21. In November 2014, the Department awarded the East Coast franchise to Virgin Trains East Coast (VTEC), a 90% subsidiary of Stagecoach and 10% owned by the Virgin Group. VTEC began operating services between London, the North East, Yorkshire and Scotland from March 2015 and was due to run until the end of March 2023. On 16 May 2018, following the franchise returning a financial loss and VTEC breaching a financial covenant in its contract with the Department, the Department announced that it would terminate the franchise on 24 June 2018. The Government has assumed responsibility for running services under the brand London North Eastern Railway (LNER).37 This was the third time this franchise had ended earlier than intended, having previously failed in 2006 and 2009. We examined the termination of the East Coast franchise in April 2018 and concluded that the Department had failed to learn the lessons from previous failures and had allowed the operator to promise more than it could deliver. The failure of the East Coast franchise was the result of a failure by Stagecoach and Virgin Group to accurately forecast the amount of money Virgin Trains East Coast would earn from operating the franchise because the passenger growth forecasts were wildly wrong.38
22. The Department pledged a number of benefits for passengers when it announced the East Coast franchise in 2014, including:
• 23 new services from London to key destinations, with 75 more station calls a day;
• Plans for new direct services from London to Huddersfield, Middlesbrough, Dewsbury and Thornaby and additional services to Sunderland from May 2020;
• 3,100 extra seats for the morning peak by 2020, and 12,200 additional seats (50% increase) across the entire train fleet;
• Reduced journey times; and
• An investment package to improve trains and stations.39
23. We asked the Department whether the commitments made for additional services when the VTEC franchise was awarded, including direct services to places such as Huddersfield, Sunderland and Middlesbrough, will still be delivered. The Department wrote to us after the evidence session and asserted that these commitments would now be delivered by LNER and that these were in the Department's Services Agreement with LNER.40 Infrastructure improvements on the East Coast ainline are necessary to enable more capacity and new direct services.41 In written evidence to the Committee after our evidence session, the Department told us that it was working with Network Rail to deliver these enhancements in the early 2020s. The Department expects the rollout of a new fleet of trains under the Intercity Express programme will complete by 2020, which will also increase capacity on the route.42 We note that LNER has removed some services between London and Leeds and Edinburgh and Stirling to improve overall reliability on the route in the event of disruption.43 The Department aims for a public-private east coast partnership to take responsibility for tracks and trains on the route in 2020. It told us that this vertical integration of track and trains would delivery greater efficiency and better outcomes for the taxpayer.44
24. The Department told us that since the franchise has been terminated it had reached a financial settlement with VTEC. It stated that it had taken all parent company support promised in the franchise contract and that the outstanding legal claims had been resolved and no further contractual payments were to be made.45 However, in written correspondence following the evidence session the Department clarified that there remain some funds in VTEC to allow it to settle its outstanding payments due to creditors, including transitional payments to LNER. The Department told us that, following these payments, VTEC had agreed in principle to transfer the remaining assets it holds to the Department as part of the settlement agreement.46
__________________________________________________
37 HC Deb, 5 February 2018, Col 1238; HC Deb, 16 May 2018, Col 285; Committee of Public Accounts, Rail franchising in the UK, Thirty-Fifth Report of Session 2017-2019, HC 689, 27 April 2018; Department for Transport press release: 'More seats, more services and new trains for East Coast passengers', 27 November 2014; Department for Transport, East Coast 2014 rail franchise agreement, June 2015
38 Committee of Public Accounts, Rail franchising in the UK, Thirty-Fifth Report of Session 2017-2019, HC 689, 27 April 2018
39 Department for Transport press release: 'More seats, more services and new trains for East Coast passengers', 27 November 2014; Department for Transport, East Coast 2014 rail franchise agreement, June 2015
40 Qq 116-118; Letter from Bernadette Kelly to Meg Hillier MP - Follow-up from evidence session, 19 December.
41 Response from David Horne, Managing Director VTEC, to Transport Committee, 19 January 2018; Letter from John Larkinson, The Office of Rail and Road, 'Applications for access to the East Coast Main Line', 12 May 2016, paragraph 67
42 Letter from Bernadette Kelly to Meg Hillier MP - Follow-up from evidence session, 19 December.
43 http://www.nationalrail.co.uk/service_disruptions/199558.aspx
44 Qq 119-120; HC Deb, 5 February 2018, Col 1238; HC Deb, 16 May 2018, Col 285
45 Qq 114-115
46 Letter from Bernadette Kelly to Meg Hillier MP - Follow-up from evidence session, 19 December.