Press Notice No. 41 of Session 2005-06, dated 11 May 2006
FORTY-FIRST REPORT: THE SOUTH EASTERN PASSENGER RAIL FRANCHISE (HC 770)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:
"Wishful thinking marked the acceptance of Connex South Eastern's franchise bid. The policy of the then Office of Passenger Rail Franchising to go for the cheapest bid clearly led to myopia over what Connex could realistically deliver. And neither OPRAF nor its successor, the Strategic Rail Authority, managed the resulting risks.
"The parties couldn't communicate properly and felt no trust in each other. The SRA was slow to realise that Connex was running into money problems and Connex didn't rush to make this clear to the SRA.
"But those who suffered most were the travelling public. Connex became a byword for incompetence among cold and angry passengers waiting for trains that limped in late or simply didn't arrive.
"It is essential that, in future, the Department for Transport identify the train operating companies at greatest risk of financial and operational failure and develop an early warning system for detecting emerging threats to the viability of their franchises. And the management and monitoring of franchises will be effective only if the responsible staff have the expertise and resolve to ask hard questions about the financial information.
"In the event, the termination of the franchise and hand over to South Eastern Trains in 2003 went well and, overall, passenger satisfaction increased. But the need for such drastic remedial action, at considerable cost to the taxpayer, should never have arisen in the first place. There are many lessons here for the Department for Transport. It should certainly resolve never to allow hope to triumph over experience when assessing franchise bids in future."
Mr Leigh was speaking as the Committee published its 41st Report of this Session, which examined the impact of Connex South Eastern's financial difficulties, the Strategic Rail Authority's decision to terminate the franchise and how taxpayers' interests were protected.
In June 2003, the Strategic Rail Authority (SRA) announced that it would be terminating Connex South Eastern's (CSE's) franchise for providing passenger rail services in Kent, parts of Sussex and South East London within six months and transferring the franchise to an SRA subsidiary. The SRA decided to terminate the franchise to protect taxpayers' money and passenger delivery. This was the first, and so far only, instance where a train operating company's franchise has been terminated early.
CSE won the 15-year franchise in 1996 with a bid for £535 million of public subsidy, based on the assumption it could realise cost savings and increase passenger numbers over the life of the contract. It increased passenger and other revenue ahead of its bid projections, but in common with other early franchise operators CSE had made unrealistic assumptions about the cost savings it could achieve. By 2001, some five years into the franchise, CSE faced mounting financial difficulties. Rather than alerting the SRA to these problems immediately, it chose to try to resolve them itself.
The SRA's franchise monitoring procedures failed to detect the emerging difficulties. Instead the SRA became aware of them only when CSE requested a franchise extension. With help from consultants, the SRA reviewed CSE's financial position and identified weaknesses in its financial management and a significant funding gap, which neither CSE nor the SRA was able to quantify with any certainty. In December 2002, the SRA issued a deed of amendment to the franchise under which CSE was provided with an additional £58.9 million of subsidy for 2003 as a 'stop-gap' measure. The deed also required CSE to make changes to its financial management, control and reporting. In June 2003, the SRA terminated CSE's franchise, frustrated by CSE's slow progress and apparent lack of commitment to improving its financial management. It also considered that CSE would require additional public subsidy to deliver the remainder of the franchise.
In November 2003, the SRA transferred the franchise to its subsidiary, South Eastern Trains (SET), in an orderly and well managed transfer. SET continued to operate the franchise until 1 April 2006, when it was incorporated into the newly created Integrated Kent Franchise, which the Department for Transport awarded to GoVia after competition in November 2005.
to view Report