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June 30, 2009

British government takes over NXEC franchise

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NATIONAL Express (NE) is to be stripped of the British Intercity East Coast passenger franchise (NXEC) by the Department for Transport (DfT) after NE confirmed funding will run out later this year.

The franchise operates long-distance trains on the East Coast Main Line (ECML) from London King’s Cross to Leeds, Newcastle, Edinburgh, Aberdeen, and Inverness, and was due to run until 2015 with premium payments totalling £1.4 billion over its life.

In a trading statement issued this morning, National Express acknowledged NXEC was expected to lose more than £20 million in the first half of the year. It added that the parent group’s commitments to the franchise – which is a separate company – were restricted to a £40 million subordinated loan, of which £17.5 million has been used so far. Once this funding is consumed, NE said it believed that the secretary of state would have a duty to reassume control of the franchise. Under the terms of British passenger franchise agreements, should the franchisee fail to meet its contractual commitments, the government can take over the services as ‘operator of last resort’.

Transport secretary Lord Andrew Adonis said: “The government is not in the business of baling out train operators who can’t meet their commitments and that wouldn’t be a responsible thing for me to do.”

The DfT is setting up a state-owned company which will take over NXEC when it ceases to operate. All staff will be transferred to the new company and all services will continue to operate. Following the government’s acquisition of NXEC, it will look to re-tender the franchise at the end of 2010.

While NE believes its two other British passenger franchises – National Express East Anglia and c2c – will continue unaffected by the government’s decision, Lord Adonis said the DfT was “exploring options” including the possibility of using legal powers to bring them into state ownership.

National Express Group chief executive, Mr Richard Bowker (who was formerly chairman of the Strategic Rail Authority), is to leave National Express at the end of August to become chief executive designate of Union Railway, United Arab Emirates. The current chief executive of the UK division, Mr Ray O’Toole, will become chief operating officer, while non-executive chairman Mr John Devany becomes executive chairman. No replacement for Mr Bowker has yet been named.

IRJ Comment The government’s decision to strip National Express of the flagship Intercity East Coast franchise raises huge questions about the franchising process – and of the purpose of passenger franchises themselves, writes Contributing Editor Andrew Roden.

In 2007, when the contract was awarded, there was widespread surprise at the level of premium payments to the DfT, which were even higher than the £1.3 billion which scuppered NXEC’s predecessor GNER. Faced with high payments and the inability to cut services to better match demand because of the highly-specified franchise agreement, NXEC was always likely to struggle should the economy turn sour. So it has proved.

The question for the government is what to do next. NXEC’s impending failure means that the last two attempts to re-let the franchise have failed spectacularly – on a route hitherto regarded as amongst the most profitable in Britain. One thing is certain: no bidder in their right mind will approach the £1.4 billion promised by National Express.

So, with re-tendering the franchise unlikely to offer anything like the promised level of return, and state control only lasting until the end of next year, perhaps it’s time to try something completely different. The ECML already has two highly-successful open-access operators - Grand Central and Hull Trains – and good regional services along its whole length other than between Doncaster and Peterborough, so why not open the bidding and make Intercity East Coast an entirely open-access operation?

The process would need some serious consideration (as would the protection of passengers’ interests) but given how spectacularly the Intercity East Coast franchise has failed, perhaps now is the time to make the ECML a truly free-market railway – it must at least be worth a go.

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