ECML franchise fails .... again....

[caradoc]

They've lost so much money because they've had to pay all the profits and more, to the government in premiums.

Operationally, the franchise has been making a very good profit, but not enough to cover the price they have to pay to run the franchise (the premium).

To date, VTEC have handed over a reported £800 million to the DafT or Treasury.

This is more than they've earned in profits, leaving them with a £200 million loss.

 

Had the premium payments been set at a lower level, VTEC would be in the black and the government would have continued to receive a regular healthy payment from them.

 

So, contrary to the Railway Magazine editorial, the problem is not solely and entirely caused by Network Rail's incomplete infrastructure upgrades (although this would certainly be a major factor once new trains are in service but unable to operate the improved and enhanced service).

 

One also has to wonder why, given the two previous failures of the ECML franchise, bidders continue to make utterly unrealistic estimates of revenue growth and therefore premium payments.

[stovepipe]

Indeed, and overbid before the upgrades were due too, such that in June last year, 2 years 3 months into the franchise, the profit warnings are being issued. Rank incompetence in my view.

[Barry O]

Daft have a lot to answer for....again. They think they run British Rail. They couldn't organise a Thomas the tank layout at an exhibition.

 

Don't even think of going back to East Coast..yes they made profits but by cutting repairs to a minimum..just like the BR days....

 

Baz

[Coryton]

Don't even think of going back to East Coast..yes they made profits but by cutting repairs to a minimum..just like the BR days....

 

 

Can you explain why they would take a different approach to privatised operations?

 

So, contrary to the Railway Magazine editorial, the problem is not solely and entirely caused by Network Rail's incomplete infrastructure upgrades (although this would certainly be a major factor once new trains are in service but unable to operate the improved and enhanced service).

 

One also has to wonder why, given the two previous failures of the ECML franchise, bidders continue to make utterly unrealistic estimates of revenue growth and therefore premium payments.

 

Indeed, and overbid before the upgrades were due too, such that in June last year, 2 years 3 months into the franchise, the profit warnings are being issued. Rank incompetence in my view.

 

Perhaps. Myself, I wouldn't presume to say that I could do a better job than a professional bidding team.

 

However...there must be a game theory aspect to this.

 

If company A thinks that company B may put in an optimistic bid, they have no choice but to do the same thing in order to win.

 

Why would company B put in an optimistic bid? Well, because company A might....because company B might...because company A might....

 

An expectation of high bidding seems to have developed on the ECML.

 

It's very easy to say that bids should have been rejected if too optimistic. But how do you actually do that? Does the DfT have it's own shadow bid team that works out what it thinks the correct price is and then rejects everything over it? (And if they're that good, why bother getting someone else in to actually run the railway?) But even that doesn't work because the bids will have different plans for how to increase revenue.

 

And while having to re-tender is expensive, if you pick a high bid that fails you collect the money up to the point at which it all goes wrong.

[Coryton]

A quick point on forecasting and how you get to a £200m loss. As a first order, the turnover and costs are c £800m. A 2.5% over and underestimate produces a £40m year loss. Multiply by 3-4 years, add on some compensation payment and you’re at that sort of figure pretty quickly. Highlights how operationally levered these sort of franchises can be.

 

Which is where in my simplistic view I think the franchising system is flawed. It relies on extremely accurate predictions working out over long periods of time, and this just doesn't and can't work.

 

I don't know what the answer is, though there have been attempts to control the problem with cap and collar and the like, haven't there?

[Clearwater]

Which is where in my simplistic view I think the franchising system is flawed. It relies on extremely accurate predictions working out over long periods of time, and this just doesn't and can't work.

 

I don't know what the answer is, though there have been attempts to control the problem with cap and collar and the like, haven't there?

I agree. There was a great report from the rating agency S&P about 10 years ago that showed on average, traffic forecasters for road projects were on average 20% over optimistic. Those were new builds but the point stands. Question is how do you incentivise bidders to generate more traffic and hence “premiums”/ returns to allow sufficient profit to motivate but allow public finances to benefit?

[D854_Tiger]

Which is where in my simplistic view I think the franchising system is flawed. It relies on extremely accurate predictions working out over long periods of time, and this just doesn't and can't work.

 

I don't know what the answer is, though there have been attempts to control the problem with cap and collar and the like, haven't there?

 

    ..... but don't the franchise agreements already have escape clauses, on both sides (with associated penalties), for when those predictions don't quite turn out to be quite right and one side, or the other, or both (as with the EC) would prefer to hand in the keys.

 

Insurance for unforeseen things like the 2007 bank crisis and knock on effects on the wider economy.

 

Surely a more sophisticated approach building upon cap and collar could be fined tuned to cover all, or most, eventualities.

