Oral evidence: Rail Franchising in the UK, HC 689

Oral evidence, 26 February 2018.

Witnesses

David Horne and Martin Griffiths.

Chair

Welcome to the Public Accounts Committee on 26 February 2018. We are here today to take evidence on two major troubled franchises. Rail franchises are something the Committee has looked at a great deal in the past, and we have been raising concerns about them for some time. Today we are looking at the National Audit Office’s Report on the Thameslink, Southern and Great Northern franchise, which does not need much introducing because passengers have had a very poor service on it. It is a particular style of franchise—in fact, we have so far not really discovered two franchises that are on exactly the same footing. We are also here to look at the Virgin Trains East Coast service—VTEC. That franchise has collapsed for the third time, this time ending five years early. We will have two panels in front of us today. The first is the owners of the east coast franchise. We have, from my left to right, Martin Griffiths, the chief executive officer of Stagecoach Group plc, which is the 90% owner of VTEC, and David Horne, the managing director of Virgin Train East Coast Limited, which is, by mathematical deduction, a 10% owner of the franchise. We have obviously seen huge publicity about the franchise collapsing for the third time. The obvious question to ask you both is why your forecasts on passengers and revenue were so wildly wrong, and why you therefore feel obliged to give up the franchise five years early.

Martin Griffiths

Just one thing for the record: Virgin Trains East Coast is a 90% subsidiary of Stagecoach Group. David is the managing director of the subsidiary of Stagecoach Group. For the record, 10% is owned by Virgin Group.

Chair

Thank you for the clarity.

Martin Griffiths

Thank you for inviting us. We will do our very best to answer your questions and, I hope, help with your deliberations. I start by saying that this is a complex matter, but to the extent that we have responsibilities and obligations, we absolutely accept those.

Chair

My question was why you got your forecasts so wildly wrong for the franchise.

Martin Griffiths

We start back in 2013, when these bids were put together. We could probably spend the whole time going through what has changed in that period. Lots of things have changed, but fundamentally, we signed a contractual position with the Government—with the Department for Transport. We accept our responsibilities under that contract. Just for the record, the franchise has not—

Chair

But you are walking away from it, so you got the numbers wrong, didn’t you?

Martin Griffiths

Just to be clear, we have never walked away from it.

Chair

You are negotiating your way out of it.

Martin Griffiths

No. We continue to fund the business to the extent that we are obliged to. We signed a contract. A risk share between us and the Government was part of the procurement of that franchise. We are doing all the things that we were expected to do when we signed that contract, and the business continues to run and trade. We have to work out the contractual structure going forward at a period in time.

Chair

Just to be absolutely crystal clear, you will not be running this once you have negotiated with the Government to exit. You have decided to give up the franchise early.

Martin Griffiths

No; we are honouring our contractual obligations under the franchise. It is really important that we make that distinction. The Government had obligations under this contract and we had obligations under this contract. I accept that our forecasts, for lots of different reasons, have not come through. We would have liked passenger growth to be greater than it has been over the last three years. That is unfortunate. I am disappointed about that, but to the extent that we have contractual commitments to fund the franchise, we have done that, up to a level agreed with the Government. Once we reached that funding commitment, the risk was then with the Government. That was the franchise model that they put in place for this contract. You actually alluded to it at the beginning: you said each contract has been different. This contract is different from how the Government have procured rail franchises in the past and, encouragingly, is probably different from how they will procure franchises in the future.

Chair

But you have had to put in the parental guarantee money—the £165 million.

Martin Griffiths

Yes, we have.

Chair

That caps your liabilities. Has that been a factor in your going? If you go, you have to pay that £165 million and you are not liable for a penny more.

Martin Griffiths

We are committed to putting in the £165 million. That was what we agreed to do at the time the franchise was let. You asked about the model. I hope the Committee would acknowledge that we have had quite a change since 2013-14. The economic outlook, the political outlook and a lot of other things have impacted rail. We have seen the lowest growth rates in UK rail since privatisation. From our point of view, contractually, we have had to accept that, but no risk share was put in place on this franchise that has recognised the macroeconomic factors that have changed. The Government decided to take a big guarantee from us to secure the continuity of the franchise up to £165 million, and that is what we did.

Chair

Let me put it differently to you before we get to Mr Horne. You bid a certain amount. One could argue that you overbid massively for this contract in order to secure it, on the basis of certain passenger numbers, leaving yourselves little wriggle room if the passenger numbers went down. Why did you get your forecasts so wrong? Or were you gambling on passenger numbers staying static? Did you not allow for or contemplate any situation where passenger numbers went down?

Martin Griffiths

There is no incentive to overbid. We would not all be here talking about it if—believe me when I talk about the time and energy in this situation. Nobody approached these bids with the intention of trying to overbid or overestimate what they might achieve. The forecasts were put together based on the best economic outlook data that was available from the Government and the OBR at that time.

Chair

Mr Griffiths, if you were so pitch perfect on the bid and you were not overbidding, why are you not able to continue to run it because passenger numbers have gone down? They have got no capacity to—

Martin Griffiths

Clearly, with the benefit of hindsight, things have changed, and we accept that. We accept responsibility for that.

Chair

Which gets me back to my original question: why were your forecasts so out? Why did you not plan for any significant variation, or even a degree of variation, in passenger numbers? I tell you what, tell us this: what was your tolerance level for passenger number variation when you bid for this, percentage-wise, plus or minus?

Martin Griffiths

We were bidding a high percentage of passenger revenue growth, based on the trends that had been seen in the previous periods at that time, based on all our own experience of—

Chair

So in your planning you did not contemplate passenger numbers going down at all.

Martin Griffiths

We ran many, many sensitivities, put them together and worked through what would happen and the scenarios that would emerge. A whole series of things have come together now that were not foreseen at the time, which we have had to deal with.

Chair

So you didn’t plan for the worst-case scenario; you planned for continuing growth, in summary.

Martin Griffiths

We ran a whole lot of downside sensitivities, as did Government, who we believe evaluated our bid very robustly from both a financial and an operational delivery point of view.

Chair

The Department provides data to the franchisees to look at, in terms of determining things. Did you rely on that data, or did you do your own market analysis of what was likely to happen to passenger numbers?

Martin Griffiths

It is a combination of both.

Chair

Were the Government’s figures robust, when you compared them with the figure that you calculated?

Martin Griffiths

If you take the economic forecasts back in 2013 and 2014, you don’t need me to tell you that those have changed quite substantially since then.

Chair

What about passenger numbers? The Department has put in some quite considerable work into passenger numbers and trends, and provides a handbook for you. Were you relying on that, or did you do your own?

Martin Griffiths

There is an industry standard of forecasting rail. We have seen fundamental changes since 2013 and 2014 that would question the reliability of the traditional way we have forecast rail revenue and rail passenger numbers—that has changed.

Chair

I am sure we will come back to that. Mr Horne, I said that your forecasts were wildly wrong, but it does seem that there has been a real difficulty here. What was your involvement in determining how to bid and how many passengers you would forecast for this line?

David Horne

Good afternoon. To be clear with you on that question, I was appointed managing director of this business just before we took over the business—I was appointed in December 2014 and we launched the business in March 2015—so I was appointed after the bid had been secured and the contract signed. At the time of the bidding process, I was involved in running another company.

Chair

Is part of your role to encourage more passengers to use Virgin Trains East Coast?

David Horne

Absolutely. We took over in March 2015 and we have had a very clear and admittedly ambitious plan to improve the service, transform the service and grow the passenger services on the back of that.

Chair

Improving the service was one of your main drivers to increasing passengers. Were there any other aspects?

