Transport Secretary: East Coast Franchise

Huw Merriman Excerpts

Wednesday 23rd May 2018 Commons Chamber

[Huw Merriman (Bexhill and Battle) (Con)]

I am very grateful to the hon. Gentleman. He is being very kind in giving way. Does he recognise that since 2015, when the franchise was put back into private hands, there have been an extra 1.74 million seats and an extra 40 services each week from London to Edinburgh? Is it therefore not the case that we have seen not only a 20% increase in money coming in, but an increase in service?

[Andy McDonald]

If we speak to people who take that train journey regularly, I think they will have their own observations about the quality of service. However, if the hon. Gentleman bears with me, I will deal with his remarks as I develop my speech.

--- Later in debate ---

[Chris Grayling]

If I am not mistaken, Lord Adonis actually accepted before the Select Committee that that did not happen. He thought that standing up in Parliament and saying that there would be a ban meant that there actually was one. I assure the hon. Gentleman that my Department looked very carefully at this and no evidence of any ban has been found. Moreover, a report from the National Audit Office stated that it had found no such evidence.

[Huw Merriman]

I was at the same Select Committee sitting. Of course, in the year following those events, the Labour party left office. What did happen at the time was that the then Secretary of State said that National Express would be stripped of other franchises, but of course that did not occur—I dare say that that could not happen legally—and the two franchises remained the same.

[Chris Grayling]

My hon. Friend is right. It is all very well Labour Members posturing, but we do have to operate within the law of the land, which is a fact that they sometimes miss.

--- Later in debate ---

[Alan Brown]

I agree with the hon. Lady. I will address a couple of those points because I agree wholeheartedly with what she says about the tender process and the backloading.

The reality is that private investors and companies either make money out of a franchise or they seem to be allowed to walk away. The Transport Secretary stated at the Dispatch Box that what is now happening is not a bail-out of VTEC. But if VTEC owes £2 billion in track premiums and is allowed to walk away without paying anything, that must by definition be a £2 billion bail-out. That is so simple and it cannot be argued against.

[Huw Merriman]

Surely the definition of a bail-out is when the Government actually have to pay money to the company, which of course they are not doing. If anything, the criticism of the Government is that they have ripped off the private sector and got more money from it than it could deliver.

[Alan Brown]

Yes, there we see the ideological blind spot yet again. If somebody owes me £2 billion, I would be writing off £2 billion of debt if I said, “Forget about it. It’s okay.” Let us say it is technically not a bail-out, but the Government are writing off £2 billion of debt that that company owes the taxpayer. The company is walking away and getting rid of a £2 billion liability, and I do not understand why Conservative Members are trying to argue different.

The Transport Secretary has previously justified the predicament by saying the franchisee got its sums wrong. That should not be an excuse, but, as I have repeatedly said, and the shadow Minister also touched on this, it means the Department for Transport also got its sums wrong when it thought the tender was suitable for award. It is not just the franchisee that got its sums wrong; the Department for Transport got its sums wrong, too.

The Government failed in their due diligence. What about the supposed parent company guarantees? Those guarantees clearly have not been worth much to the taxpayer. We do not know what the runner-up bids looked like, but do those runners up have a case against the Government, given they clearly failed in their due diligence by awarding this franchise, from which VTEC gets to walk away?

As the hon. Member for Edinburgh West (Christine Jardine) said, we know VTEC backloaded the track premiums. If another consortium’s bid did not backload the track premiums, the taxpayer might already have made more money, but we do not know whether there was such a bid because it is all clouded in commercial confidentiality. It also shows, yet again, that no lessons were learned from the failed 2012 west coast franchise. The Transport Secretary had a duty to ensure that lessons were learned and properly applied in awarding the east coast franchise, and it is clear that not enough analysis was undertaken.

When the story broke, although VTEC got the sums wrong, Richard Branson blamed some of the reduced numbers on Network Rail. Given the Transport Secretary also has responsibility for Network Rail, what is the truth in that statement? If it is true that Network Rail was the problem, VTEC should be compensated because that is the way the franchise model works. If it is not true, why has the Transport Secretary not come out fighting to disprove Richard Branson’s comments, instead of casually defending VTEC at the Dispatch Box? It is more smoke and mirrors from VTEC.

At the Transport Committee, the chief executive of Stagecoach used excuses such as that the Scottish referendum and Brexit hit the numbers. Considering that our referendum was in 2014, before the franchise was awarded, that is clearly patent nonsense.

Despite all that, the Transport Secretary’s new wheeze to prevent a blame game between the track owner and the franchise holder is a combined partnership model. That might improve things, but at this stage we do not know what the set-up will look like or how it will interact with other services outwith the franchise. Given the repeated Back-Bench Tory support for open access on the line, there will clearly be further complications for such a partnership to address. It is absolutely guaranteed that there will be further issues down the line.

--- Later in debate ---

[Alan Brown]

I completely agree. Rail franchise holders have been able to walk away. As has been said, the profits are privatised and the losses are underpinned by the taxpayer. That is not a proper free market model because there is absolutely no punitive action against franchise holders when they fail.

