GNER east coast franchise terminated

The 10-year contract for GNER to run passenger trains on the London-Edinburgh east coast main line has been terminated and a fresh competition to run the service started, the government announced on Friday.

It is only the third time a UK rail franchise has been terminated early since privatisation 10 year ago and the decision marks the failure of the operator’s efforts to renegotiate its contract, which had been due to run until 2015.

Passenger and revenue forecasts have failed to meet the expectations set out in GNER’s aggressive bid for the contract, in which it promised to pay the government £1.3bn over 10 years for the right to run the service. Competition on the route has also intensified.

The DfT had insisted throughout that it never renegotiated franchises, leaving GNER with little choice but to abandon the service because Sea Containers, its parent company, which is under Chapter 11 bankruptcy protection in the US, cannot fund its losses.

Douglas Alexander, transport secretary, said the government had made it clear that train operators which ran into financial difficulty should expect to lose franchises.

“To do otherwise could set the precedent that we are willing to bail out operators at extra cost to the taxpayer,” he said.

Operators interested in competing for the franchise have until January 15 to submit expressions of interest. When the contract was up for renewal ahead of the start of GNER’s latest contract, in March 2005, there was fierce competition, with Virgin Rail Group, the joint venture between Sir Richard Branson’s Virgin Group and Stagecoach, the bus and rail operator, coming second. It promised to pay £1bn for the right to run the service. FirstGroup, the UK’s largest rail operator, and a joint venture between DSB, the Danish state railway, and EWS, the rail freight operator, also took part.

GNER will continue to run the East Coast service on a management contract until the new competition is completed, which will take at least until September next year. Management contracts typically cover operators for their costs and a small profit margin, but are not regarded as a long-term means of running franchises.

The scrapping of the contract and the start of the management contract has been backdated to December 10. GNER will fund the DfT’s costs for holding the new competition.

GNER has run the long-distance services on the East Coast Main Line since winning the franchise at privatisation in 1996 and was widely regarded as one of the most successful private operators. However, competitors were surprised during the competition for the contract that has just been scrapped that it agreed to pay the government so much to run the service.

There was also surprise that the operator agreed to remove from its contract standard clauses voiding many of its provisions if a new competitor was granted the right to run competing rail services on part of its route.

The July 2005 London bombings and other factors prevented revenue from reaching GNER’s optimistic forecasts, while the Office of Rail Regulation has granted Grand Central, a small new operator, the right to run services from London to Sunderland, partly in competition with GNER.

The new franchise round is certain not to produce anything like the level of payment GNER promised to run the service, as costs have increased since the last bidding round and Grand Central will take some of the revenue.

The only two previous operators to have had their franchises terminated were both run by Connex, part of France’s Veolia Environnement. Connex South Central lost its franchise in 2001 because of poor punctuality. Connex South Eastern lost its franchise in 2003 over poor financial management.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.