David Horne

It was. We supported the revenue growth projections with a significant amount of investment, and that is really in three phases. The first phase, which we have delivered over the last three years, has been about improving the existing trains, running more services with the existing train fleet, and improving other elements of the customer service. The second phase is about the delivery of the new train fleet, which is coming later this year. Both of those things—based on the experience of both Stagecoach and Virgin elsewhere—had delivered significant revenue growth on other routes. So we felt that we could place a lot of confidence in the model that we adopted at the time of the bid. As I think Mr Griffiths has mentioned, other things have since happened in terms of the wider economy.

Chair

At board level—I don’t know which of you sits on which board of which part of the organisation—were there any discussions about the potential risks to passenger growth? Did anybody call out and ask, “What if we don’t get this passenger growth? Have we got enough tolerance in our bid?” Or, indeed, did you, Mr Horne, when you took over and were looking at the day-to-day costs of managing this contract—this franchise—and continuing it running?

Martin Griffiths

Absolutely. I will take that because, as I said, I am ultimately responsible for the Stagecoach Group bid. Yes, at bid level, steering group level and, ultimately, Stagecoach board level, there was a lot of discussion about the bid, the forecasts, the revenue assumptions and what happens if certain things don’t work out. If the macro-economy is different, is there a risk share? What is the ultimate liability or the tolerance for risk that the group would have? That was a very robust process. Part of that was agreeing with the Government the contractual framework, which said, “We are prepared to take risk”—there is risk; you won’t win franchises if you don’t take risk—“but is the risk transfer and the risk allocation acceptable to us?” Back in 2013 and 2014—again, a very different time—we concluded that the risk was acceptable for us and we pushed ahead with the contract. I would just echo what David said. David’s team are responsible for driving forward the business and, against the background, it has been extremely challenging. His management team and our staff have done an excellent job, and we are growing. Many businesses in the last five years have not seen growth, but our railway has grown; it is just not growing at the rate we had hoped or anticipated when we put the bid in— not even when the contract started, but when we put the bid in.

Chair

Okay. Let us go back to when you put the bid in. You have talked about a massive change in the economy, but there were still shocks apparent at that time, and it seems that nobody either in Virgin Trains East Coast or Stagecoach or in the industry was calling that out. In hindsight, do you think you could have got the franchise for cheaper than your bid?

Martin Griffiths

Hindsight is a wonderful thing. Of course, if we could go back today to that time and look now and see what has happened, you would bid less. You would not take the position that we did. But all of the evidence we had at the time, from the testing we had done, the customer interviews we had done and 21 years of running railways in this country on South West Trains and East Midlands Trains, and what we have done with Virgin on transforming the west coast main line—as recently as 2006 that railway had 14 million passengers a year, and Virgin Trains West Coast will do something like 34 million passengers this year. We have seen significant passenger growth on the back of what of what was expected on the economy, customer experience improvement, new investment and new trains. It was a bid that was ambitious, but it was a transformation—

Chair

It was ambitious, but it was also—you say that hindsight is a wonderful thing, but you knew when you bid that it had failed twice before.

Martin Griffiths

Yes, we did.

Chair

So what particular cautions did you take in bidding for this franchise, knowing that it had failed twice before? Surely that was a big, bold warning sign that it was not a simple franchise to run. I’m not suggesting that you thought it was simple, but it was going to have its own complications.

Martin Griffiths

It is not a simple franchise, but I go back to: it was a business transformation project. This was to be eight years, plus potentially options to go further. It was to introduce a whole new fleet from later this year or early 2019, which was absolutely to transform and revolutionise public transport on the east coast main line. And we will do that—or somebody will do that. It will be a fantastic project; it is just that the first three years of operating have been below what we would have expected. That is despite a significant capital investment programme. All the customer experience—the customer on-board experience and the station experience—and first class has been upgraded. For those of you who use it, I hope you see that. So everything that traditionally you would have put into driving growth on a railway has been done, and then some. We have got growth; we just have not got the growth that we had anticipated back in 2013.

Gareth Snell

Mr Griffiths, you can’t see what I can see, which is one of our colleagues shaking her head at the idea that the service has improved on the east coast main line. I have got the train a couple of times, but I take the west coast main line. You have just explained how everything with the west coast main line seems to have gone well and passenger numbers have grown, but earlier on you said that part of the reason you have not seen the growth in passengers on the east coast main line was because of macroeconomic problems and wider economic circumstances. So how is the east coast economy any different from the west coast economy in terms of driving passenger growth? Surely, the only people to blame when people are not getting on your trains are the company that provides the service. The idea that somehow there is this wider set of forces that means that passenger levels have been subdued on the east coast main line, when every other franchise across the piece is experiencing an increase in usership, suggests that you are out of kilter and it is not the public who are at fault.

Martin Griffiths

It is absolutely our responsibility. But, to be clear, Virgin Trains East Coast has outperformed the sector over the last three years in terms of growth. The railway has seen the lowest growth rate since privatisation, and Virgin Trains East Coast is part of that. So when I talked about the historical experience on west coast, that was in a different period of time. In the period leading up to the bid, we had seen substantial growth. In the last three years, rail revenue growth across the UK has collapsed. That is to do with the economy. That is to do with political uncertainty. We have had some terrible high-profile incidents in places like Manchester, which you will clearly all be aware of, and a fundamental change in people’s perception about travel.

Chair

Can I just probe that? How does political uncertainty stop someone getting on a train and going somewhere? I don’t understand the connection.

Martin Griffiths

The whole economy—

Chair

You mean economic uncertainty? That is different.

Martin Griffiths

When we bid for the franchise, nobody foresaw two referendums—one in Scotland. We did not foresee the Brexit referendum, with two general elections. All of these things. I can take you to other parts of our business—

Chair

I have to say that you got a lot of business with a load of MPs travelling up and down to Scotland for the referendum.

Martin Griffiths

We are in a very different place. That is my point. So Virgin Trains East Coast has outperformed.

Gareth Snell

I think it is a baffling excuse, frankly, that two referendums stopped people getting on the train.

Martin Griffiths

I just said it is relevant; it is part of the whole wider debate.

Gareth Snell

How? This is what I do not understand. How exactly—in fact, don’t worry about that question, because it is so baffling and such a throwaway comment that it’s not even relevant to what we are discussing. What I do want to know is this. You have said that the east coast main line is outperforming every other franchise and it has had record growth. How have you not been able to sustain the programme of activities that you had planned to do if you are the most successful, in terms of growth, out of the franchises?

Martin Griffiths

One of the most successful. As I said, everything is relative to what you bid. We assumed that we would have higher growth rates than we have achieved, and we take full responsibility for that. Contractually, that was a risk, and we have accepted it. It is disappointing. I am disappointed for our staff and for our shareholders; I am disappointed it has not worked out. But that is where we are. Just to be clear, our risk—you asked about the model. When we signed this contract on this franchise, the Government stress tested this bid as well. The way the Government dealt with the risk allocation was this. You asked what we did; we presume the Government—I am sure you will ask them this—did all this evaluation as well. But what the Government then asked for, to protect the taxpayer in the scenario that these forecasts did not come through, was this. The Government asked us to write at that time the single biggest guarantee that had ever been given on a rail franchise.

Chair

It was £165 million.

Martin Griffiths

It was £165 million. Our total losses on this contract will be about £200 million; that is about 20% of the market capitalisation of Stagecoach Group at the current time. That is a very, very significant and painful experience for our company.

Chair

Clearly, walking is less painful than staying with the contract, or you wouldn’t have walked—let go.

Martin Griffiths

Can I just go back to this? We are honouring our contractual position—absolutely. We are funding the business. We are doing everything that we were asked to do.

