Department for Transport (DfT) officials accepted the franchise bid by Virgin Trains East Coast (VTEC) despite believing passenger growth targets would be missed, MPs have heard.
VTEC’s contract to run trains on the East Coast Mainline was ended prematurely last month after revenue was lower than the operator expected.
The joint venture between Stagecoach (90%) and Virgin (10%) began in March 2015 and agreed to pay the Government £3.3 billion for what was supposed to be an eight-year franchise.
Simon Smith, DfT’s director of rail passenger services, told the Commons’ Transport Select Committee: “We thought Virgin Stagecoach’s bid was quite ambitious at the time we received it.
“We expected at the time that we evaluated their bid that revenue would be lower than they forecast.
“They had attributed quite ambitious growth to certain initiatives including things like their marketing and pricing strategy.
“We thought they would get some of that but we didn’t think they would get all of that.”
Polly Payne, the DfT’s director general of rail group, said: “We want ambitious bids because they maximise the revenue we get for the taxpayer but we also want to ensure that if things don’t work out as we and the franchisee hope then we make sure both passengers and taxpayers are looked after.”
Critics claim the decision to end VTEC’s contract early was a “bailout”, but Transport Secretary Chris Grayling insisted that “taxpayers have not lost out” and it is only the private firms that have “made losses at this time”.
Stagecoach says it lost £200 million during the franchise.
VTEC is the third private operator to fail to complete the full length of a contract to run East Coast services.
GNER was stripped of the route in 2007 after its parent company suffered financial difficulties, while National Express withdrew in 2009.
Services on the route were brought back into public ownership last month.
Nationalised operator London North Eastern Railway will operate until a public-private partnership takes responsibility for both trains and track operations in 2020.