[Huw Merriman]

If that were the case, why did the share prices of the companies involved collapse?

[Alan Brown]

Funnily enough, Stagecoach’s share price increased when the Transport Secretary gave a statement from the Dispatch Box in February. Share prices go up and down, which is to do with the overall performance of these companies, and they are very big companies. The whole point of these big companies bidding and providing parent company guarantees is that it is supposed to offset the risk, rather than leaving the risk to the taxpayer.

On the question of state-owned companies or public sector organisations running franchises, the Transport Secretary’s logic completely falls apart when we consider that four foreign state-owned rail companies already operate franchises in the UK. Those companies are making a profit here for reinvestment in their domestic set-up, which is proof that state-run railways can work efficiently.

The previous east coast main line services are further proof that public ownership can work. When the previous franchise failed and was taken into public sector operation, it returned £1 billion in track fees to the Treasury and turned an operating profit of £42 million. So, as has been asked before, why move away from that successful model to one where VTEC can come in with inflated sums and then get to walk away? It is clearly not right.

The southern rail franchise shambles also happened on the Transport Secretary’s watch. The main conclusion of the NAO’s report is that it could not be demonstrated that the franchise has delivered value for money. At the time, the operator blamed Network Rail and the unions, and the Government blamed the unions, completely ignoring the Transport Secretary’s role in refusing to engage with them. The fact is that 60% of the cancellations were due to Govia Thameslink Railway and only 40% were caused by Network Rail. The UK Government set up the model supposedly to deal with the complex infrastructure upgrades, but the Government took all the revenue risks, so the strikes actually cost the taxpayer, because the loss of revenue is underwritten. The Government also awarded the franchise based on an even higher roll-out of driver-only operation, which is what caused some of the disputes.

--- Later in debate ---

[Huw Merriman (Bexhill and Battle) (Con)]

It is a great pleasure to follow my Transport Committee colleague, the hon. Member for Easington (Grahame Morris), who always speaks well on this subject.

I am very interested in why this franchise has been brought in-house yet again, and the Transport Committee is keen to get under the skin of whether there is a particular issue with this franchise that causes it to be more problematic than others. We were very fortunate to have two respected industry professionals come and speak to the Committee, Iryna Terlecky and Nicola Wood, who both act independently to verify whether a franchise should be passed. Quite simply, their point about why this franchise failed is that the bidders overbid. Why did they overbid? Because they took the view that this network is the jewel in the crown of the UK rail network, and if a private company has the jewel in the crown, that sets it up well for the remainder of its franchises.

The House may welcome my taking a step back. The Government can of course be looked at—they should, rightly, be looked at—for allowing this to happen on their watch, but it would be slightly negligent of a Government not to try to take the maximum amount of money they could for the taxpayer. That money ultimately allows the Government to continue with the financing of the entire rail network, and in that regard I think that such strong criticism is based a lot on ideology in relation to who should run the railways. In my view, although I will always regard the private sector as the better operator, where the private sector cannot operate, the state will of course step back in, as has indeed been the case.

Network Rail has taken a bit a battering in this debate. It was quite clear to us from the evidence—indeed, VTEC has acknowledged this—that, in terms of the works Network Rail has delivered, it is not responsible for the issues on this line. It may be that Network Rail became a problem, but it delivered during control period 5. We should acknowledge that, rather than use it as a scapegoat, as it often is. [Interruption.] Quite frankly, I am not particularly bothered what Richard Branson has to say. That actually tends to be the case, but I think he looks more to Brexit and other reasons to explain why this has failed, when we have in fact seen more of an inflow of people staying in this country, rather than leaving.

This point has already been raised, but I want to mention the noble Lord Adonis. I was particularly impressed by the evidence he gave to the Select Committee, and he was very balanced. He made the point that, in his view, all the franchise systems work well, but this line is an exception and has been one previously, and there is no reason to change a model that he still believes works well. He is worth listening to, but I take issue with his claim that, on his watch, a bidder such as Virgin-Stagecoach would not have been allowed to bid again and would have lost its other franchises. Of course, when National Express suffered the same fate, the legal advice was that the cross-default mechanism did not allow it to be stripped of the other two franchises, and it was not stripped of them. It is all well and good for Lord Adonis to say that a future Labour Government would have stopped such bids coming through, but he knows full well that between 2009 and 2010 there was no option to do so, so we will never know whether that would have been the case.

In the 30 seconds I have left, I want to talk up our rail network. In my view it works well. Within the EU, we have the largest investment in the railways; the utilisation of our railways is 60% greater than the EU average; and the European Commission has found that there are £11 billion of efficiency savings for the other 27 members to deliver, but zero for the UK. We have the second safest railway and the second highest passenger satisfaction ratings. That is hardly surprising, given that we have doubled the number of passengers since privatisation. I want to talk up rail because it still has more to offer us in private hands.