First wins London-Glasgow rail franchise on £5.5bn bid
By Richard Johnstone | 15 August 2012
Virgin Trains has lost the West Coast rail franchise between London and Glasgow after rival First Group promised to pay the government £5.5bn to run trains on the line.
The deal, agreed today, would provide improvements for passengers, rail minister Theresa Villiers said.
The contract, which will run to 2026, is the first to be agreed since the government relaxed the criteria for rail services. Villiers said that a less rigid specification as well as the increased franchise length – the current West Coast deal lasted for six years – had led to promises of investment.
First has pledged £190m of improvements, including introducing 11 new electric trains to increase capacity between Birmingham and Scotland.
However, Virgin hit out at the decision. Rail Group chief executive Tony Collins said Virgin’s bid was worth around £700m less to the government than First’s over the same period.
‘It’s a very, very aggressive bid that they’ve put in there. We didn’t bid that sort of premium payment for a very good reason,’ he added.
Founder Sir Richard Branson said the award was ‘a risk’. He cited the examples of GNER and National Express, ‘who overbid on the East Coast mainline’ and had to return their franchises to the government early, in 2007 and 2009 respectively, because they were unable to meet their payments.
Branson added: ‘Sadly, the government has chosen to take that risk with First Group and we only hope they will continue to drive dramatic improvements on this line for years to come without letting everybody down.
‘The East Coast is still in government ownership and its service is outdated and underinvested, costing passengers and the country dearly as a result.’
As part of its bid, First will give the Department for Transport £265m in bonds and loans as guarantees that it will deliver the commitments.
The firm, which already operates four rail franchises across Britain, said revenue was expected to grow by a rate of 10.4% as a result of its investment.
This will return a premium to government of £5.5bn, on net present value. Over the past ten years, revenues on the franchise have grown by 10.2% on the same measure, and now stand at around £900m annually.
First chief executive Tim O’Toole said that the winning bid was ‘a deliverable proposition’.
He added: ‘Our bid delivers value for taxpayers by returning premiums to the government underpinned by sustainable growth in passenger numbers and revenues from the utilisation of significant available capacity.
‘As the UK’s largest rail operator with a highly experienced management team, we have established a vast wealth of knowledge with unrivalled expertise in operating every type of rail franchise.’
Virgin is the only firm that has operated on the West Coast mainline since privatisation in 1997. It will be replaced by First on December 10.