A preliminary report by Sam Laidlaw published on 29th October into the Department for Transport’s handling of the bidding process for the West Coast Mainline franchise raises serious concerns. A final report will be made at the end of November.
Among the report’s initial findings we read of the following:
“The DfT was aware of a lack of transparency in the SLF [subordinated loan facility] process and decided nonetheless to continue with the ICWC [InterCity West Coast] franchise process and to accept the risk of a bidder challenge.”
The subordinated loan facility is the key part of the risk capital that bidders would have to agree to forfeit if they failed to meet the terms of their contract. The DfT was aware in the first quarter of 2012 that there was a risk of a bidder challenge.
“The amount of the SLF ultimately required by the DfT in respect of the two leading bids was not determined in compliance with the DfT’s own SLF Guidance.”
“The DfT’s ultimate determination of the level of SLF required in respect of the bids of First and Virgin was influenced by extraneous factors with the result that the bidders were treated inconsistently.”
The report suggests some contributing factors which included:
“There is a body of evidence that strongly suggests that the DfT’s approach to the evaluation of the financial robustness of bids in the ICWC franchise process was developed late, in a hurry and without proper planning and preparation.”
“As a general observation, the organisation [DfT] has undergone a significant reduction in size accompanied by frequent changes of leadership at a time when the DfT’s agenda has been expanding.”
“There were a number of significant projects running concurrently with the ICWC franchise competition that resulted in resource at the DfT being stretched.”
The initial report can be found here:
Let us then go back to the meeting of the Transport Select Committee on 11th September at which Patrick McLoughlin [Secretary of State for Transport] and Philip Rutnam [Permanent Secretary, DfT] were questioned in relation to the bidding process for the West Coast Mainline. Patrick McLoughlin had only taken up this role eight days earlier, so we will look more at Philip Rutnam’s responses.
Mr Rutnam commented as follows:
“The process that we are adopting in this round of refranchising has developed from the process that was used by previous Administrations in franchising, in that we are trying to take a more sophisticated and more evidence-based approach to the assessment of risk. That involves more detailed financial models being supplied by bidders and a more detailed scrutiny of those financial models by the Department.”
“That is what happened in the case of the West Coast. The process as described in the
documentation was followed.”
In view of the initial findings of the Laidlaw report this comments appears to be seriously misleading.
“We are always looking to make sure that our methodology is absolutely the best that we can make it………..”
Further detail is available here:
On 28th August, after Virgin announced its legal challenge to the DfT with regard to the West Coast Mainline bidding process, the then Secretary of State Justine Greening advised that :
“We will defend the robustness of the process.”
It now appears that virtually all the claims made by Virgin to substantiate their legal challenge have been vindicated by the Laidlaw report.
Unfortunately the DfT has “form” regarding its ability to perform its responsibilities well. When senior civil servants from the DfT came before the Public Accounts committee to discuss the sale of High Speed One on 18th April 2012, they were significantly challenged on
- Their ability to accurately forecast passenger numbers
- Their presumption that there would be no price premium for HS2 fares
- The value for money of HS2
- The lack of an evaluation framework for HS1 or HS2
- The value of time for business travellers
Several answers did not meet the satisfaction of the Chair of the Public Accounts Committee.
Consider the consultation held into HS2 in 2011. There have been two batches of responses which were “lost”; these totalled more than 1100 responses. More significantly the vast majority of respondents opposed HS2, but the DfT still decided to press ahead anyway.
So what can we conclude from this? The Department for Transport is overstretched; it does not follow its own guidance and is ill prepared. It appears to be willing to mislead. Most seriously, it appears to be willing to take risks with taxpayers’ money which in the case of the WCML franchise bidding process are likely to result in a cost of £40 million, but probably a great deal more. When it comes to HS2, the DfT appears to be set on pressing ahead despite the absence of a credible business case or environmental case. However the risk here is far greater; the amount in question is measured in tens of billions of pounds.
If the DfT was a private company, would you invest in it? Almost certainly not. But as it is a government department, we have no option.