This article is more than 2 years old

This article is more than 2 years old

The Department for Transport failed to conduct “appropriate due diligence” on a bid to run the troubled East Coast rail franchise, a report by MPs has found.

In June, Virgin Trains East Coast (Vtec) became the third company in just over a decade to have its contract to run the east coast mainline prematurely terminated, after anticipated revenue and passenger growth failed to materialise.

In a report by the transport select committee released on Wednesday, MPs accused the government of encouraging overbidding for the contract to run trains on the London-Edinburgh-Inverness route.

The train operator Vtec, a joint venture led by Stagecoach with Sir Richard Branson’s Virgin Group, had pledged to pay £3.3bn to run the service from 2015 until 2023. Prior to 2015, the line had spent six years in public ownership.

MPs concluded that the latest franchise to run services on the mainline ultimately failed because Vtec ran out of money after proving unable to meet “overoptimistic” revenue targets.

“The actual day-to-day operations of the franchise were managed successfully by Vtec,” the report said.

“Based on passenger satisfaction, it was among the highest performing long-distance franchises on the network … In terms of Vtec’s operational finances, the franchise was performing well and Vtec made an operational profit of around £260m in the financial year prior to its termination.

“Despite this, the operating surplus generated did not fully cover the premium obligations it had with the Department for Transport (DfT) as part of its franchise contract.”

The committee said franchises should be able to withstand normal fluctuations in the economic cycle. “The fact that this franchise did not suggests that Stagecoach and Virgin built very little resilience into their bid,” the report said.

Although the MPs described the private companies as naive and said they “bear prime responsibility” for the franchise failure, they insisted the DfT must “also take responsibility for not managing the bid process effectively”.

“The DfT encouraged overbidding by setting unrealistic benchmarks in the invitation to tender, and the bid process lacked the necessary boundaries to temper overoptimistic bidding,” they said.

“Specifically, the DfT’s financial stress-testing of the bids was not robust enough. If the DfT had conducted appropriate due diligence and identified weaknesses in the assumptions underpinning the bid, it may not have been in this position today.”

The committee accused the government of failing to find “the right balance between the risk of franchise failure and returns they might obtain from encouraging ambitious bids”. It added: “We recommend the department revisit its approach to franchise failure.”

Vtec is the third private operator to fail to complete the full length of a contract to run east coast rail services. Great North Eastern Railway (Gner) was stripped of the franchise in 2007 after its parent company had financial difficulties, while National Express withdrew in 2009.

Services on the east coast mainline are now run by the London North Eastern Railway, which is owned by the DfT. A public-private East Coast Partnership (ECP) will take responsibility for trains and track operations in 2020.

Stagecoach said that in formulating the east coast bid, it “used the same bold, ambitious and meticulous approach which delivered strong success in the past”.

“As the committee makes absolutely clear, there was no incentive to deliberately overbid and there was no taxpayer bailout in the unfortunate premature end to the contract,” the company said.