Chair

You are honouring it, but you were expecting to run the franchise, as you said, for a minimum of eight years, with a possibility of extension, so this is well out of kilter with your plans when you bid for the franchise.

Martin Griffiths

Of course.

Chair

And you said only last year that you expected the franchise to be profitable by next year—by 2019—so why is it that you are prepared to pay that Government guarantee of £165 million but not prepared to put money into keeping the franchise going until it is profitable? Or do you disagree with what you said last year?

Martin Griffiths

No; there is no doubt that the trading position has deteriorated even further since this time last year.

Chair

So you do not now think it will be profitable by 2019?

Martin Griffiths

No.

Chair

That is very clear; thank you.

Sir Geoffrey Clifton-Brown

Can I just try to examine for a minute why the franchise is not as profitable as you thought it was? Is it because you are getting lower passenger numbers? Is it because people are buying cheaper tickets? Or is it because your costs are more than you thought they were going to be?

David Horne

Can I take that question? It is absolutely a matter primarily of revenue. If you go back to the time of bidding—to 2014-15—the inter-city sector, across the whole rail network in the UK, was growing at about 7.5% in terms of passenger revenue. So far this year, from April 2017 to now, the sector has been growing at only 1.2%. Across the sector, passenger revenue numbers are still growing, but at a much lower rate than they were at the time of bidding. We have also seen an impact in terms of the price that people are prepared to pay. It is fair to say that people are under more financial pressure than was expected. We are certainly seeing that the market is shifting more in terms of the lower-cost fares that people are looking for. We have responded to that as best we can by running more services so that we can offer more cheap fares—at weekends, for example—and we are seeing some good growth on the back of that, but it is a different position from what it was at the time of bidding.

Chair

Mr Horne, I just want to cut across Sir Geoffrey. You are one of the companies that has pioneered early booking and cheap fares.

David Horne

We have.

Chair

So, in a way, are you not hoist with your own petard? You have promoted advance booking and cheap fares, and people are now, you are saying, buying too many of those, so that has been damaging your—

David Horne

It is a mix. When you are running a business like this, it is a mix between the volume strategies, the extra passengers that you attract by cheaper fares, and the fares that you can expect business customers, for example, to pay. Clearly, the focus has shifted in terms of affordability. People have less discretionary income than they used to, which has made the revenue challenge a bit greater. As a business, we have been responding to that as best we can by, for example, running more services and improving them where we can.

Chair

Have you done an analysis of how business passengers, walk-up fares and expensive tickets have dropped off? You talk about the balance changing, but have you done an analysis of what percentage drop there has been?

David Horne

I don’t have that figure to hand. We can certainly follow that up.

Chair

If you can provide it, that would be helpful. The Department has got its handbook, and clearly passenger numbers dropping overall is an industry-wide issue.

Martin Griffiths

We can provide that.

Chair

That would be very helpful.

Martin Griffiths

We have experience of running other railways. This is not just inter-city; commuter franchises are also seeing this.

Chair

We would be very interested in that, because it is something we want to probe.

Martin Griffiths

We have that.

Chair

Our sister Committee is interested, too.

Sir Geoffrey Clifton-Brown

Let me try to test your bidding process against where you are at the moment. You have told us today that you are running 34 million passengers. What did you predict in your original bidding process? Where did you think you would be at the moment in your original bidding process?

Martin Griffiths

I can’t remember right now off the top of my head, but we were certainly looking, in these early years, for a minimum of high single-digit revenue growth, and we have been getting low to middle single-digit growth. In those three years, we were significantly behind what we hoped for, for the reasons we have alluded to.

Sir Geoffrey Clifton-Brown

How will this affect your bidding process in the future? I don’t know whether you are going to be bidding for this franchise in 2020 or not, but if you were, how would you approach the bidding process?

Martin Griffiths

There are two things. There are lessons to be learned here for all people. We have responsibilities, but there are lessons to be learned by various stakeholders—the Department, Network Rail and us principally—about how we approach bidding, the risk transfer and the risk allocation. Bids are set at a point in time in the economic cycle. You asked me about that. You can only form a view based on the evidence, the trains and the data you have at that point in time. Clearly, if you were bidding tomorrow, you would have a much more cautious outlook because of what you are seeing at this point in time. I think the Government recognise that the model they procured on for this particular franchise is perhaps not fit for purpose. I know you have looked at Richard Brown’s review from 2012. I am a great believer that risks should sit with those best able to manage them, and he said that macroeconomic risk should largely sit with Government. On this franchise, there has been no risk share, so all the risk—macroeconomic, initiative and all of that—has sat with us, the operator. We accepted that contractually, but I don’t think it has worked. One of the reasons we are here is that it clearly hasn’t worked out as any of us intended. I think there needs to be some time for reflection about what the rail franchising model needs to look like as we go forward.

Sir Geoffrey Clifton-Brown

Just to try to work out where we are going to go from here, you are going to negotiate your way out of this, because you have come up against your £165 million guarantee. Is it likely either that the Government will pay you to run it until 2020, or that they will take it over themselves? In any case, are you likely to be bidding for it in 2020?

Martin Griffiths

The Secretary of State made an announcement in the House of Commons a few weeks ago, and he clearly flagged that the contractual position on the railway needed sorting. Again, I would reiterate that the railway generates a high cash surplus. This is a very strong railway that will generate something like £260 million cash profit this year.

Chair

We are talking about east coast?

Martin Griffiths

East coast will generate something like £260 million. The issue is the contractual structure below it—in other words, the payments to Government—which was part of the bid structure we have talked about. Going forward, the taxpayer will still get an incredible amount of value out of this franchise, whether we are running it, the Government are running it or somebody else is running it. In answer to your question, the Secretary of State has made it clear that he wants to evaluate his options. I believe we can demonstrate that it is still best value for us to deliver the next stage of the growth that David alluded to, which is the new trains coming in. It would be very disruptive to change that now. But that will be a decision the Secretary of State will have to make when he sees the different options evaluated to him. We will obviously co-operate with him. He has made it clear that if we were to continue to run it, and we understand this, it would be on a not-for-profit basis through to 2020, but if we met certain key milestones around, I think, things like passenger satisfaction and delivery of new trains, we would look at whether there would be an exit fee payable. He will measure that against bringing the railway back to be run in house. On your question about—

Chair

Can we unpack that comment? There is a discussion going on that if passenger satisfaction hits a certain bar and things like the delivery of new trains—I won’t ask you to detail everything in that, because obviously it is under discussion—you could forgo your exit fee. Is that the £165 million?

Martin Griffiths

No. To be clear, there is everything we are contractually committed to under this contract, but it is not actually that. There is the £165 million, the performance bond and the net assets. The Government—

Chair

Can you just be clear about what you mean by the exit fee and what ballpark, if not precise, figure you are talking about?

Martin Griffiths

To be honest, we have not really discussed that. I am not ducking the question. I only saw that when you saw that, three weeks ago when the Secretary of State announced it. There is ongoing discussion about what that structure might look like.

Sir Geoffrey Clifton-Brown

The final bit of that question was, are you likely to be a bidder in 2020?

Martin Griffiths

Stagecoach Group has been operating and bidding rail franchises in the UK for 21 years. We take it very seriously. This has been an unfortunate experience, but I believe passionately in the railway. We all do. As long as the contractual structure and—coming back to this—the risk allocation are right, I would like to think that we will continue to bid for UK rail franchises.

Sir Amyas Morse

I want to make sure I have understood properly what you have said, Mr Griffiths. If I understood what you were saying there, in the event that you were to run the railway up to the end of the current franchise period on a not-for-profit basis, I think you mentioned that there might be space for you to get an exit fee if you hit a series of performance targets—a return of some kind if you were highly successful. Is that what I heard you say?

