Labour slams FGW

[whole diary]

[JayMac]

I agree FGW^▸ (First Great Western) did nothing wrong, but I don't buy their reasoning about the delay to IEP^▸ (Intercity Express Program / Project.) 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^» (Department for Transport - about) 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.

[paul7575]

I disagree, the 10 years was based on electrification by 2013 and IEP^▸ (Intercity Express Program / Project.) 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^» (Department for Transport - about) haven't spat their dummy and why the DfT were full expecting this.

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 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^▸ (First Great Western) 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

[Andy W]

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.

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^» (Department for Transport - about) 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.

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^▸ (Intercity Express Program / Project.) 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.

[ellendune]

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

[Btline]

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

[TonyK]

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^▸ (First Great Western) 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^▸ (West Coast Main Line), 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.

[Andy W]

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

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^» (Department for Transport - about) 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.

[Btline]

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^▸ (United Kingdom) rail franchises.

[ellendune]

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^▸ (United Kingdom) 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.

[matt473]

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^▸ (Intercity Express Program / Project.) 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.

[Andy W]

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^▸ (Intercity Express Program / Project.) 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^» (Department for Transport - about) 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.

[paul7575]

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^▸ (Train Operating Company) 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^▸ (Electric Multiple Unit) fleet presumably will have had quantifiable costs .

Paul