Great Western Coffee Shop

Shadow Transport Secetrary, Maria Eagle, has launched a scathing attack on FGW live on BBC2's flagship programme Newsnight.

Talking about fare rises, she said that rises could be avoided if companies didn't hand the keys back early and default on later year payments.

Sorry but what has fare rises got to do with First Group doing what it was contractually allowed to do? AFAIK First haven't defaulted on any payments, but happy for someone to correct me.

I just watched that. Shows how little she knows. FGW did not default.

You could have lead on her refusal to answer the question about renationalisation. Ignored it completely and continued to answer the question she wish she had been asked.

God help us if she ever gets control.

Most disingenuous of Ms Eagle. It was her party that awarded to current Greater Western Franchise with it's heavily back loaded premiums toward the end of the franchise. The end date of which was flexible on both sides. DfT under Labour allowed that contract term.

Look at all the money saved by First Group in walking away early from Greater Western. I wonder what they'll do with that?

Oh, I know. Use it to outbid Beardie.  :P ;) ;D

So, providing First Group stay the course on the ICWC, HMG still get their pound of flesh.

And just to be accurate, Labour didn't slam FGW. Ms Eagle didn't mention them. Although for those in the know the subtext was clear.

True, but as you say it was blindingly obvious she meant First.

I bet she'd moan about reducing the costs of the railways too (ie. staff).

It is brazen cheek though, given how long her party had in government to sort out the rail franchising system if they didn't like it!

When the HLOS/SoFA announcement happened a few weeks ago, all Eagle could really come up with was that it was all about future spending over the 5 years from 2014, and therefore of little use to today's issues.

She completely and conveniently ignored the fact that the HLOS procedure and timetable was a specific legal requirement of the 2005 Railways Act, and the DfT were following the process exactly as laid down by Labour...

Paul
 
 

True, but as you say it was blindingly obvious she meant First.

I bet she'd moan about reducing the costs of the railways too (ie. staff).
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She could also have been referring to National Express as the government are still operating the service they abandoned.

As for criticising First for using a clause in their contract, it was her partys government that agreed that contract so maybe its another example of labour trying to rewrite history

Almost certainly speaking about NXEC, FGW have neither defaulted or handed any service back early. Terrible uneducated assumption to make that she was referring to FGW. Remember to Assume makes an ASS out of U and ME

She referred to NXEC first.

She then definitely referred to FGW. FGW have handed the keys back early. They have been BANNED from doing so on West Coast or face losing all their franchises.

Thus not a "terrible uneducated assumption", but an accurate educated one.

This was rumoured beforehand, but I have not seen it in any of the statements.  Given the complete inaccuracy of some of the rumours do we have any evidence for this?

Whilst FGW look like they have pulled a fast one by ending the franchise early and avoiding the ^850 million payment, they have done nothing wrong. If the intention had been to prevent that, then the franchise contract would have prohibited it. Maria Eagle is, like Theresa Villiers and Justine Greening, a politician, not a railway expert. We have DafT to translate the political aspiration into legal agreements. I don't think First can even be accused of exploiting a loophole here, and it looks an even more astute move now they have the WCML gig.

FGW have not ended the franchise early, they have simply declined their right to a 3 year EXTENSION of the 7 year franchise! Thats how it is!

I commented this on another forum, and had responses flying back that I was incorrect, and it was a 10 year franchise all along and they have just cut the contract short

Yes they exercised their right to early contract termination - nothing illegal and to be honest it would have been commercially silly not to do so. That being said I see no reason whatsoever to allow them to re-bid. If they do not want the franchise so be it, let it go to a company that wants it. The taxpayer is almost a billion pounds out of pocket because of this tactic.

You were quite right about it being a 7+3 contract, and here's your ammunition: 

The key factor is the existence of an 'initial expiry date' (defined as 31 Mar 2013 in the overall franchise agreement) which is used in the 'franchise continuation criteria' shown in Schedule 18 of the franchise terms here:

http://assets.dft.gov.uk/publications/rail-passenger-franchise-agreement-first-great-western/fgw-terms-2012.pdf

The 'initial expiry date' is not only the date by which the DfT could end the contract, if the continuation criteria were not met, but it was also quite clearly the date at which FGW could end the franchise:
 

If people actually bothered to read both the franchise agreement and the franchise terms together there ought to have been a lot less talk of FGW 'handing in the keys'...

Paul

I agree with Andy W. If First were passionate about running FGW they wouldn't have handed the keys back.

They should be barred from bidding.

At least Virgin showed some passion for the route, and passion for improving the service by cutting journey times.

I stand corrected - I have fallen under the spell of the malign spin doctors! First said their motive was to win the full 15-year deal on Great Western. I also see no reason why they shouldn't do so, except that they have pledged to cut fares on WCML.  Another operator may offer to do that on Great Western. So FGW decided against paying best part of a billion for an extension to the year before the line is electrified, and have been proven right so far. It looks like astute business practice, if not dedication to transporting the masses cheaply.

Why would they commit to a further 3 years when they were short sold ideas from the dft like IEP etc.

Hi Paul,

Thanks for the link to the document.

