Transport Scotland has just made something of a controversial contract to the outsourcing specialist, Serco.
Serco has been awarded a 15 year contract to deliver the Caledonian Sleeper rail service between London and the Scottish Highlands, with a 7 year ‘break clause’ it says it has no intention of using – and the economics of the deal would indicate the commercial sense of that determination.
The beaten bidders were the sitting tenants, Aberdeen-based First Group and Arriva Night Trains.
The award is controversial for two reasons:
- Serco’s current reputational standing – which is poor, alongside its financial situation, which is markedly less healthy than it was;
- the award of the contract outside of Scotland, with the home-bidder, First Group, the disappointed post-sitter.
Serco has been caught in a fraud on the UK Government in the infamous prisoner tagging scam.
It has previously been caught in a fraud – falsifying data – on a contract to deliver out of hours GP services in the south west of England.
In the aftermath of the overcharging of the UK government, claiming to have tagged prisoners who had served their sentences and been released or, in some case, had died, Serco lost its preferred bidder status for UK government contracts, pending an inquiry. Its share price took a dive. Its CEO departed as a voluntary scapegoat. Establishment figure, Rupert Soames was brought in as the new CEO to try to mend some fences.
So the big direct negative for Serco centres on earned questions it has raised on issues of trust.
The second question relates to whether or not government’s should retain state contracts within national borders – in this case keeping the Scottish pound in Scotland.
All things being equal, who would argue that it should not?
But were all things equal?
Nothing has been said about the offers from First Group and Arriva Night Trains – not in terms of their bid prices of course, but in terms of what investment they included.
What is known about the winning Serco bid is that it is to invest £40 million which, with a £60 million grant from the Scottish Government, will make a £100 million investment in commissioning 72 new carriages to make up four new trains for the Caledonian’s destinations from London to Glasgow and Fort William and to Edinburgh, Aberdeen and Inverness.
The new trains are to come onstream in the summer of 2018, with the service running under Serco from April 2015, presumably using the current rolling stock.
These new carriages are to have hotel-style cabins with en suite bathrooms; and flatbed sleeping pods for non-cabin based travellers. A partnership with the currently expansionist and high-end Inverlochy Castle Management International, north of Fort William and the celebrated chef, Albert Roux, is to bring to the journey first class cuisine, featuring Scottish produce.
The 15 year contract will assure Serco of the opportunity to earn a good return on its investment. The company is said to expect to earn £800 million across the term of the contract.With no information, even from the losing bidders themselves, on what investment proposals they had made in their bids, it has to be assumed that these were less persuasive than Serco’s.
This raises a different question.
Why would a Scottish-based company not be keen to invest in a high end service to Scotland? If it is not prepared to do so, why should it win a contract for what must be the signature rail service to the Highlands?
Keeping the Scottish pound in Scotland is a prudent strategy – all things being equal; but ought never to be a recipe for commercial complacency and underdelivery by Scots companies.
If Serco make a successful reality of the potential excitement of the new rolling stock and the substantially upgraded facilities and services it has promised, it will have justified its win.
First Group’s livery for the Caledonian is, to be frank, tired and rather down market. The Caledonian does not look like a class act. It looks like a budget carrier and in truth it is pretty utilitarian. It needs to look special, to be special, to convey specialness, pride, comfort, slick efficiency.
First has also not seriously improved the facilities and servicee on the Caledonian, which is dated and unseductive.
This loss has to be the latest in a series of signals to First, that it needs to find a way of upping its game.
- In October 2012, First ‘won’ the west coast rail service contract from the sitting operator, Virgin Trains. This turned out to be a flawed contract, driven to some degree by an ‘ABB’ [Anyone But Branson] stance in the Whitehall transport department. Branson’s robust challenge saw a reversal of this decision, with Virgin awarded a contract to continue providing this service.
- First has very recently lost – to a Go-Ahead led bid – the £8.9bn seven-year Thameslink contract, Britain’s biggest rail franchise.