Martin Griffiths

Really, there has been no detailed discussion about that, other than what the Secretary of State for Transport said in the House of Commons. He was very clear that it would be not for profit through the life of the remaining contract, but he would want to talk to us about certain deliverables and if we hit them there would be a discussion about whether there would be some very small compensation for that.

Chair

Why would you want to run a railway not for profit, Mr Griffiths, given that you are a private company with shareholders who expect you to make profits?

Martin Griffiths

That is a very valid question, and that is why, until I understand what the Government might mean by that proposition, it is difficult for me to comment. You are right: we are a private company, we have shareholders to answer to and they would rightly ask exactly the same question as you, “Is this the right thing for us to be allocating our management time to?” Until I see the details of that I cannot absolutely comment.

Chair

One could say that it might preserve some of your integrity as a company to continue to run it. There might be some reputational benefit. Is that something that would be considered?

Martin Griffiths

Absolutely. As I said, we are not in any way shirking where we have responsibility here. We have not asked for any special favour, and we have not been given any special favour. We are seeing through the contract and the Government are pursuing the contract, as I would have expected them to do.

Chair

But you cannot be proud that this has happened.

Martin Griffiths

No, I am not. I am very disappointed. It has been a very painful experience. But when we sign contracts we honour them. Through the depths of the recession we honoured them. We have never shirked our responsibilities. This is where I feel that there are other parties with responsibilities here as well—

Chair

We are going to get on to that in a moment.

Martin Griffiths

We expect everyone to be responsible under the contract, and we will be too. We accept that.

Anne Marie Morris

At what point did you begin to realise that there was a problem and that you were not going to get the results you had expected? How did you monitor exactly how this contract was going? If you realised earlier that there was a problem, what did you do about it? What steps did you take? Every business can always adjust; businesses have to.

Martin Griffiths

I knew about this a few weeks after we got in.

Chair

A few weeks after you got the franchise?

Martin Griffiths

After we started. I knew we had a problem.

Anne Marie Morris

And what did you do then?

Martin Griffiths

I have been talking to the Department for Transport about it for over two years.

Anne Marie Morris

But what about your own internal organisation? Did you not look at what it was you were trying to deliver?

Martin Griffiths

Of course. I think the management team and the staff have done an incredible job, against a very difficult backdrop, to drive up the revenue and manage the costs, recognising that this was a key business transformation. We have known for a long time that it was going to be a difficult experience, but I feel that we have done a good job.

Anne Marie Morris

But if you knew it was going to be difficult, I would find it helpful to hear from Mr Horne exactly what you did. It was a transformation project. You knew it was going to be difficult. What were the things—you discovered this very early on—that you put in place, to try to make the best of this? The sense I get is that you just carried on and at the end of the day threw in the towel.

Martin Griffiths

I disagree. I will let David answer the question, but the last thing we have done is throw in the towel. We have been working extremely hard at everything that was within our control, to maximise the business.

Chair

Mr Horne, you arrived just at the point at which Mr Griffiths said you knew it was going wrong, so perhaps you had some contribution to the discussion, which you could explain to Ms Morris and the Committee.

David Horne

Yes, indeed. The point is that at the beginning of a franchise there is a lot to do anyway, so we were very focused on delivering the transformation that we had set out in the bid. But when we realised that we also had a bigger job to do in terms of revenue growth, we reviewed our revenue strategy. To give you a couple of examples, we formed a separate group to look at our long-term commercial strategy. We had the immediate management team focusing on the next year and then we had a separate team looking at 12 months-plus. Over the last three years, they have come up with a new long-term commercial strategy to drive revenue in the context of the circumstances in which we now find ourselves.

Anne Marie Morris

It sounds to me like you have separated out the transformation bit from the profit bit. It seems to me that if you had worked them together, there might be a success story coming out of this.

David Horne

We have worked very hard to make the best of the situation we have found ourselves in and the challenging circumstances we have been in. For example, some of the new services that we have launched in the past year are the response to that. We have started to run services that were not envisaged at the time of bidding and are not franchise commitments, but we have introduced those services, because we are confident that they drive revenue growth. The experience we have had on the east coast main line is that where we have run additional services, there has been revenue growth on the back of them. For example, last May we introduced extra services between Leeds and London, and we introduced a whole package of services just in December, which bring the Saturday service up to the same level as other days in the week. Those are examples of the actions that we have taken in response to the commercial and revenue situation that we found.

Anne Marie Morris

What was the transformation vision that you originally had? You are painting more of a picture of economic challenges—“How are we going to sort out the profitability issue?” Looking at what passengers will pay, you do a tweak here, a tweak there and a new service there, but what was the overall vision for the transformation? That is not really coming through.

David Horne

At the time of bidding, the business development team reviewed the existing offer and we considered that in the three or four years between the franchise start and the new trains arriving we could do an element of transformation with the existing trains through investment. We have invested £74 million over the past three years to improve the service. The interiors of the trains have been completely refurbished with new interiors and we have invested something like £13 million or £14 million in improving the reliability of the very old fleet that we are running at the moment. That has delivered results. We know that has delivered some benefits, but clearly the revenue growth in aggregate has not been as much as was expected.

Anne Marie Morris

I am still not clear about what your overall transformation vision was. I hear about what you have done, in terms of refurbishing this and that, but—

Chair

Just list them for us. There are the new trains.

David Horne

We have the new trains that are coming.

Martin Griffiths

Sixty-five state of the art new inter-city high-speed trains are coming, starting from next year. That will completely change the whole fleet on the east coast main line.

Chair

Answer Ms Morris’s question. What else? We have had it in bits, but let us have it all in one list.

David Horne

The new trains will enable the operator to significantly increase the number of trains that the franchise operates and reduce journey times.

Chair

We are getting into detail again. Ms Morris is right in saying that we have had little bits and pieces about what you might improve; you have talked about improving the existing rolling stock, but the long-term vision was new trains, which would mean faster and more efficient services.

David Horne

Faster journey times; more capacity, so passengers are able to get a seat; new services to places that do not have regular services at the moment, so the likes of Braford, Lincoln, Middlesbrough and Sunderland—new services.

Martin Griffiths

This is an old railway. It’s really tired. It is remarkable that it has got this far. The whole business plan here was to absolutely revolutionise it between now and 2023, and to create something that will be completely different from a customer point of view and much more valuable from a taxpayer point of view. That will happen; the investment is coming through that will drive that. What we started with, and even what we have today, will be a completely different proposition by the time we are through to 2022-23. It was a complete transformation of the railway.

Sir Geoffrey Clifton-Brown

Mr Griffiths, you gave a rather surprising answer to my colleague about when you knew that you were in trouble over this franchise bid. You said it was fairly soon after the in. What had actually changed in such a short space of time?

Martin Griffiths

To make sure you understand the process here: we started putting this bid together at the back end of 2013; the shortlists were around the beginning of ’14; the invitation to tender came out in March ’14; we put a bid in in June ’14; and we were told that we were going to be awarded the contract six months later, in December, with the franchise to start the following March. We all know that bidders are on risk from the time you submit your bid—you are on risk for revenue. This was also an unusual franchise—it is a bespoke contract—but the Government actually sold this business. Normally, it is an operating contract that they let, but because of the history and because it had been part of Government, they sold the business, so we “bought” a company. It was buyer beware—if you buy things from the Government, you take your chance and you don’t get many warrantees. By the time we got hold of it and opened the lid up, the revenue base that we thought we were inheriting was actually lower than we had assumed when we started. Again, contractually that was our position and I have accepted that.

Chair

How could that be the case? Was there no open book approach to it?

Martin Griffiths

No. You don’t reset.

