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He certainly does. In 2006 the east coast franchise was then known as GNER and it failed in far more favourable economic circumstances. The Government appear to have learnt nothing from the collapse of GNER and have continued to press train operators to make wildly optimistic bids. However, I accept that no one in 2007 expected to see such a big reduction in GDP.
However, is it not the case that the franchise agreement and the bid were based on a fixed and capped amount of parental support from National Express of about £70 million? If the DfT wanted more parental support
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There has been much use of the word "default". What precisely is the default? What is its nature? NXEC has stated that it will run out of parental support provided in the franchise sometime later this year unless the economy picks up to an extraordinary extent. Has the Secretary of State detected any failure of operating performance by NXEC, the actual franchise, not National Express? Is NXEC meeting all its contractual obligations, and what part of the contract has been broken by National Express at this point?
The key point is that taxpayers and rail users around the country will want to know whether Ministers appreciated when the DfT let this franchise that the operator's liability was capped; and is this desirable or not?
In a previous exchange, the Secretary of State told us that there were cross-default provisions in the franchise agreements with National Express. But is it not the case that they only apply when the default on one franchise will have a material impact on other franchises within that group, and is there any evidence of this?
My final question is this. Does the Secretary of State really expect to be able to let a franchise on this route with another operator but at substantially the same terms as those obtained in 2007 when the economy was so very different?
This is a very difficult problem for the Secretary of State to solve. He is in a Catch-22 situation. The fact of the matter is that less money is coming into the rail industry and he will have to work out what to do about it. If he renegotiates-which he does not want to do-he will open the floodgates; if he does not, he will face extra costs and loss of morale among the operating staff on the east coast line.
Lord Bradshaw: My Lords, I thank the Minister for making the Statement to us. I should chasten him on one or two points. The National Audit Office, from which he drew comfort, in its report on the franchising process ticked the boxes and said that the procedures had been followed. However, when I raised the policy issues behind the franchising process with the NAO, it said that policy issues were not a matter for it. What you have is an auditor's report with a lot of ticks in boxes; you do not have a fundamental review.
Secondly, the south central franchise has new rolling stock, more rolling stock on order and is in a part of the country which is less affected by the recession. I am not surprised that there were reasonable bids for
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Also, I take issue with the idea that there is the prospect of a highly competitive market. It will not be a highly competitive market. National Express's debt is £1.5 billion; First Group, which has been talking about bidding for the franchise, has a debt of £2.5 billion. Do we really want to let franchises to people who are basically without money behind them?
For half the money that we invested in privatisation, we could have had the best railway in Europe. What we have is much more expensive compared with British Rail. I suggest that the Minister draws some professional, experienced railwaymen into a debate about the future of the franchising process. I congratulate him on obtaining the services of Elaine Holt as chief executive and I can assure him that I can give him the names of a few more people who would do a damn sight better job than is being done now.
I am sure that Her Majesty's Opposition as well as supporters of the Government would join in such a review. They must by now acknowledge the fact that privatisation was a tremendous mistake based on running down the railways. The focus, however, must be on what the passenger wants. I suggest that he wants clean trains with clean lavatories, sufficient accommodation and proper catering. These are very simple things which are often provided by very few well trained, low-paid extra staff-probably not the sort of people who are employed by lawyers, merchant bankers and consultants.
What we need is a cheaper, less confrontational railway. The franchising system is not fit for purpose and a review is necessary. Network Rail has just appointed a new chairman and is reviewing the structure of that company. What could be a better time to review the future of franchising and take out of the railway a lot of the internal and expensive disputes with which it is plagued?
Lord Adonis: My Lords, the noble Lord, Lord Bradshaw, is a distinguished former rail manager and I thought that he was going to volunteer himself to run the east coast main line. But for the fear of conflicts of interest, in this highly charged parliamentary atmosphere, he appeared to me to be a very well qualified candidate for the post.
Lord Adonis: My Lords, the appeal grows with every passing moment and I will certainly put him in touch with Elaine Holt. I share his high opinion of her; I got to know her when she was managing director of First Capital Connect, and she of course did a very good job there.
The noble Lord asked me to reflect on the lessons of this experience, and I intend to do that. As the great Mr Gladstone said at the age of 82 as he was forming his fourth Administration, "I have been a learner all my life". At my very young age, I am certainly a learner. It is very important that we continue to learn from the experience of events such as the collapse of the National Express east coast franchise, and I will be learning. I am also very mindful of the noble Lord's point about seeing that we get a better contract specification. That is precisely why I do not intend to rush into re-letting the franchise. I could have simply re-let the existing franchise in a much shorter period than from now to September 2010, as indicated in my Statement. The reason why I want to take longer is to reflect on the experience, as the noble Lord recommended, and to improve the contract specification.