When the announcement came that Serco had won the Caledonian sleeper contract, early trading on Wednesday 27th May, saw Serco’s shares rise 2.7% to 364.6p; and First Group’s slide by 1% to 137.1p.
Transport Scotland came in for some criticism for splitting the Caledonian sleeper contract from the Scotrail franchise which First Group currently operate.
There are service and branding logics in splitting the two and provided the business case is also there, this decision does have the constructive effect of underlining the once and potentially future distinctiveness of the Caledonian.
The omens of the Serco award
The renewal of the Scotrail franchise is currently in train, with Abellio, Arriva, FirstGroup, MTR and National Express getting through the pre-qualification stage of the process.
Will First ramp up its bidding performance to retain the Scotrail contract which expires at the end of March 2015?
And what about the eternally complex situation of the Scottish west coast ferry services?
In September 2012 the Scottish Government announced that tendering for the new Clyde and Hebrides Ferries Services [CHFS] contract would begin in the Autumn of this year, 2014; with the new contract to start in 2017. The CHFS franchise is to be a single contract for the entire west coast network, probably for an extended period, perhaps of ten years the EU will now accept, to enable return on potential investment by a winning bidder.
Will Serco throw its hat in the ring? It was the controversial winner of the Northern Isles ferry services in a deal where it clearly had latitude to breach the conditions of the contract. When the Hamnavoe, on the Orkney run, had a serious technical failure which kept it out of service for a prolonged period of weeks, Serco, with no penalty exacted, did not supply a relief vessel as it is required to do for a supposedly lifeline service.
The big issue here is the position of CalMac. As a state owned operating company with a single shareholder – the Scottish Government – whose instructions it must follow, CalMac is hamstrung. It has limited financial and strategic independence., which limits both how it can bid and how it can defend itself as other bidders do in the event of questionable contract awards against them.
The major ‘what if’ here is Serco coming in with a bid based on its bringing in a new west coast fleet, provided the contract is for long enough to allow it to return on that investment.
At the moment, Caledonian Maritime Assets Limited [CMAL], also owned by the Scottish Government, is the asset holder where CalMac is the operator. CMAL owns the vessels and the infrastructure, the piers, harbours, ports and port buildings that support the service delivery.
CMAL’s fleet is ageing and increasingly unreliable, with a greater frequency of breakdowns. CalMac, as a state owned company, has no choice but to use these vessels – but would any incoming private sector operator be prepared to take on this fleet as the basis of their bid service? This heightens the possibility of a Serco bid based on bringing in its own vessels. How could CalMac hope to compete in a bid against a privateer with pockets as deep as Serco’s, even in its reduced state today?
CalMac’s CEO, Martin Dorchester, has been talking bullishly about CalMac gearing up to be competitive. The company has certainly been flexing its capability of late, in making well regarded bids abroad and down south. As in its recent Swedish adventure with the Gotland contract, which, in the end, stayed with the sitting operator; and in its also unsuccessful bid for a cross-Thames ferry service, ironically previously operated by Serco.
What would Transport Scotland do if Serco came in with a bid to bring in a new fleet? A question that would have to be pursued in such a move would be whether, as it has just done in the Caledonian sleeper contract, the Scottish Government would heavily grant aid such an investment? It has, after all, contributed more than Serco [60% to Serco's 40%] to the cost of the new trains that are the pacifier for that contract being awarded outside Scotland.
The west coast ferry services situation, however, is materially different. If the Scottish Government were to grant aid investment for Serco in new boats for the CHFS franchise, it would have to explain why, as the sole owner of the boat-owning company CMAL, it had failed to invest in timely fashion in its own fleet.
Would this situation see the end of CalMac and CMAL and the Scottish Government go out of public sector transport service provision? This is entirely possible. The sudden u-turn in 2012 in effectively mothballing the CHFS contract, has always indicated just such an intention, postponed perforce until just after the September independence referendum, to reduce adverse weather conditions.
