West Coast rail deal contained ‘significant errors’
By Richard Johnstone | 30 October 2012
The Department for Transport made a number of ‘significant errors’ when it awarded the West Coast Main Line franchise to First Group, according to an independent review of the decision to scrap the deal.
In an interim report, published yesterday, Sam Laidlaw, chief executive of Centrica and a non-executive director at the department, concluded that the government’s new franchise programme contained
‘complex and novel’ competition procedures. An ‘accumulation of significant errors… resulted in a flawed process’ in the award of the 13-year West Coast deal, he said.
‘These errors appear to have been caused by factors including inadequate planning and preparation, a complex organisational structure and a weak governance and quality assurance framework,’ Laidlaw stated.
He concluded that the department’s calculation of the security bonds that bidders have to provide, known as a subordinated loan facility, was ‘flawed’. Although the DfT was aware of problems in determining the level of security required, it nonetheless decided to continue with the franchise award, Laidlaw found.
Franchise bidders were not given enough information to reliably predict the likely size of the SLF, which made it difficult for them to decide the optimal capital structure for their bids.
Also, the amount of the SLF ultimately required by the two leading bids was not determined in compliance with the DfT’s own guidance, but instead influenced by ‘extraneous factors’. These included a departmental concern that too large a requirement would knock a bidder out of the competition and might even halt the firm’s participation in future bids.
Presenting the interim report to Parliament, Transport Secretary Patrick McLoughlin said the report revealed ‘a number of issues’ confirming that his decision to cancel the deal was necessary.
There was a ‘lack of transparency’ in the bidding process, with ‘inconsistencies in the treatment of bidders’, he added.
‘To be blunt, these initial findings make uncomfortable reading but they provide a necessary and welcome further step in sorting this out. The government will need to see the full and finished report before it can comment in detail on any conclusions.
‘In dealing with this, my department has been frank and open about its mistakes and is absolutely determined to find out exactly what happened.’
He added that the government would look carefully at the final report, and also the conclusions of a second review by Eurostar chair Richard Brown, to focus on wider lessons to be learned for the future rail franchising programme.
The government was making ‘good progress’ in its discussions with current franchisee Virgin on an extension to operate the line in the interim period before a new franchise is signed, McLoughlin added.
Laidlaw’s final report will be published by the end of November. The preliminary report looked at the process that led to the award of the franchise to First in August, and the flaws that required the decision to be cancelled earlier this month. The final report will include an in-depth analysis and lessons that can be learned.