I entirely share the noble Lord's concern to see that many of the nuts-and-bolts issues are addressed. I refer to better facilities at stations and better services on trains. I also know that among your Lordships catering on the east coast main line has been-how shall I put it?-a live issue over many months, and I intend to see that we have proper contract specifications in respect of catering. In addition, as part of my campaign to see that stations are much more amenable to cyclists, I want a great deal more bicycle parking at stations. I believe that this could be a very big growth market for the railways in the future. Therefore, I will be reflecting; I will not be rushing into a new franchise; and I hope that the next franchise that we let will be better than the previous one.
The noble Earl, Lord Attlee, made a number of points with which I agree. I think that for the future we need to reflect further on the relationship between parent groups and special purpose vehicles. However, his fundamental point, which I know his party has been making during the day, is that the system is fundamentally broken. Perhaps I may say in parenthesis that this is a system that his party began. It involves the private sector, which I thought was a great cause of the Conservative Party, and it involves people bidding in market conditions for franchises. Therefore, I think that the noble Earl and his party need to be quite careful before they seek what many of my noble friends would like, which is to move back much more dramatically in favour of a publicly controlled and managed railway. I have sought, as I do on many of these issues, to see that we get the best of the private sector but ensure that it is properly regulated, as it must be when serving the public interest.
I must address the suggestion which has been put out during the morning and which I regard as comical: that Ministers and my predecessors-presumably the noble Earl means predecessors on his side of the House too-press train operators to make, in his words, "wildly optimistic bids". He had the grace to concede that GDP had fallen significantly since. We are talking about people such as Brian Souter and Sir Moir Lockhead. Does he believe that they would respond to suggestions from me that they should raise their bids a bit and put aside their own commercial interests? I have never met anyone with a sharper sense of his own commercial interest than Brian Souter, and I respect him for that. That is why he is such a
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This contract, which the noble Earl says was wildly optimistic in its bidding, was bid for by Richard Bowker, who was then the chief executive of National Express. Richard Bowker is a former chairman of the Strategic Rail Authority, so the idea that we had some ingénue who did not understand the rail market and was responding to a Minister of the day who was pressing him to bid higher than he wished to do comes from fantasy-land and does not help us through this issue at all. The reality is that we had 16 rail franchises and only one of them is in financial difficulty. None of the other operating groups has indicated to me either any intention to default or any likelihood of defaulting. Let us be clear that National Express will pay a financial penalty for leaving the franchise in the way in which it has indicated, and we will ensure that it meets its contractual commitments in full. National Express will pay a massive penalty in reputation for breaching its contracts with the Government.
I said that we had previous experience, which I shall put in context. Since the process of rail franchising started, we have let a large number of contracts-41 to be precise. Of those 41, only two have failed until now. The franchise that we are discussing today might well fail, but of the two that have, neither of the owning groups responsible is now in the UK rail business. That is a sobering lesson to any other operator, including National Express, that chooses to go down the same path. It is a massive penalty.
I shall end my remarks by referring to the National Audit Office. I am always guided by a proper and thorough analysis of public policy in the decisions that I take. The NAO, as the noble Lord, Lord Bradshaw, indicated, carried out a thorough review of the franchising system. I do not think that it is fair to say that it simply looked at procedural issues. It looked at substantive issues, and reached substantive judgments. It said:
"The Department's approach to rail franchising produces generally well thought through service specifications and generates keen bidding competition. This approach has resulted in better value for money for the taxpayer on the eight franchises let since the Department took over from the SRA".
I fully accept my public responsibilities to see that the train service is not interrupted and that we learn the lessons from previous experience in re-letting the franchise, but I do not accept that the fundamental policy is flawed. Never in the past 50 years have railways been in a better state in this country than they are today. They have an optimistic future. I am an optimist and I believe that we could construct the best railway system in Europe. We just have to have a mind to do so.
Lord Palmer: My Lords, I have three quick questions for clarification. The first concerns pensions for existing National Express staff, many of whom were ex-British Rail and then became staff of GNER. What will happen to their pension arrangements? I feel very strongly as I have known many of the employees quite well for the past 20 years.
Secondly, how confident in reality is the Minister about re-letting the franchise? I have serious worries and doubts. Thirdly and finally, does he have any idea about, or will he look into what plans there might be, for those of us who have loyalty programmes with National Express? I have a serious amount of credits, and should be interested to know what will happen to them in the long term.
On pensions, I undertake that the terms and conditions of staff working for National Express East Coast will be fully protected as it transfers into the new public company. The staff will not lose out by the transfer. On the question of re-letting, as I said in my Statement, we have recently re-let an important contract-the South Central contract-for services from south London, Sussex and Surrey into central London. The noble Lord, Lord Bradshaw, said that this was somehow a special case. In fact, the range of bids for that contract was very wide indeed. As a result, we have moved from a franchise that was being subsidised by the taxpayer to a franchise operator agreeing to pay £534 million to the Government over five years and 10 months. It is not a new, fly-by-night merchant, but a solid, reliable and well established operator. Recent experience of rail franchising has been positive and gives us comfort for believing that we can have competition for the east coast main line, which is highly prestigious, and that we can get good value for the taxpayer. Experience of what happened to GNER after Sea Containers withdrew, and what happened with Connex, the south-eastern train operator, which could not continue in the rail business, shows that we had keen competition for the franchise thereafter.
