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DfT wanted more cost pressure on franchise


08 June 2018

The DfT encouraged Transport for Wales to demand more from bidders for the Wales and Borders franchise at a late stage in the procurement, only to change its mind about three or four months ago, according to TfW. 

The DfT’s rethink appears to have coincided with concerns about “overbidding” for franchises when transport secretary Chris Grayling revealed earlier this year that the Stagecoach/Virgin Trains East Coast franchise would be cut short.

The Welsh Government required an agency agreement from the DfT to procure the Wales and Borders franchise, which will begin on 14 October. Welsh Government company Transport for Wales managed the procurement process.

James Price, chief executive of TfW, told LTT this week that the Welsh Government and TfW had taken care not to encourage bidders to promise more than could be delivered with the funding available. 

“As we were going through the process, UK Government have been quite interested in what we’re doing. About six months ago they were pushing us again to say [to the bidders], ‘We think we’re paying too much.’ [The DfT said to us:] ‘You need to drive the cost down. You need to encourage higher bids.’ About three or four months ago, they did a U-turn on that,” said Price.

Four months ago Grayling announced that Stagecoach and Virgin’s East Coast franchise contract would end sooner than expected, blaming Stagecoach for overbidding and getting its numbers wrong. In February the DfT said it had made technical changes to exclude future franchise bidders making over-ambitious bids.

Price said TfW had developed growth forecasts for Wales and Borders, while the bidders had their own. KeolisAmey will break even if it achieves TfW’s growth line, but Price said this was low. “We expect that to be significantly exceeded.” 

In that event “money starts to come back to us”, rather than KeolisAmey retaining all of the additional revenue. Price said the model combined elements from DfT franchises and Transport for London concessions, with the revenue risk shared between TfW and KeolisAmey.

Price also revealed that, until last week, TfW was planning to borrow to acquire the £800m new train fleet itself. It now plans a leasing arrangement.“At the minute we’re buying them through a lease arrangement with the manufacturer via Keolis,” he said. “Keolis will put in the order for us. We did look to buy them outright but the rates that are available [from the private sector] on a 20-year usage guarantee are really low. The lending house has offered a discount rate below the Treasury discount rate.”

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