[Mike Storey]

Equally nobody forced the DfT to actually chose that over ambitious bid did they? A bit like nobody forced anyone to take out all those risky mortgages before 2008, or forced councils to put public money in Icelandic banks.

 

Now granted with any bid / contract setup it can be difficult to decide where to draw the line - however things like previous experience and considering 'what if scenarios' are just as important as all the wonderful promises the bidder may include or the money they are willing to pay.

 

Ever heard of the saying 'Sounds too good to be true' - well that statement sounds very much like the ridiculously large growth forecasts Stagecoach / Virgin used to underpin their bid. Given previous high profile failures you would have though someone at the DfT would have had the sense to say No and reject the bid.

 

Oh and who was it that drew up the 'invitation to tender' guidance that ultimately the Stagecoach / Virgin bid based on - why yes the DfT again.

 

It is all too easy to forget that, the last time Virgin "lost" a franchise bid (to First Group), they reached for their very expensive lawyer whilst stating their bid had been superior and that the technical evaluation had been flawed, and won.

 

Perhaps the DfT have longer memories than we do?

[D854_Tiger]

It is all too easy to forget that, the last time Virgin "lost" a franchise bid (to First Group), they reached for their very expensive lawyer whilst stating their bid had been superior and that the technical evaluation had been flawed, and won.

 

Perhaps the DfT have longer memories than we do?

 

An inevitable consequence of the DfT losing their best (as in anyone any good) people to the private sector.

 

HMRC has the same problem to which their (somewhat controversial) solution is to get the private sector accountancy firms to write their tax law for them.

 

I believe it's called poacher turned gamekeeper but it usually works better than any alternative.

[Max Legroom]

Virgin Mobile, which is part of Virgin Media, has nothing to do with the Virgin Group whatsoever, other than using the Virgin branding, which they pay a licence fee for.

Virgin Media is a subsidiary of American company Liberty Global.

 

 

.

Interesting that they licence the branding without, seemingly, stipulating a high standard of customer service. It's almost as if they think the brand can't be tainted. This probably explains how they got away with the west coast tender that wasn't and now the latest east  coast debacle.

[Glorious NSE]

However...there must be a game theory aspect to this.

 

If company A thinks that company B may put in an optimistic bid, they have no choice but to do the same thing in order to win.

 

Why would company B put in an optimistic bid? Well, because company A might....because company B might...because company A might....

The other part to that is that they will have invested a substantial sum of money in preparing the bid, do you spend £10m+ on your bidding process to just walk away?

[Ron Ron Ron]

If you are referring to the premiums, yes it was written into the franchise agreement.

As explained above, the agreed level of payments was set far too high, based on flawed revenue growth assumptions and an expectation that increased capacity would have been deliverable.

VTEC pitched their bid too high (as I'm sure the other two bidders did) and the DafT and Treasury were far too greedy.

 

You make it sound like the franchise specification issued for tender by the dft required that £3.3bn of premia be paid. This is incorrect, VTEC bid that amount to win the franchise, no-one forced them to. ......

 

 

Sorry for the late response Stovepipe.

No, I don't believe I made it sound like that at all.

At no time in that quote, did I say, suggest or imply that the DfT set out the level of premiums to be paid.

VTEC bid, DfT accepted, contract terms (including payment levels and schedule) agreed and the franchise agreement was signed by both parties.

 

No one forced VTEC, but in deciding to enter the bidding game, there must have been an intention to win, otherwise what's the point of playing?

They either got their sums badly wrong, or as you later suggested, may have been gaming the system.

Regardless, the DfT willingly signed up to that deal.

 

 

.

[Ron Ron Ron]

An inevitable consequence of the DfT losing their best (as in anyone any good) people to the private sector.

 

 

Same as with politics and the HoC's then?

 

 

.

[D854_Tiger]

 

No one forced VTEC, but in deciding to enter the bidding game, there must have been an intention to win, otherwise what's the point of playing?

They either got their sums badly wrong, or as you later suggested, may have been gaming the system.

Regardless, the DfT willingly signed up to that deal.

.

 

Virgin (or more to the point Stagecoach) did get their sums wrong but, thus far, not to the point where they are no longer prepared to take the hit for it.

 

Trouble is, in the meantime, NR and the DfT have come along and provided them with a watertight reason to tear up their franchise agreement and indeed even claim compensation.

 

The best solution for all concerned would have been to recognise the failings on both sides and renegotiate, trouble is, the awkward squad has since come along and claimed Virgin are deliberately gaming the system, banking on the DfT and NR failing to deliver.

 

As to the truth of that and the extent that Virgin has learned the hard way (or is that the easy way) that they can get away with it, we shall never know, but what we do know however is that the DfT has the perfect solution to that and it's called getting their ******* act together.

 

Whichever way you wish to write this up, the DfT and NR are culpable and we can hardly blame the TOCs for perhaps having now developed a somewhat cynical approach when dealing with them.

