UK Markets close in 2 hrs 22 mins

Rail franchise bid case starts in high court

Gwyn Topham
Photograph: Murdo Macleod/The Guardian

A high court battle pitting rail operators against the government is due to start on Monday, with Stagecoach and others seeking tens of millions of pounds in compensation in a case that could have far-reaching implications for the privatised rail system.

Stagecoach is suing the Department for Transport after being disqualified from bidding for three rail franchises last year for failing to comply with demands on pension liabilities. It is expected to argue that the DfT mismanaged the bid process with regards to the Railway Pension Scheme, where a £7.5bn deficit has been identified by the regulator, and was attempting to shift too onerous a responsibility on to private firms.

The litigants, which also include Stagecoach’s bid partners Virgin and SNCF, and the rival firm Arriva, claim that franchising contracts, which make the operators responsible for pension liabilities, pose an unacceptable level of risk, whether through strikes or financial collapse.

Although the DfT has said there are mechanisms to mitigate the risk, operators fear they could be landed with a huge bill to close the pensions deficit, on relatively low-margin rail contracts. Existing franchises are already seen as precarious, with warnings that South Western and others may have to be renationalised, following the collapse of the Stagecoach-run Virgin Trains East Coast franchise in 2018 after the firm lost around £200m.

Any alterations to rail pensions – a final salary scheme that remains open to new entrants and is payable at age 62 – would be fraught politically, with unions threatening a national strike should the current scheme be modified. Following earlier warnings of action from the RMT, the TSSA union wrote to train operating companies last week saying: “The pensions scheme is off the table … or a national rail strike is very much on the cards.”

Should the train operators succeed in their high court action, and have their franchise bid disqualification ruled unlawful, they could be awarded compensation. The sums sought would cover bid costs and possibly loss of earnings on three affected franchises – SouthEastern, East Midlands and West Coast.

The outcome could potentially lead to the two completed franchise competitions being declared invalid, after the awards to Abellio on East Midlands and First-Trenitalia on West Coast, posing fresh headaches for the government.

DfT mandarins are expected to be cross-examined, including the highest-paid civil servant, Peter Wilkinson, the architect of recent rail franchises, who declared in 2016 that the government was ready for the battle with unions that the franchise contracts would provoke.

A Stagecoach spokesperson said: “We believe in a rail system which is focused on delivering the best services for customers, is financially sustainable and has the confidence of the public. It is disappointing that we have had to resort to legal action; however, we believe there are important issues to be determined by the court and we have a strong case.”

A DfT spokesperson said: “We do not comment on legal proceedings. However, we have total confidence in our franchise competition process and will robustly defend decisions that were taken fairly following a thorough and impartial evaluation process.”

The hearing is expected to last around four weeks in the high court, with a judgment following later this year.

Rail pensions are a growing issue for the industry and government, although the franchising system is likely to be reformed. The government-commissioned Williams review into the future of the rail industry is due to report soon, and the chairman Keith Williams has already said franchising no longer works in its current form.