Lord Clinton-Davis: My Lords, does my noble friend appreciate the possibility of the new publicly owned company proving a great success in running the railway line? Will he give an assurance that that situation can continue indefinitely?
Lord Adonis: My Lords, I do not believe that it would be in the public interest for us to have a nationalised train operating company indefinitely, as my noble friend suggests, because of our recent experience of rail franchising, which has, as the National Audit Office said, delivered good value to the taxpayer and keen competition from established, successful train operators. As I said, I see the situation in respect of National Express as exceptional. I do not see the system as flawed; we have had a problem with one operator that we have had to deal with. I believe that the public interest is best served by, in an orderly way,
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Baroness Harris of Richmond: My Lords, the Secretary of State referred to the folding of the NXEC franchise as regrettable and disappointing. I would add, but not surprising. I have been a long-time critic of the way that that franchise has been run on the railway. I am very pleased to hear the Secretary of State say that the jobs of the onboard staff will be assured and safe. I suggest that one way to get a bit of money back would be to look at the senior management structure of National Express East Coast, because I can assure him that a great deal of money could be saved by getting rid of a lot of them.
Lord Adonis: My Lords, now that the noble Lord, Lord Bradshaw, will be working for free, we will be saving a great deal of money on the senior management structure. The noble Baroness's point is well taken. We will ensure that we have a lean management structure in the new company, that we do not pay beyond the going rate and that we get the best possible deal we can for the taxpayer.
Baroness O'Cathain: My Lords, first, it is very reassuring that the Government have been able to take such swift action without a whole lot of messing around and speculation in the press about what is going to happen. Did the Minister have any idea, or did anybody have any idea, that this was going to happen? Only yesterday, there was quite a large article about Mr Richard Bowker in the Times. I know that only because I was reading it at six o'clock this morning when I heard on the news that he had resigned. I thought, "Gosh, this is a great man, what has he done? He has resigned". Did that come completely out of the blue, or was a situation building up that no one took any notice of?
Secondly, I am delighted that the South London franchise will yield £534 million over five years and 10 months, or whatever, but I say to the noble Lord, Lord Bradshaw, that the economic situation in the south-east and south London is no better than anywhere else in the country.
Lord Adonis: My Lords, I think that the noble Baroness's last point is well taken. In respect of prior warning, it is fair to say that National Express had made its concerns about the viability of its east coast operation clear to us over a number of months, but it was only in the immediate run-up to today and the trading statement that the company felt that it had to make on its half-year results that it told us firmly that it intended later in the year to default on its franchise commitments. By the way, the noble Earl asked me: what is the default? The default will be a failure to pay the premium payments to which the company is committed.
Lord Morris of Handsworth: My Lords, the Minister will be aware that National Express Group came into existence as a coaching company and employed a lot of drivers and other professionals. In the light of that, can he say what impact there will be on the coaching side of the business from the company's statement?
Lord Adonis: My Lords, I am not aware that the announcement made by the National Express Group today has any impact on the coach operation of the group. Its statement was solely in respect of its east coast rail business.
Viscount Tenby: My Lords, I shall say in passing that those who would like to put the clock back are by no means confined to noble Lords sitting behind the Secretary of State. In these strained times for train operating companies, can the Secretary of State give an assurance that essential services to passengers will be continued and all economies by train operating companies, such as the closure of stations, ticket offices and cleansing services in stations, will be resisted at all times?
Baroness Maddock: My Lords, I welcome the Statement. As my noble friend said, some people who travel regularly-I declare an interest as one of them-have been concerned about the east coast franchise. I particularly welcome the Secretary of State's comment that he will do his best to make sure that there is smooth running of the service. I was particularly interested in what he said about car parking. We have particular problems in Berwick-upon-Tweed with people reneging on promises. The Secretary of State knows about this because I have spoken to him about it.
I am concerned that we get the franchising right this time, and I know the Secretary of State is interested in doing that. I hope that we do not rush it too much. I am still worried about the timescale the Secretary of State is talking about. I have raised with him the fact that in recent months there has been a lot of discussion in the press about the franchise. One of the things I picked up was the increase in passengers that National Express thought it would get to give it the money to pay the Government. When I looked at it, I had no idea where it would have put those passengers because the trains that we travel on are very crowded and there was no indication, in the short term anyway, that we were going to get new rolling stock. When the Government look at the franchise, will they please look at the passenger predictions because many of the trains, even now in the downturn, are very full? Putting 50 per cent more people on the present trains is impossible.
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