UK Edition
Dutch government leads £80m rescue of giant East Anglian rail network
British and Dutch ministers are facing a rail showdown after it emerged the Netherlands has led an £80m rescue package to bankroll the loss-making activities of one of Britain’s biggest train networks.
Greater Anglia, which operates one in every 12 UK rail journeys and is majority owned by the Dutch state rail operator, is being forced to make crippling payments to the Department for Transport (DfT) - pushing its finances into the red.
The payments, which sources said could end up costing Greater Anglia hundreds of millions of pounds, are linked to a complicated clause contained within the franchise agreement.
The operator attacked the arrangement as a “flawed mechanism”. With tensions between Greater Anglia and DfT running high, Transport Secretary Chris Grayling is believed to have been drawn into the dispute.
Industry insiders have speculated Greater Anglia “could be the next east coast” - referring to the embarrassing re-nationalisation of the east coast main line earlier this year after more than £200m of losses were racked up.
Operating more than 1,300 train services every day Greater Anglia is a 60/40 joint venture between Abellio - a subsidiary of the Netherlands’ state operator Nederlandse Spoorwegen (NS) - and Japanese company Mitsui & Co.
Abellio won a nine-year deal to operate the East Anglian rail network in October 2016, fending off competition from UK listed transport companies National Express and First Group, in one the first rail awards by Mr Grayling. Industry sources said Abellio paid as much as “£1bn more” than rival offers.
One insider added: “It is not a surprise for anyone in the industry… The bid that won, won by a long margin.”
The Dutch bailout is not the first made by Nederlandse Spoorwegen to a UK rail operator of late. Abellio also operates the sprawling ScotRail network and drew down loans of £10m in 2017, in addition to £14m previously pledged.
In January, Dutch opposition leader Henk Nijboer called for Abellio to embark on “fewer foreign adventures” amid concerns it was overbidding in “the battle for bus and train transport in England”.
Recently filed accounts reveal parent company support of £30m was drawn down in January and a further £50m in August. Abellio East Anglian Limited posted a £1.1m loss before tax on revenue of £650.2m in the year to March 2018. This compares with a profit before tax of £19.4m in the prior year.
The train network’s finances were “significantly impacted by a decision by the Department for Transport to enforce a mechanism included in the franchise agreement for the sharing of revenue risk”, company financial statements read. Such enforcement had “created unintended consequences”, pushing Abellio East Anglian into the red. “We have disputed the grounds for this payment with the [DfT].”
A spokesman for Abellio said: “The agreement for the East Anglia franchise includes a risk sharing measure known as the Central London Employment (CLE) mechanism. This was intended to provide protection for the operator and the DfT against revenue fluctuations as a result of dramatic changes in the London economy."
The clause was intended to protect rail companies from a decline in employment in London, which would hit revenues generated from commuter. If job figures fall below a certain level, DfT would pay an amount over to the rail franchisee. Payments flow in the opposite direction if employment data is above a specific threshold.
“However, it is now widely accepted that CLE is a flawed mechanism that does not deliver on the intended aims. We are therefore working with the DfT to develop and implement more effective risk sharing models," the spokesman added.
Virgin East East Coast - a 90/10 joint venture between Stagecoach and Virgin - was handed back to the Government earlier this year. Mr Grayling said Stagecoach “got its sums wrong”. Parliament’s Transport Committee said Stagecoach should take “prime” responsibility but accused ministers of “encouraging” it to overbid for the franchise.
Stagecoach blamed a challenging economic environment, political uncertainty and lower rates of passenger growth than predicted for its troubles on the East Coast franchise.