Chair

So you didn’t know the revenue issues until you actually took—

Martin Griffiths

Not fully, until you are fully taking charge of the business. There clearly were signs of things starting to slow down—we run other railways. But it got much more pronounced thereafter. As I said, the base we inherited was lower than we had assumed when we bid.

Sir Amyas Morse

I am asking to make sure I have understood what you are saying. You are saying that the volume figures up to the time of the bid turned out to be wrong.

Martin Griffiths

No, what I am saying—

Sir Amyas Morse

More or less, you said, “When we had a look at it, we realised that the figures were lower than we thought.” Is that not right?

Martin Griffiths

What I said is the annualised revenue run rate was less than we had assumed it would be when we took over.

Sir Amyas Morse

Just be clear: you were making this bid in just normal commercial practice. Were you not allowed to do due diligence?

Martin Griffiths

Yes, you were, but I go back to my timeline. You put the bid in in June, and you didn’t get told whether you had won the franchise until December—so that’s six months. The contract didn’t start until the following March—that’s nearly nine months. You already have nine months of history. We know this—this is the way the model works and the way the Department procures franchises: the bidders are on risk for that period for what happens in the business.

Chair

Do you think that is too long a time?

Martin Griffiths

Yes I do.

Chair

How quickly do you think, practically, that could be done if you were running the Department?

Martin Griffiths

I would reset it. It would be a leveller for all. It does not change the competitive position because it takes everybody back to the same starting point: your bid and your growth. That is what they do in the rest of Europe. The chief executive of Arriva, who is relatively new to the UK, does not understand why that does not happen.

Chair

So basically, at the point of award, you just reset.

Martin Griffiths

You reset. Again, why is it important on this franchise? It is highly geared. These are low margin and fixed cost. I will make this very simple. I am exaggerating, but whether I had to carry one passenger or thousands of passengers, the costs would be the same. I have high costs, so it is all about revenue. If your revenue base is lower than when you start—those of you who are mathematicians can do the compounding. If you need to grow 8% off a lower base, you are already significantly underwater. That is why you asked me. I knew as soon as I looked at it. That in itself would not have been insurmountable, just to be clear. It was a challenge, but all the other things that we have talked about on top of that have made it more difficult.

Gareth Snell

Mr Griffiths, you said that you would expect a very small exit fee for hitting KPIs even if you were running not for profit. I wonder whether you can tell me how small you think “very small” is. I imagine we might have very different ideas about that. Secondly, given that you have essentially bought yourself out of responsibility for the remainder of the contract, do you honestly believe that you are entitled to even £1 more of taxpayers’ money?

Martin Griffiths

First, I have not bought my way out. I have honoured my contract. I keep going back to this: the Government set the risk transfer on this.

Chair

We have got that.

Martin Griffiths

I am doing what I was expected to do. Secondly, we get no subsidy at all on this franchise. This is premium payments to the taxpayer; this is not a subsidy railway. We are paying the Government for the right to operate.

Chair

I think Mr Snell was talking about the exit payment.

Gareth Snell

Yes, the exit payment. You said, “Very small.” What do you consider to be very small? Do you honestly believe, given the way this franchise has been run and the amount of work that is now going into keeping it aloft, that, even if you do run it not for profit and meet those passenger satisfaction levels, you should be entitled to any public money at all?

Martin Griffiths

Just to be clear, the franchise will continue to generate significant value for the taxpayer going forward.

Gareth Snell

Yes, you have said that three or four times.

Martin Griffiths

Well, I think it is important.

Gareth Snell

My question was very simple.

Martin Griffiths

We need to see what the Department wants to do. The Chair rightly said that, ultimately, our shareholders are going to ask us, “What should we do?” We go into that with a sense of realism about where we are at. We want to try to maximise the best for passengers and taxpayers going forward, so we need to sit down and understand what the Government want to do there, recognising that the business, and what is right for passengers and taxpayers right now, is at a very sensitive stage. We are about to go into this period of huge transformation—massive transformation—and the last thing we should be doing is disrupting all that. On what the ultimate commercial return to the shareholders will be, if any, we will sit down and be realistic with the Government about that. The Secretary of State has made it clear that he will be very transparent about which option he pursues, and we will have to work through that with him.

Chair

Is that a bid to keep running the franchise on a different basis? Are you keen to carry it on?

Martin Griffiths

Look, we have put in a lot of time, effort and capital, and it has been a painful experience, but I believe passionately in what we are doing. This will be a great railway. I like to think that we can continue to take it to the next stage if the Government choose to do that with us as a partner.

Chair

At the beginning, Mr Griffiths, you talked a lot about macroeconomic circumstances and changes to the economy, yet you have just talked about the bidding process and the fact that it is not reset at that six-month point when the contract is awarded. Which was the bigger of those problems that you laid out? Was it the economic circumstances or the fact that, at that reset point, you did not have the—

Martin Griffiths

The reset point, as I thought I said, would not have been insurmountable in its own right. The other things that have emerged are more significant.

Chair

Mr Horne, Sir Richard Branson has made a number of statements about Network Rail’s infrastructure being a key factor, in his view, in the challenges to this franchise. Do you share that view?

David Horne

It is certainly an issue that we needed to talk to the Department about. At the time of bidding for this franchise in 2014, everybody was expecting the suite of enhancements that Network Rail are delivering on the east coast main line to be delivered by 2019, including Network Rail. There are public documents from 2014 where Network Rail said that these things would be delivered by 2019. The Department procured the trains and encouraged each of the bidders to come up with timetables to take advantage of the new trains and the infrastructure enhancements. We did that, and our franchise agreement and the premiums are predicated on the basis of both the new trains and the infrastructure enhancements. What has happened since is, the dates for completing some of those infrastructure enhancements have been delayed. That is another thing we have been in discussion with the Department about, as well as working with Network Rail to ensure that the enhancements are delivered.

Chair

Mr Horne, how long have you worked in the rail industry?

David Horne

Twenty-one or 22 years.

Chair

Have you ever known a rail project deliver on time?

David Horne

I have, actually.

Chair

Okay. Give us an example.

David Horne

Actually, if you take some of the work that Network Rail has been doing on this route, some of it has been delivered on time; other elements have not been delivered on time.

Chair

But you must acknowledge that an awful lot of rail projects—if it is not all of them—do not deliver on time. It is a very high percentage. I suppose I have to return to Mr Griffiths at this point. Although it is not a defence of anything Network Rail has not achieved, it is not something you could have factored in when you were bidding, to think, “Where is the risk or potential for time lapse?” That can happen in a project of this size, with all the guarantees made by the Department and Network Rail. You must have built in some for potential slippage, because that often happens.

Martin Griffiths

Let me try to explain it this way. We were told to assume, as part of the bidding process, that a whole fleet of new trains would be procured and delivered by 2018-19. On the back of that, infrastructure would be provided and funded by—

Chair

Basically you trusted that.

Martin Griffiths

It is not just trust; we were entitled to rely on that, because that meant there would be more trains per hour, faster train journeys, more destinations, more revenue and more premium. I do not know whether Network Rail made those decisions, whether the Treasury made them or whether the Department for Transport made them, or Peter Hendy’s review—I do not know. But, at the end of the day, you cannot change the inputs and expect to get the same outputs.

Chair

We appreciate that. But in any other business, where there are a number of variables, especially in third parties—

Martin Griffiths

But this is hundreds of millions of pounds. You could never have priced that back in. This is a fundamental change to the franchise contract.

Chair

Did you have any conversations with Government about the surety of those deadlines and figures, given the track record in the rail industry—

Martin Griffiths

At the time, or since?

Chair

At the time of bidding.

Martin Griffiths

Well, no, because at the time you were—

Chair

Because you had to take it or leave it.

