Sussex. This was conducted during the recession yet yielded a winning franchise bidder – the existing operator – committed to paying a premium of £534 million to the taxpayer over nearly six years, in place of the previous contract under which the operator was subsidised by the taxpayer. This bodes well for future franchise awards, including for services on the East Coast main line.