 

There is a long history of private sector companies coming unstuck when dealing with the state, just ask the IT companies, woe betide those without highly specified watertight contracts because back watching and contingency, of the highest order, are pre-requisites, when you deal with the state, and you can't expect old fashioned things like good faith, based on handshakes and gentleman's agreements, to ever prevail when dealing with the, here today gone tomorrow, world of civil servants and politicians.

 

To their credit, the casualty list of failing TOCs has, by and large, been pretty small and given the relatively new concept of rail franchising that has be viewed as no small miracle.

[caradoc]

What we will now never know of course is whether, if Network Rail had completed the upgrades within the agreed timescale, the enhanced service thus made possible would actually have earned enough extra revenue to pay the increased premiums ? Especially given the fact that the franchise is in serious trouble before any of the upgrades could have been completed.

[The Stationmaster]

Which is where in my simplistic view I think the franchising system is flawed. It relies on extremely accurate predictions working out over long periods of time, and this just doesn't and can't work.

 

I don't know what the answer is, though there have been attempts to control the problem with cap and collar and the like, haven't there?

 

Cap & collar would seem to be the simplest way of dealing with it.  Overall there is not much wrong with the franchising idea - it has worked fairly well for most franchises and it has seen significant increases in rail use (but there are other significant factors in that growth of course).  But it has repeatedly gone wrong on the ECML since DafT got involved - in fact they've now achieved a hat trick - which suggests to me something is as seriously adrift in their assessments of ECML franchise bids as it is in the assumptions made by the bidders.

 

But - like democracy - is there anything better?  It is noticeable that management contracts (as let by DafT) appear to stifle operator initiative with the latest examples coming from the recent changes on Great Western (just ask those folk who travel the Reading - Basingstoke route or those of us who now face journey times to/from London which take 10% longer than the did over 50 years ago) whereas franchises have encouraged initiative in at least some respects.

[Joseph_Pestell]

 

 

 

 

If company A thinks that company B may put in an optimistic bid, they have no choice but to do the same thing in order to win.

 

 

But they don't need to win that badly. Because they are shell companies with no staff making the bids (they take over existing staff if they win), there are no serious downsides to losing. OK, perhaps a few hundred thousand up to £2M in bid costs, but that is cheap as chips compared to losing £200M a year having "won", a real Pyrrhic victory.

Edited February 8, 2018 by Joseph_Pestell

[Glorious NSE]

But they don't need to win that badly. Because they are shell companies with no staff making the bids (they take over existing staff if they win), there are no serious downsides to losing. OK, perhaps a few hundred thousand up to £2M in bid costs, but that is cheap as chips compared to losing £200M a year having "won", a real Pyrrhic victory.

Bid costs were running much, much higher than that - unless they have come down a lot in the last few years?

[D854_Tiger]

Cap & collar would seem to be the simplest way of dealing with it.  Overall there is not much wrong with the franchising idea - it has worked fairly well for most franchises and it has seen significant increases in rail use (but there are other significant factors in that growth of course).  But it has repeatedly gone wrong on the ECML since DafT got involved - in fact they've now achieved a hat trick - which suggests to me something is as seriously adrift in their assessments of ECML franchise bids as it is in the assumptions made by the bidders.

 

But - like democracy - is there anything better?  It is noticeable that management contracts (as let by DafT) appear to stifle operator initiative with the latest examples coming from the recent changes on Great Western (just ask those folk who travel the Reading - Basingstoke route or those of us who now face journey times to/from London which take 10% longer than the did over 50 years ago) whereas franchises have encouraged initiative in at least some respects.

 

Brian Clough always used to say that when a football manager gets the sack then so should those in the boardroom that appointed him.

 

In the private sector there is a concept of due diligence, when evaluating bids, and, if one goes wrong, you sure better have ensured you followed the correct process because, in my experience, you will only get away with a failed bid evaluation, provided you have followed such a process (to the letter), and you won't even get a second chance if you haven't.

 

To be fair to the DfT those involved in an embarrassing manner do seem to be moved on, trouble is, sometimes to similar or even better things.

[D854_Tiger]

Bid costs were running much, much higher than that - unless they have come down a lot in the last few years?

 

The figure I saw reported was somewhere around £5m when Mr C*****n was asked where he was going to get the money from should the state decide to bid competitively for franchises (as prescribed by EU rules).

[jjb1970]

The Dutch have prospered greatly from wind farm contracts, raking in money from all over the EU and using it to build a highly profitable, state of the art construction fleet which works world-wide and employs a lot of Dutch personnel. I’ve worked on some of them, and very impressive they are.