Martin Griffiths

At the time it was clear, and we were clear—as were the other bidders—what you were to assume.

Chair

So you could take it or leave it.

Martin Griffiths

Yes. The Government’s specification for the franchise was very clear as to what was going to happen. There was a very detailed specification that they wanted to be delivered.

Chair

Mr Horne, when is Virgin Trains East Coast going to run out of money and hand back the keys to Government?

David Horne

I think that depends on the economy and on our revenue trends going forward. So we do not have a projection giving us a specific date at the moment. I think the Secretary of State said something in the House of Commons, but that was clearly his view. We are just working hard at the moment, looking after our customers and looking after the business at the moment.

Chair

Mr Griffiths, you may have answered this earlier, but can we pin down how much money you will have lost by the time you walk away from this franchise?

Martin Griffiths

Over £200 million.

Sir Amyas Morse

Sorry—you didn’t really just say that you don’t have a projection forward for when you are going to cross the break-even? Of course you do. Come on.

David Horne

We have some projections, but this is a business which is quite volatile, so I cannot give you a specific date. Even if I could—

Sir Amyas Morse

Even if you wanted to.

Chair

At some point the coffers are going to run dry.

Martin Griffiths

As part of your franchise obligations, you have to give a forward-looking ratio analysis, and that is looking forward what we call 13 rail periods. So, based on where we are at now, and us putting in all our contractual commitments, at some point in that next 12-month period that ratio would be breached. I believe that is what the Secretary of State was alluding to, so we need to sit down and reset the contractual structure. Now, as David said, there are a lot of variables—not revenue and cost. You asked about Network Rail as well. We have some contractual day-to-day issues with Network Rail we have to resolve as well. And these are quite significant numbers.

Chair

Just to be absolutely clear for anyone watching who is a passenger or a taxpayer, you are not just going to run out of money one day and walk away; you are going to keep that negotiation going with the Department for an ordered handover.

Martin Griffiths

There is no mechanism. People always go on about you throwing the keys back.

Chair

I am just being absolutely clear—

Martin Griffiths

There is no mechanism for handing back the keys.

Chair

So, just to be absolutely clear, you are responsible for it until there is an alternative.

Martin Griffiths

Correct.

Chair

Okay. Can I ask about the future of the staff at Virgin Trains East Coast, Mr Horne? What is going to happen to them? Are they going to be TUPE-ed over to any future provider?

David Horne

Yes, they would be. That is what happens in this situation, and the Secretary of State’s section 30 duties provide for that.

Chair

Will you be poaching the best of them to go and work for Virgin Trains elsewhere?

David Horne

I am not expecting to, no. They perform very important roles in the business and are a very talented team.

Chair

What about you two, Mr Griffiths and Mr Horne? Where are you going to end up as a result of losing this franchise? Mr Horne, first of all—you are the managing director.

David Horne

We are in discussions with the Department for Transport to deliver the business up to the East Coast Partnership in two years’ time. At the moment, we are very focused, I am very focused, on running the business today and on putting arrangements in place for the next two years, so we can deliver the new trains successfully.

Chair

But after two years, will you be—

David Horne

I have certainly not given any thought to what I will be doing in over two years’ time.

Chair

Okay. Mr Griffiths, do you get a bonus payment this year?

Martin Griffiths

I don’t decide my bonus payment; bonus payments are for shareholders and remuneration committees. I think we can safely assume, in the light of what has gone on this year—even if they gave me one, and I wouldn’t think they would, I would not be expecting or taking a bonus this year.

Chair

You won’t take one. So if you are offered a bonus, you will refuse it.

Martin Griffiths

Yes; I wouldn’t take a bonus this year.

Chair

Mr Horne, do you get offered a bonus as the managing director?

David Horne

Sorry?

Chair

Do you get offered a bonus—awarded a bonus?

David Horne

Yes, I do.

Chair

And do you expect to get one?

David Horne

I don’t expect to get one this year, no.

Chair

Would you give it back if it was offered?

David Horne

I would, actually, in this case.

Chair

Thank you for your candour. That is heartening to hear; maybe it is a small heartening point in what is not a good example of railway management. We and our sister Committee are interested in looking at what is happening with franchising. We don’t have time with you to go into the issue about different franchising models, but as a Committee we are constantly looking at that, as is our sister Committee. Thank you for coming and for your candour. We remain concerned about this matter and will continue to keep a close eye on it, but thank you very much indeed. Examination of Witnesses

Witnesses

Bernadette Kelly, Peter Wilkinson, Mark Carne and Charles Horton.

Chair

Welcome. You may take your jackets off if you wish, but you probably don’t want to. Before we get into the main session—we are really talking today about the Thameslink franchise with Govia—I want to replay some of the questions, Bernadette Kelly, that we have just asked about the east coast main line. This is the third time we have seen a failure of this franchise. Doesn’t it rather underline that the system of franchising is bust—the fact that you can’t manage to let a contract that sticks on the east coast main line?

Bernadette Kelly

It is true that this is the third time we have seen this particular franchise fail. I think that reflects some of the particular characteristics of this franchise that make it perhaps more volatile than others. We are not seeing franchise failure elsewhere in the system in anything like that regard, so I don’t think it proves that the system as a whole has failed. I would say it is a significant challenge in this particular case, but I do not think it is proof of system-wide failure. Indeed, following the Brown review, we very consciously adopt an approach to franchising in which default is not impossible, and we do that because we are trying to drive the right amount of risk allocation through the system; also, we are trying to incentivise train operators and bidders to be ambitious in the services that they offer to passengers.

Chair

What about the issue of passenger numbers, which we have seen dropping overall? Our previous witnesses were saying this is a major contributor to their walking away. Do you think that your methodology in the Department and across the industry is now bust in terms of predicting passenger numbers, or is it just bad luck?

Bernadette Kelly

I think what we have seen in the last two or three years is an unexpected decline in passenger numbers after a long period of sustained growth. I think we were seeing 5% year on year for a very significant number of years. As I say, we have seen a decline, although there are some signs that that may be starting to pick up a little as well. It is always hard to be absolutely confident in these sorts of forecasts, and of course over the past couple of years we have also seen, across the economy, forecasts generally proving not to be right—including, for example, the OBR’s own forecasts of growth in the economy.

Chair

What kind of analysis are you doing of passenger numbers to ensure that you are seeing what is happening? There has been a view that it may be because people are working more from home and they are not commuting or buying a season ticket for the whole week because they are working or travelling fewer days. Have you done any detailed analysis of passenger behaviour to back up those sorts of assumptions?

Bernadette Kelly

We have done a lot of detailed analysis, as you would expect, because this is extremely important to us—as has the industry, in fact, because it is critical to them as well. I might ask Mr Wilkinson to describe in a little bit more detail some of the work we have been doing.

Chair

I have not introduced the witnesses because we were mostly focusing on Ms Kelly, but Peter Wilkinson is the managing director of passenger services at the Department for Transport. Mr Wilkinson, do you want to expand a bit on that?

Peter Wilkinson

Thank you very much. As Ms Kelly has said, we are doing a lot of work to understand the factors that are causing a significant drop-off in the underlying rate of growth. It is important to remember that we are still seeing growth on the railway; even at the levels of 1% or 1.5% that is still tens of thousands more journeys being taken on this railway and in the country. Keeping this in proportion is important. However, there are a number of structural changes taking place. We have identified about 50 factors driving changes in growth in demand on rail in this country, so there is no single magic bullet answer to this question. In fact, the Committee and the NAO in the 2015 Report rightly identified that we needed to think more flexibly about the commercial model we have with the industry, to take account of potential changes in demand for rail. That is something we took very seriously when you recommended it, and we have begun already to make changes in the franchising model so that it is able to adapt to and cope with those kinds of changes in demand.

