Government announces a halt to the Rail Franchising system

Published 4th October 2012

Midnight Department for Transport announcement costs taxpayers £50m due to Beaurocratic blunders

LONDON - The Department for Transport (DfT) chose to announce that they had wasted around £50m of taxpayers money just after midnight on October 3.

The announcement says that the DfT is no longer contesting the Virgin Judicial Review of how the West Coast Main Line (WCML) franchise was awarded in late August. It has also said that all the four bidders will be offered compensation for their collective wasted efforts will be up to £50m spent compiling bids and including the costs of the refranchising team over the last 18 months.

Obviously there will be a further cost in carrying on operating trains after the end of the current Agreement on December 9 plus the new costs of refranchising at a later date.

No service disruption

Transport Secretary Patrick McLoughlin has promised that trains will continue to operate and this could be done with the following two options:

Virgin carry on which would create an interesting situation for the DfT to manage OR the Government’s Directly Operated Railways (DOR) will assume operating and safety responsibility as with the East Coast Main Line franchise, using a fully owned subsidiary company.

Who Profits from the taxpayers’ loss?

This would lead to the Government retaining the profits from the line - which must be there to be generated given the passion surrounding the bids.

The Government is to rethink the whole franchise system but perhaps could operate the profitable franchises themselves to reduce the overall cost of subsidy.

Other Franchises in the sidings

The other three franchise competitions, Great Western, Essex Thameside and Thameslink have been what is described as paused pending investigations. This will add yet more cost and uncertainty to the rail industry. East Coast was also up for grabs under DfT plans which will also no doubt be held up further.

Transport Select Truth?

Transport Secretary Patrick McLoughlin appeared before the Transport Select Committee last month and assured everybody that the due process had been gone through by the Department. He was obviously wrongly briefed and one has to speculate that the DfT knew something was wrong when the previous post holder, Justin Greening was removed. If so, why did the DfT carry on defending their decision until late September?

Suspensions

Patrick McLoughlin has also announced that some DfT staff have been suspended while an investigation takes place. The outcome will be interesting given the reputation the DfT has within the rail industry for micro- management while proclaiming freedom for the business led decisions by franchisees. Does it mean some staff have been going off-limits or just incompetent?

When the railways were privatised, the author was in a commercial department of seven and was the only ‘railwayman’. The other six were on 40% more salary despite compatible grading, but all had left within 18 months saying it was too difficult to understand!

They said:

The Transport Secretary said that evidence of significant flaws in the Department’s approach emerged while officials were undertaking very detailed evidence-gathering in preparation for legal proceedings in the High Court.

These flaws stem from the way the level of risk in the bids was evaluated. Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.

Comment:

This is scandalous given the links with the Treasury that were mentioned as part of the process in economic forecasting so does the line of responsibility travel towards the financial wizards at the Treasury?

Patrick McLoughlin also said that The Department cannot be confident that these flaws would not have changed the outcome of the competition or that any of the four bidders would not have chosen to submit different offers.

The decision means that the Department for Transport (DfT) will no longer be awarding a franchise contract to run the West Coast service when the current franchise expires on December 9. It is consequently no longer contesting the judicial review sought by Virgin Trains Ltd in the High Court.

The Transport Secretary has also ordered two independent reviews to be undertaken: the first into what went wrong with the West Coast competition and the lessons to be learned, the second into the wider DfT rail franchise programme, both overseen by leading business figures;

He has also paused all the other outstanding franchise competitions (Great Western, Essex Thameside and Thameslink) pending the independent reviews which are designed to ensure future competitions are robust and deliver best value for passengers and tax payers.

Mea Culpa by Mr McLoughlin who said:

“I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process.

“A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held.

DfT permanent secretary Philip Rutnam said:

“The errors exposed by our investigation are deeply concerning. They show a lack of good process and a lack of proper quality assurance.

“I am determined to identify exactly what went wrong and why, and to put these things right so that we never find ourselves in this position again.”

One review will be undertaken by Eurostar chairman Richard Brown CBE, and examine the wider rail franchising programme examining whether changes are needed to the way [financial] risk is assessed and to the bidding and evaluation processes, and at how to get the other franchise competitions back on track as soon as possible.

Evidence of significant flaws in the Department’s approach emerged while officials were undertaking very detailed evidence-gathering in preparation for legal proceedings in the High Court.

These flaws stem from the way the level of risk in the bids was evaluated. Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result. (This leads back to the Treasury, surely?).

The Department cannot be confident that these flaws would not have changed the outcome of the competition or that any of the four bidders would not have chosen to submit different offers.

The Investigating Committee

Richard Brown is the chairman and former chief executive of Eurostar, of Eurostar and previously commercial director and a main board director of National Express Group, where he set up its UK Trains Division, at the time the largest UK passenger franchise operator. He has spent 35 years in the transport industry and was a director of British Rail’s Intercity Division before privatisation.

Sam Laidlaw has been chief executive of energy company Centrica since July 2006 and has been a non-executive director of HSBC Holdings Plc since January 2008. He has been the lead non-executive board member of the Department for Transport since December 2010 and is also a member of the UK Prime Minister’s Business Advisory Group.

Ed Smith is a non-executive board member of the Department for Transport and was formerly chairman of strategy for PricewaterhouseCoopers, deputy chairman of the Higher Education Funding Council for England, as well as chair of their Leadership, Governance and Management Strategic Advisory Committee.

Political Timetable

The investigations report is due by the end of the year which means that the WCML could be under DfT control for a couple of years, neatly bringing us up to the next election.

Have your say:

rail.co.uk is hosting a WCML Franchise webchat on Wednesday October 10 between 12 noon and 1400hrs.

External Links

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