To indicate that the Dutch are rolling in money from offshore wind and that overseas investment is negative is a great simplification. There are plenty of British companies and British based subsidiaries of overseas companies actively involved in offshore wind farm construction and doing well out of it. Siemens have invested heavily in UK wind turbine facilities, including a lot of high value, high skill jobs. The market leader in heavy lifts in the sector seems to be Seaway Heavy Lifting, a subsidiary of Subsea 7 (headquartered in London though registered in a tax haven). Seajacks have built up a good operation over in Great Yarmouth with some impressive vessels. MPI are part of Vroon now but they are still a UK based operation and employ a lot of good British people.

 

Many companies and individuals from O&G took a conscious decision not to enter that market because the cost model is very different and margins are much lower. Some O&G contractors took cost models based on O&G into the segment and left quite quickly as they weren’t competitive. I’ve hears a lot of comments from O&G people that they wouldn’t get out of bed for salaries on offer in offshore wind. That meant that the sector evolved quite differently to O&G and the companies active in the segment are not quite the same and facilitating new entrants who saw potential. These days it is quite an international industry.

[Barry O]

CORYTON,

Daft did have a much different approach to East Coast..why? Well East Coast didn't have as strict a set of requirements as a private firm has. And remember, Daft saw it as a new toy to play with without someone in charge giving them pain by being in the way.

Ask people in the train leasing companies.....

 

Baz

Edited February 8, 2018 by Barry O

[D854_Tiger]

To indicate that the Dutch are rolling in money from offshore wind and that overseas investment is negative is a great simplification. There are plenty of British companies and British based subsidiaries of overseas companies actively involved in offshore wind farm construction and doing well out of it. Siemens have invested heavily in UK wind turbine facilities, including a lot of high value, high skill jobs. The market leader in heavy lifts in the sector seems to be Seaway Heavy Lifting, a subsidiary of Subsea 7 (headquartered in London though registered in a tax haven). Seajacks have built up a good operation over in Great Yarmouth with some impressive vessels. MPI are part of Vroon now but they are still a UK based operation and employ a lot of good British people.

 

Many companies and individuals from O&G took a conscious decision not to enter that market because the cost model is very different and margins are much lower. Some O&G contractors took cost models based on O&G into the segment and left quite quickly as they weren’t competitive. I’ve hears a lot of comments from O&G people that they wouldn’t get out of bed for salaries on offer in offshore wind. That meant that the sector evolved quite differently to O&G and the companies active in the segment are not quite the same and facilitating new entrants who saw potential. These days it is quite an international industry.

 

Indeed, I suspect reports of a decline in the British wind industry are somewhat premature, no shortage of wind over here.

 

Then most of the prevailing wind hits Britain first, where we get to slow it down before the Dutch even get their hands on it.

[stovepipe]

Regardless, the DfT willingly signed up to that deal.

 

 

.

But how exactly are they supposed to decline the bid, when they are charged with obtaining the best value for the public purse? The NAO and PAC would be all over then, and the politicians, indoctrinated with the belief of private sector superiority, would not support accepting a lower bid. Lord knows DfT are flawed, but simply saying it's all down to them, ignores the reality of government procurement rules and the space within which they have to operate.

[stovepipe]

Virgin (or more to the point Stagecoach) did get their sums wrong but, thus far, not to the point where they are no longer prepared to take the hit for it.

 

Trouble is, in the meantime, NR and the DfT have come along and provided them with a watertight reason to tear up their franchise agreement and indeed even claim compensation.

 

The best solution for all concerned would have been to recognise the failings on both sides and renegotiate, trouble is, the awkward squad has since come along and claimed Virgin are deliberately gaming the system, banking on the DfT and NR failing to deliver.

 

As to the truth of that and the extent that Virgin has learned the hard way (or is that the easy way) that they can get away with it, we shall never know, but what we do know however is that the DfT has the perfect solution to that and it's called getting their ******* act together.

 

Whichever way you wish to write this up, the DfT and NR are culpable and we can hardly blame the TOCs for perhaps having now developed a somewhat cynical approach when dealing with them.

 

There is a long history of private sector companies coming unstuck when dealing with the state, just ask the IT companies, woe betide those without highly specified watertight contracts because back watching and contingency, of the highest order, are pre-requisites, when you deal with the state, and you can't expect old fashioned things like good faith, based on handshakes and gentleman's agreements, to ever prevail when dealing with the, here today gone tomorrow, world of civil servants and politicians.

 

To their credit, the casualty list of failing TOCs has, by and large, been pretty small and given the relatively new concept of rail franchising that has be viewed as no small miracle.

I think you might be out of date. Last week Dft informed VTEC that they were in breach of their payment agreements and notice has been served that the franchise agreement is to be ended. They didn't get to the point where they could legitimately blame it on NR. They didn't either get to the point where a cap and collar arrangement could be implemented - 3 years in I believe.