The government’s botched award of the West Coast rail franchise is likely to cost the taxpayer almost £9m, the National Audit Office revealed today.
Mistakes by the Department for Transport in the tender process led to the £5.5bn contract award to First Group being scrapped in October, just before a legal challenge from incumbent operator Virgin Trains.
After examining the deal, auditors found that the franchise competition lacked proper management oversight, and the governance of the project was confused.
Their report, Lessons from cancelling the InterCity West Coast franchise competition, said the final cost to the department of cancelling the contract, and awarding an extension to Virgin this week, was not yet known. But it was ‘likely to be significant’, the NAO report concluded.
Current estimates are that it cost £1.9m to run the initial competition, and that the cancellation will lead to £2.7m being paid in legal fees and £4.3m on external advisers for two government commissioned reviews.
Refranchising the West Coast operation was a major endeavour, with considerable complexity and uncertainty, the report said.
However, none of five ‘essential safeguards’, which should be applied to avoid failure in major government projects, were adhered to. These include the agreement of clear objectives to help decision-makers make correct judgements, and strong project and programme management. There should also be both internal and external assurance to identify any areas of concern.
Departmental objectives were insufficiently clear during the competition, the report concluded, and there was a lack of strong management, in part due to ‘considerable turnover’ in senior positions. The DfT has had four permanent secretaries in two years.
The NAO’s examination comes the day after the publication of the first independent reviews into the cancellation, commissioned by ministers.
Centrica chief executive Sam Laidlaw’s examination found flaws in the methodology used to assess the risk capital needed by bidders.
Auditors agreed that calculation of the bond, which bidders had to provide to guarantee they would meet their promised franchise payments (the subordinated loan facility), was ‘a particular area of confusion’.
There were significant errors in the model the department used to calculate how big a loan it would require bidders to have. It had been designed to inform internal discussions and received no extra quality assurance before it was used to calculate the loan, a key commercial decision.
Auditor general Amyas Morse said; ‘Cancelling a major rail franchise competition at such a late stage is a clear sign of serious problems.’ The result is likely to be a significant cost to the taxpayer, he added.
‘The failure of essential safeguards raises questions about the department’s broader management approach, as well as this specific matter.It is commendable that, once it uncovered the problems on the franchise, the department sought to be open about what happened and to investigate further.’
Responding to the report, Transport Secretary Patrick McLoughlin said the NAO had made ‘a number of recommendations that mirror many of the findings of the Laidlaw Inquiry in terms of the work we need to do to strengthen our organisation and the structures within it’.
He added: ‘I am pleased to say that we are already taking swift action on this front and I believe the plans we are putting in place to ensure future franchise competitions are conducted on the basis of sound planning, the rigorous identification and oversight of risk, and the right quality assurance, will prevent a repeat of these lamentable failures.’