Chair

Can you give us some precise examples of what you are doing or what you have learned from that so far about what is affecting revenue and passenger numbers?

Peter Wilkinson

For example—forgive me, these are two technical points—we have put into recent specifications two quite important technical changes that mean we have the option to exclude a bidder that in our central forecast is clearly demonstrating an over-ambitious bid. We apply a downside risk adjustment. We take a very pessimistic view of the economy and apply that downside, and we look at whether a bid will survive under quite a severe downside scenario. That is technology that was not in the bidding in the franchise design process prior to 2015. We have also put in a different kind of risk-share model. We were very reliant on a GDP risk-share model until recently. We have adapted that, in line with the conclusions that I think you were coming to in the 2015 Report, to put in a forecast revenue mechanism that still leaves incentive with the market to go out and chase revenue and grow patronage on the railway, but shelters them from the worst excesses of economic change.

Chair

Okay. But in terms of passenger trends, we heard for instance from previous witnesses that cheaper journeys are becoming more popular but there is a downturn in more expensive season tickets. Is that something you have done detailed analysis of? Can you give us examples of that and the other—how many factors did you say? Sorry, I’ve forgotten.

Peter Wilkinson

Between 50 and 60.

Chair

Yes; 50 or 60 factors is quite a lot. Can you give us some examples of some of those 50 or 60?

Peter Wilkinson

There is no doubt that people are not commuting in the same numbers that they were, five days a week into London. That is a change in working pattern that is fairly recent. It is connected to flexible working in both the public and private sectors, increasingly. That is one very important change that is taking place. The long-term relatively low cost of petrol has undoubtedly had an impact on longer-distance travel, particularly on those routes like the east coast where it is a very competitive market. There are several railway companies competing on that railway, but they are also competing with long-distance coaches and with cars. Those are the sorts of issues we are looking at.

Chair

That is an interesting challenge for the Department for Transport. We do not have time to go much more into that particular bit. Bernadette Kelly, there is talk—we heard it then from Mr Griffiths—about potentially running this franchise again. We understand that Stagecoach are also bidding for another franchise. How can you, in all conscience, think that it is okay for them to be considered as a bidder for another franchise when they have got it so badly wrong in their numbers and the running of the east coast one?

Bernadette Kelly

It is important to remember that what has gone wrong is entirely a failure by Stagecoach to forecast their revenues correctly. The performance for passengers on this railway remains very good indeed; it is one of the highest performing parts of the rail network. Passengers are not suffering as a consequence of what is currently happening on the east coast. However, Stagecoach got their assumptions about revenue badly wrong and, as a consequence, they are paying the price for that. As the Secretary of State has made clear, we will hold them to every penny of their contractual obligations to the taxpayer on this. That is a very significant cost that we will be holding them to account for—nearly £200 million in total—but they will have fulfilled all their contractual obligations; we will hold them to every penny and letter of those.

Chair

There may well be a cost to the taxpayer in setting up a new vehicle or letting the new franchise.

Bernadette Kelly

There may be a cost to the taxpayer in running a process, true. Obviously we will now be running a new competition to determine who runs this railway from 2020, and we will need to deal with that. As I said, what we can hold Stagecoach directly to account for is the full extent of their financial and contractual obligations to the taxpayer, and that is exactly what we are doing.

Chair

How much will the competition likely cost?

Bernadette Kelly

I cannot give you a precise figure.

Chair

A ballpark, a range?

Bernadette Kelly

A ballpark cost of a full competition?

Peter Wilkinson

A full competition costs the Department something in the region of £600 million; but the process that we are going through immediately, in terms of a potential operator of last resort or a potential short-term contract with an incumbent, would be considerably less than that.

Chair

Briefly, it is only fair to turn to Mark Carne, who is the chief executive of Network Rail. We asked about Sir Richard Branson’s comments that Network Rail was to blame for some of the poor services. What is your response to that?

Mark Carne

We have delivered all the infrastructure that was required so far and, as Mr Griffiths said, the failure of this franchise was entirely down to their inability to predict the revenue forecasts.

Chair

So there were no delays or problems.

Mark Carne

No—in fact we delivered the power supply upgrade, which was the big project that we were meant to deliver, bang on schedule, you will be pleased to know.

Chair

So nothing that Network Rail did on that line was behind schedule.

Mark Carne

No, we have delivered all the projects that we said we would deliver.

Chair

Finally, Bernadette, when will the Secretary of State announce the option and what will happen with this franchise?

Bernadette Kelly

There is further intensive work going on at the moment to determine at what point it is appropriate to end the current arrangement with Stagecoach. I think that the Secretary of State has talked in the House about that possibly taking a small number of months, but we cannot be absolutely sure at this stage. We are also doing extensive work on both the options that the Secretary of State has identified, one of which would be a short-term arrangement with Stagecoach and the other of which would be to bring this in to the operator of last resort. That work is going on now to assess options in parallel. I cannot give you an exact date; I expect it to be within the next few months.

Chair

Okay. We may write to you in a couple of months to find out whether that few months is up or not. We will keep an eye on this. I know that our sister Committee, the Select Committee on Transport, is interested in keeping an eye on this too, as you would expect. Moving on to our formal second panel, although three of you have already had a bite—

Sir Geoffrey Clifton-Brown

Can I just ask one question? Mr Carne, in view of your very firm answers that none of your infrastructure relating to the east coast franchise was late, when Mr Griffiths was hinting that he was going to seek some compensation for late delivery of your infrastructure, are you saying that there is no case whatsoever for any compensation?

Mark Carne

No, I do not believe that was what Mr Griffiths was referring to. That is a separate issue about the overall performance of the railway, where there is an outstanding commercial claim that we are debating with them and is unrelated to the delivery of infrastructure.

Sir Geoffrey Clifton-Brown

Sorry. Thank you for that clarification. Examination of Witnesses

Witnesses

Bernadette Kelly, Peter Wilkinson, Mark Carne and Charles Horton.

Chair

I now want to formally introduce our panel for the second part of our session, which is looking at the Thameslink, Southern and Great Northern rail franchise. The witnesses are, from my left to right, Charles Horton, who is the chief executive of Govia Thameslink Railway, which runs the contract on a management basis for the Government and, indeed, for passengers. Mark Carne, as I said, is chief executive of Network Rail. This is not quite your last hearing with us, Mr Carne, as I think you are with Network Rail until September. Since you came in front of us last you have announced that you are leaving.

Mark Carne

Yes, indeed.

Chair

Do you have plans about what you will do when you go?

Mark Carne

I am sure that I will have lots of things to do, but I am not yet in a position to discuss that.

Chair

I am sure we will ask you that at your valedictory, when you come again, as I know you no doubt will. I am sure it will not be your last hearing in front of us. Then we have Bernadette Kelly, the permanent secretary at the Department for Transport, who we heard from just now, and Peter Wilkinson, who is the managing director of passenger services at the Department for Transport. First of all, I have to turn to you, Mr Horton. What do you have to say to long-suffering passengers on Southern, who are affected by the franchise that you have been running?

Charles Horton

For the disruption that has happened to passengers in the past, I have apologised to those passengers on many occasions, but I would observe that the challenge we are meeting is to transform one of the busiest and most congested parts of the UK rail network. We have seen unprecedented growth on this part of the railway network and we are leading a transformation programme, which has a number of elements. The first—

Chair

Forgive me, but in the time that we have we are not going to go through all the elements. I do need to turn to what happened over the weekend, with Redhill station facing dangerous overcrowding. I think you have apologised publicly for that. Would you like to say what happened there and why such chaos reigned? I would have thought that it was entirely predictable.

