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date 23 September 2003
source House of Commons Transport Committee
type Memorandum

Supplementary memorandum by the Strategic Rail Authority (SRA 08A)

VIRGIN RAIL GROUP INTERIM AGREEMENT

PURPOSE

1. This note describes the background and purpose of the interim agreement between the SRA and Virgin Rail Group announced to the Stock Exchange on Monday 22 July 2002.

BACKGROUND

2. The franchise agreement for Virgin West Coast which started in January 1997 provided for higher service levels, reduced journey times and new rolling stock to be delivered in two stages—the first in May 2002 and the second in 2005. The infrastructure improvements required to deliver this were contained in a contract between Virgin Trains and Railtrack—Passenger UpGrade Two (PUG2)—to be implemented in two phases, in 2002 and 2005.

3. The Virgin Cross Country franchise also depended in part for its delivery on the PUG2 outputs for those services from Coventry to Birmingham and the North West.

NEW TRAINS

4. Virgin Rail Group (a joint venture between Virgin Trains and Stagecoach) has fulfilled its franchise commitments to refurbish the existing fleet and procure new trains. It also established an effective procurement process which has delivered a total of 78 Voyager and Supervoyager trains for Cross Country now in public service. The first Pendolino trains for the West Coast will enter service in January 2003.

INFRASTRUCTURE

5. Late in 1999 it became likely that Railtrack would not be able to deliver all the planned outputs. At the same time, it was evident that the costs had risen (from £2.5 billion to £6.5 billion), and this was reflected in the Regulator's review in October 2000. A small proportion of this was in respect of enhancement—the bulk of the increase was in the backlog of renewals reflecting the state of the infrastructure inherited from BR. In 2001, it was evident that further delay and cost escalation was likely as detailed planning revealed the size of the task. Following the Railtrack Railway Administration Order in October 2001 it was evident that the SRA (which had not been a party to this contract) would have to take the lead. This was done through a detailed review involving Bechtel and the principal train operators on the route. The SRA issued a West Coast Strategy document for public consultation on 9 October 2002. The deadline for response is 16 December. A final Strategy for the route will be published in early 2003

FUNDING

6. The original Virgin Trains bid for the West Coast and Cross Country franchises were based on strong revenue growth from additional passengers attracted to use their services by the new trains, but particularly by the reduced journey times and increased service frequencies. It was the prospect of this strong growth which provided the basis on which Virgin Trains would be able to fund the operation of the two franchises while the works on upgrading the infrastructure took place. The first phase of those improvements was not delivered in May 2002, as contracted by Railtrack, and consequently the revenue growth has not taken place.

PASSENGER INTEREST

7. Holding the Virgin Rail Group strictly to the terms of its franchise agreements posed a risk that the company would be unable to complete the procurement programme for the new trains and might even wish to terminate one or both of its franchise agreements. Neither would be in the interests of passengers, as no other company could take over the responsibilities at this advanced stage without interruption to the delivery programme and considerable uncertainty for passengers and staff; and, had we terminated the Virgin franchise(s), any successor would have faced the same cashflow issues because they would have inherited the conditions that caused Virgin its problems in the first place. Replacement of either or both of the franchises at this stage would have incurred additional costs.
8. On this basis, the SRA took the decision to hold good the VRG businesses in the short term while long-term solutions were put in place. The Interim Agreement covers the period to the end of March 2003 and provides for additional franchise payments of up to £106 million. It delivers stability while the SRA works with Virgin Rail Group to identify and secure the best future for passenger service and delivery on the WCML and Cross Country routes. Provision is made, if required, for the franchises to be run beyond March 2003 under a management contract until new franchise terms are agreed.

SUMMARY

9. In reaching this decision, the SRA sought to secure the following:
— establishment of an upgrade programme for the West Coast Main Line which is deliverable and is value for money for the taxpayer;
— maintenance of VRG skills in train procurement, project management and service development;
— minimal disruption to passengers; and
— provision of a sound basis for restructuring of both VRG franchises.

SUPPLEMENTARY DETAIL

10. The Transport Select Committee's specific questions are answered as follows.
— The £106 million is a maximum additional payment facility; £39.5 million for West Coast Trains and £66.5 million for Cross Country Trains.
— Neither amount has yet been paid in full. £10 million in aggregate had been drawn down as at 13 December.
— The payment is a grant as all franchise payments are.
— None of the additional funding may be distributed to shareholders.
— Under the Interim Agreement with Virgin Rail, the grant may by recovered by the SRA in certain circumstances, including in the event of Virgin receiving any compensation from Railtrack (now Network Rail) other than under Section 8 of their track access agreements.
— There are no other sources of public support for the Virgin franchises.
— The SRA will take account of the amount of additional support provided to both Virgin Franchises in the renegotiation process.
11. Virgin is entitled to retain 10% of the proceeds of Liquidated Damages negotiated with Alstom for delays to delivery of the Pendolino trains and 10% of the benefits of any rescheduling of rolling stock lease payments negotiated with Angel Trains.

Railhub Archive ::: 2003-09-23 TCO-001