The way the contract reads then it is, as you say 7+3. However it is my understanding that the way the franchise payments are structured it is largely in the last 3 years that First pays for the franchise. This amounts to some ^850 million.

I looked through the document for Figures for Appendix 8 Calculation of Annual Franchise Payments to try to verify this but cannot find it.

So while the franchise is 7+3 it is financially structured as a 10 years contract.

First have exercised the option, quite legally, to terminate after 7 years saving this payment of ^850 million to the taxpayer.

That is all fine but given that First have exercised that right I see no reason whatsoever why they should be allowed to re-tender. They had the option to run the franchise past 2013 and chose not to, to me that is the end of the discussion.

It is a question of morality not legality.

Every taxpayer is collectively out of pocket to the tune of ^850 million. Yes you can point to frankly useless politicians & civil servants at the DfT in allowing this to happen and First are probably wise to exploit this and then course First can then use this money to outbid others for other franchises, good business but dubious morals.

So thanks and goodbye should be the response to the early termination.

I agree.

Love or loath them, VT would never walk away.
Chiltern would also never hand back the keys.

I disagree, the 10 years was based on electrification by 2013 and IEP being up and running so if they had have took up the extension they would be paying a hefty premium for something that they didn't have! That is why the DfT haven't spat their dummy and why the DfT were full expecting this.

But you appear to be proposing an additional penalty going beyond the contract. The lawyers would love it! Government procurement can't be run like that.

Hi Vacman,

I can't see any obligation for either electrification or IEP in the Franchise agreement - can either you or Paul, who appears to be the expert in these matters, point that out to me. DfT cannot 'spit out their dummies' as you put it because as Paul demonstrated they First are well within their rights to terminate after 7 years. I'm not saying you are wrong, I'd just like to see this commitment.

I'm not proposing any additional penalty, what I am saying is First had a contract beyond 2013. They have, perfectly legally, chosen not to take up that contract. It should therefore be open to others to provide the service that First demonstrably aren't interested in.

They are. Its called the franchise bidding process.

There really is not alot of difference between this and when Chiltern took up the offer of an early termination in order to bid for a 20 franchise which they won.

My point is they should forfeit the opportunity to bid. This is a cynical tactic to avoid paying the franchise monies. If the contract wasn't back end loaded to the last 3 years I might agree.

For the record how much money did First pay for the initial 7 years of the franchise?

In terms of Chiltern exactly how much money did they avoid paying? IIRC the Chiltern scenario was to extend the contract not to dodge paying up - but please correct me if I'm wrong.

Comparing Chiltern, who negotiated a long franchise and invested huge amounts of money to transform the service to FGW who handed back the keys to avoid paying the gov after a botched and scaled down refurb that was only the scale it was because of a slap on the wirst from the gov is ridiculous.

And even now the air con doesn't work!

FYI http://www.railnews.co.uk/news/2011/03/14-speculation-that-first-gw-may.html# Some outline figures are presented in this article.

I disagree entirely.

They did not bid for 10 years they bid for 7 extandable by a further 3 years by mutual agreement.  I assume therefore DfT assessed the bids on the basis of 7 years not 10. If the original franchise had been 10 years that would have been different, but it was not.

I agree FGW did nothing wrong, but I don't buy their reasoning about the delay to IEP being partly responsible. It was a financial decision pure and simple.

Had they gone full term, the next franchise would have started with only a short period before IEP came on stream. It may even have been beneficial for the DfT to extend the extension(?!) by a further 12-18 months so that the new franchise coincided with full introduction of the new infrastructure and fleet of trains.

Instead IEP comes 4-5 years into the next franchise, causing a real headache for the bidders.

Of course, its convenient for FGW to hang their reasoning for not taking the option to extend on the IEP delay, passing some of the 'blame' onto the DfT.

I don't see any reference to electrification and/or IEP in the original franchise spec either, there was just a requirement to work with the proposals to remodel the Reading station area (details still to be decided at the time) - and this was completely independent of electrification back in 2005/6 when the franchise was being let. 

I think the electrification probably became a key issue though, due to its sudden DfT inspired appearance planned for the latter part of the 10 year franchise.  Perhaps what FGW looked at in early 2011 was that the combination of three major changes during 2013-16, (ie the tail end of the Reading rebuild (the western flyover), the newly intended electrification and the simultaneous IEP infrastructure changes prior to introduction in early 2016), and perhaps this was going to require a significant variation to the franchise specification as was allowed.  It may have been considered much easier to deal with it all as a new franchise, and DfT may have just agreed to this?

Paul

Hi Ellen,

I suggest you read Schedule 18 in the Terms document posted by Paul.

1). The schedule is titled Continuation to Expiry date. The contract is a 10 year contract. As Paul points out either DfT or First can exercise an 'Initial Expiry Date' which is 7 years into the contract, but unless they exercise that right the contract runs for 10 years.

2) The termination is by mutual agreement is wrong, there is no contractual provision for any mutual agreement. Schedule 18 1.4 clearly states First can exercise their right to implement the 'initial expiry date' and there is no requirement for DfT agreement - it is done unilaterally.