Charles Horton

We had engineering works yesterday at Redhill station. It was slightly unusual, because we had all lines stopped on the Brighton main lines. All four lines were not operating. We had a plan to operate buses from Redhill to destinations south of Redhill, including Gatwick airport. We found that the road congestion and the difficulty of getting buses to circle around the routes we had planned meant that we were unable to get sufficient buses to Redhill station to allow the passengers to move in reasonable time. I have apologised absolutely for that. That is very regrettable. As a result of those very disappointing and bad conditions for customers yesterday, we are doing two things. First, we have had an urgent review today of our plans for next weekend and the weekend after, when we have similar engineering works, and we are putting in place revised plans as a result of those reviews and the lessons learned from today. We are working closely with Network Rail on that. Secondly, we are making it clear to passengers who suffered such inconvenience yesterday that we want them to get in touch with us. We will be giving them compensation. Where people have suffered further losses as a result of being in queues for such a long period of time, we will ensure that they are not out of pocket as a result of that.

Chair

So if someone missed their flight, you will pay for that?

Charles Horton

We will ensure that people are not out of pocket for things such as missing flights because they were in queues for long periods of time—yes.

Chair

Okay. Is there a cap on how much you will pay people?

Charles Horton

We will look at every case on its merits. Obviously, we will want to ensure that people give us some evidence for what they have been doing, but we will look very generously on those claims.

Chair

That sounds great, but just to be acidic for a moment, it takes quite an infrastructure in an organisation to deal with a lot of claims such as those and to process them. Have you got that infrastructure in place or will you buy it in from somebody?

Charles Horton

We have an arrangement with our outsourced customer call centre where people can get in touch with us. We also have a team within our head office, which is leading the process of looking at these claims and so our head office team are ready to receive those claims. Indeed, we have started dealing with some of those already.

Chair

So you are promising that it will not be the same next weekend?

Charles Horton

We are going to make sure that it is not the same next weekend.

Chair

Okay. If I was a coach driver in the area, I would be quids in, wouldn’t I? I suspect they will all be in touch with you. Bernadette Kelly, this was a very complicated franchise and it was made even more complicated by the way the Department chose to let it, adding in a lot of modernisation into one place. Do you have anything to say to the passengers who have been suffering on that line over recent months?

Bernadette Kelly

First, it is the case that passengers have suffered sustained disruption on this franchise in recent years. Mr Horton has rightly apologised for that, and the Department has required the company to pay penalties for that poor performance. But I think it is important to put this into perspective. You talked about the scale of change, but this was a franchise designed to deliver the Thameslink improvements, which is a truly massive transformation project for the rail industry, comprising a huge infrastructure upgrade, combined with the introduction of several new train fleets and extensive timetabling changes. That is probably the single most complicated upgrade we have ever attempted on the live UK rail network. That was bound to bring some challenges in this franchise, which we designed precisely to mitigate and manage those challenges, with a single franchise to reduce the number of interfaces and a franchise in which the Department took revenue risk so that the operator could focus on delivering the programme. Those were sound decisions. I acknowledge there has been disruption for passengers, but it is also important to acknowledge that the worst period of disruption was materially created by an extensive period of official and unofficial industrial action.

Chair

You brought up the strike action. Was it not foreseeable that if you were going to push for driver-only operated trains, it would cause industrial relations issues? Did you not factor that into dealing with an already very complex franchise?

Bernadette Kelly

I would make a couple of points. Obviously, industrial action on the railway is not unprecedented, and from that point of view it was clearly a risk that we thought about, but we had good reasons at the point at which we were designing and letting the franchise to imagine that it would be nothing like as significant as it has been in practice. DCO was already in extensive use across the railway, including on this franchise, before the start of the franchise. We did not demand that it be introduced. It was entirely a choice taken by the bidders in presenting their plans for service improvements for passengers on this franchise. There were perfectly good reasons for us imagining that it would be possible for the operator to introduce their plans without anything like the level of action and disruption to passengers that we subsequently saw.

Chair

Did the Department have any discussions with the trade unions about this aspect before it let the franchise?

Bernadette Kelly

We specifically did look, at the point at which we were letting the franchise, at the risks of industrial action. I will ask Mr Wilkinson to say a little more about the work we did to assess that risk at the time.

Chair

Mr Wilkinson, we are fascinated to hear what you have got to say.

Peter Wilkinson

We did try to engage with the trade unions leading up to letting this franchise that has proved difficult. We assessed the bids for the franchise—all the bids went far further than our specification in procuring additional DCO services, because on this railway 60% of the services were already driver-controlled operation. At that time, it was not seen as particularly contentious that we would extend that a little further, which is what we were talking about.

Chair

Was it the Department or the trade unions who did not see it as contentious? Were you talking to the trade unions at this point?

Peter Wilkinson

There had been a history of introduction of DCO on the railway over a significant number of years—going back to the mid-1980s, if I recall—without significant industrial action. There had always been some industrial action relating to the introduction of driver-only operation. We risk-adjusted our bids to take account of that, and we expected a certain amount of disruption on the railway. However, we did not expect or forecast the significant levels that we saw with this programme.

Chair

If you had not added in the driver-only operated trains, would it not have smoothed out some of the many complex issues you were dealing with in trying to get this franchise and this railway operating better? Why did you push for that, particularly?

Peter Wilkinson

That is a fair question. It is because the Thameslink programme is all about catering for the growth that we are seeing on this railway. We have seen over a large number of years significant levels of growth, which we continue to see today. To cater to that growth and to make sure that we were not leaving passengers at platforms, we embarked on a programme that would see a very high-density traffic railway, and a lot of train throughput in the Thameslink core. We and the industry took a view that trains that the driver had full control of—not a communications relationship between a driver and a guard in operating the doors—were the best way to achieve that, and that practice was already well established in the industry.

Chair

Was that because you are suggesting it would be slower to have a guard and a driver talking to each other?

Peter Wilkinson

The evidence is such, yes.

Chair

So it was about speed of the railway going through. What about the safety aspects? How much were they taken into account?

Peter Wilkinson

It is about the train throughput, which is what this programme is genuinely trying to achieve.

Chair

We appreciate that, with 24 trains going through—

Peter Wilkinson

On safety, driver-only operation has been safely used on the railway in this country, and in many other countries, without—

Chair

I know that there will still be on-board train managers, but they will not have the ability to use the doors, so what is the back-up if something happens to the driver? With an increasingly busy service on an interesting bit of the route, let us say, on which there are perhaps interesting passengers at certain times of the night, having other people on board with safety training is surely a consideration that is exacerbated by the extra number of passengers, rather than declining?

Peter Wilkinson

That is absolutely right. We are continuing to keep people on trains. In fact, there are more staff working on trains now on this franchise than there ever have been before. These are very well-staffed trains and those staff come with safety training. So there has been no attempt whatsoever to diminish the role of the second person on the train, in terms of their safety competencies and their ability to support the driver at any times of difficulty.

Charles Horton

If I may, Chair, I will explain the change that we made on the Southern network more than a year ago now. The change involved changing the operational role of the second person on the train, so that they are freed up from the task of opening and closing the doors. They are still safety trained and they are still able to deal with emergency situations on those trains. What they are not involved in is the operational tasks of opening and closing doors. The benefit for customers of that is that those members of staff who are on board have more time therefore to interact with customers, to move through the trains, to offer assistance, to provide customers with tickets and to help customers out with their problems and issues. That is the method of working now on our Southern network. And as Mr Wilkinson said, we have more of those people on our trains now than we had under the old way of working.

Chair

So if you had bid for this without it being a requirement by the Department, would you still have wanted driver-only operated trains?