DfT ignored own guidelines when awarding train franchise

Adam Leach is a freelance business journalist
posted by Adam Leach
31 October 2012

The Department for Transport’s (DfT’s) failed effort to award the franchise for the West Coast Main Line was riddled with flaws, an interim report has found.

The study, commissioned by the DfT and conducted by Centrica CEO Sam Laidlaw, identified a lack of transparency, technical flaws in its calculation of risk and inconsistent treatment of bidders as among the problems.

Reporting his interim findings into the current process, which was cancelled last month, Laidlaw said it is too early to draw strong conclusions, but there was a series of flaws in how the process calculated risk. One of the main reasons Virgin Trains challenged the government’s selection of FirstGroup was concern that inflation and changing passenger numbers had not been factored into the risk calculation. 

Laidlaw confirmed that the amount of Subordinated Loan Facility (SLF) – the amount of money that bidders were required to provide the government with for the bid – was “not calculated in compliance with department’s own published guidance”. He also said there were “inconsistencies” in the way the two leading bidders, FirstGroup and Virgin Trains, were treated with respect to SLF.

Furthermore, he reported that the department was aware that it had not operated in a sufficiently transparent fashion over the SLF, but carried on with the bidding process and accepted the risk of a bidder challenge. In a note to accompany the report, Laidlaw 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.”

As a result of the cancelled award of the franchise, Virgin Trains will continue to operate the West Coast Main Line, which runs from Glasgow to London, until a new bidding process has been completed. The full findings of the review by Laidlaw will be published shortly.

Update: DfT broke competition rules over West Coast Main Line 

7 December 2012 

The Department for Transport (DfT) broke franchise competition rules when calculating the amount of risk capital bidders were required to commit to, a report has said.

In his final report into the West Coast Main Line franchise award, published yesterday, Sam Laidlaw, CEO at Centrica, confirmed his initial finding that DfT had used a flawed methodology to calculate the amount of capital that bidders must offer to secure the franchise. However, he further found that this error was compounded when it varied the figures between bidders, which broke franchise competition rules. 

Transport secretary, Patrick McCloughlin, said: “The final report from the Laidlaw inquiry makes extremely uncomfortable reading for the department. It has identified precisely what went wrong, revealing serious failures, as well as offering us a number of sensible recommendations to put things right.” 

Laidlaw recommended that the DfT simplify its governance process for franchise competitions, appoint a single director responsible for all rail policy and franchising, and improve the internal skills mix, while also using external advisers where necessary. 

DfT said it will implement the recommendations in full.

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