3) Roughly 20% of the fee agreed to be paid for the franchise is paid in the first 7 years and 80% in the final 3 years. If, as is claimed, this is a 7 year contract with a 3 year extension than the full amount would be paid for the franchise in the first 7 years and a premium paid for the 3 year extension.

By terminating after 7 years First have avoided paying 80% of the fee they agreed to pay - it is a financial decision pure and simple.

Paul many thanks for your input.

If electrification / IEP is an issue then the best thing to do would be to extend the contract until these projects are completed. Furthermore I would suggest that there should be no increase in the amount payable for the franchise so rather than paying the 80% over 3 years, pay it over 5-6 years. I have no problem with that.

What incenses me is the huge amount of money First have avoided paying the taxpayer.

I have read it now thanks. So it can be unilateral. Whatever, since there is a break clause at 7 years they could not assume it would go beyond that date so should have assessed it on the basis of 7 years.

Ellendune

Those figures are shocking. :o
No wonder the gov have banned First from handing back the keys again.

Btline,

You would make a rubbish lawyer, even in a barrack room. The terms of the contract that First chose not to extend will have no bearing on the terms of any new contract. The government, in the guise of DafT, can make the new contract for as long as it sees fit, with or without the availability of an extension for a specified length of time at a specified price. First broke no law, nor exploited any loophole, in deciding not to continue for the three year extension on the terms offered. You will just have to get used to that.

As a correspondent to the Times pointed out recently, the Romans had trouble like this. In the days of Julius Caesar, they franchised taxation. The would sell the right to extort cash from hard-done-by colonials to a company, for a price. The company, whom we call call as an example "Primam Magni Occidentalis", agreed to extort that amount of money in the specified time, rendering the same to Caesar, plus an amount for themselves at their discretion to cover their operating costs and profit. They may have been given the contract for VII years, with an option to extend it by III years to a total of X years, but may have been affected by a recession, and a failure by Caesar to honour his pledge to implement certain improvements in infrastructure, like the new chariot-only roads he promised would be up and running by 53 BC.

Little has changed in two millenia.  First Great Western probably decided that with delayed electrification, plus the economic downturn, that it was not worth taking up the option. They may have thought that they might even have been disadvantaged in bidding for the current round of franchises had they been still carrying on the FGW gig. In other economic times, it may have looked a good commercial option to take up the extra three years, but they know best. First Group took something of a hit from the American school bus deal they did, because of the harsh times befalling our former colonies. For WCML, they may have overbid this time, they might not. Like all businesses, they will be hoping that they have got it right.

Branson's portfolio is bigger and more widely spread. He can tax people for borrowing money, for flying, for listening to music, and for using their phones to tell their family that the train is running late. FGW can only tax them for travelling.

Worse still it is not only unilateral, it is also unconditional on the part of First. Any contract with a break should be conditional. I have never seen a contract written giving such a break without some form of financial penalty.

FTN
It is not a 7 year contract that was extendable to 10 years despite the wording - in implementation and financial structure it is a 10 year contract with a 7 year break.

If it is a 7 year contract then the full franchise fee would be recovered in the 7 years.

First absolutely did not do anything illegal - but the Muppets at the DfT should never have allowed such a contract to be implemented without ensuring that the taxpayer was financially protected. To allow a break at 70% of the full term when only 20% of the franchise fee has been recovered is absurd.

Surely the gov should have realised that with 70% of the payments due in the optional final 3 years this was bound to happen!

Apparently ff First hand the keys back again, they lose all their UK rail franchises.

But a break clause if it exists in the new franchise it wouldn't be a default. It would only apply if they did what National Express did on East Coast.

Also I have only heard rumours of the 'loose all franchises' condition and the I recollect eharing a statement of First Group to their shareholders suggests otherwise.

First handing back the keys from what I gathered is beneficial to both parties as the dft would have to pay first a large amount of compensation due to disruption on the network due to upcomming works which is higher than the payments due to be made by first. It seems this is a mutual deal between fgw and the dft as a fresh start with a new franchise with payments factoring disruption with IEP and electrification makes a more stable long term franchise. Sometimes it's better to wipe the slate clean for both parties which this seems to be the case.

Hi Matt,
So the compensation for disruption due to electrification would be in excess of ^820 million pounds. I find that difficult to comprehend.

If that is the case then the DfT should delay electrification / IEP for 3 years, pocket the ^820 million franchise money that is outstanding and factor in the 'disruption' into the next franchise.

Paul, you are the most clued up, have you any idea what the figures for disruption are likely to be given most work will be night time / weekend I would presume.

I haven't really got any idea.  All I can really work out is how the relevant project dates impact on the franchise length, and I could confirm by a search that 'electrification' was an unknown concept as far as the original franchise spec was concerned.  But as you suggest, the physical work ought to be mostly non-disruptive - as indeed the Reading station rebuild seems to be from my perspective as a passenger.  Yes there are the odd line closures and weekend blockades yet to come - but they are normal business for a TOC surely?  I suspect there's a certain amount of exaggeration of the potential difficulties caused by the physical project itself; whereas getting the staff ready for a new train fleet, and whether that will be second hand 319s or a completely new EMU fleet presumably will have had quantifiable costs .

Paul