The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“The Department for Transport’s complete lack of common sense in the way it ran the West Coast franchise competition has landed the taxpayer with a bill of £50 million at the very least. If you factor in the cost of delays to investment on the line, and the potential knock-on effect on other franchise competitions, then the final cost to the taxpayer will be very much larger.
“The Department made fundamental errors in calculating the level of risk capital it would require bidders to put on the table and it did not demand appropriate levels of capital from both bidders. Faced with the possibility of legal challenge, it cancelled the competition.
“The franchising process was littered with basic errors. The department yet again failed to learn from previous disasters, like the Metronet contract. It failed to heed advice from its lawyers. It failed to respond appropriately to early warning signs that things were going wrong.
“Senior management did not have proper oversight of the project. Cuts in staffing and in consultancy budgets contributed to a lack of key skills.
“The project suffered from a lack of leadership. There was no single person responsible from beginning to end and, therefore, no one who had to live with the consequences of bad policy decisions. For three months, there was no single person in charge at all. Not only that, there was no senior civil servant in the team responsible for the work, despite the critical importance of this multi-billion pound franchise.
“We are astonished that the Permanent Secretary did not oversee the project because he was told he could not see all the information which might have enabled him to challenge the processes, although it was one of the most important tasks for which the department is responsible.
"Given that the Department got it so wrong over this competition, we must feel concern over how properly it will handle future projects, including HS2 and Thameslink. The Department needs to get its house in order and put basic principles and practices at the heart of what it does, with an appropriately qualified and senior person in charge of the project throughout and an accessible leadership team ready and willing to hear and act on warning signs.”
Margaret Hodge was speaking as the Committee published its 31st Report of this Session which, on the basis of evidence from the Department for Transport, examined the cancellation of the InterCity West Coast franchise competition.
On 3 October 2012, the Department for Transport (the Department), cancelled its decision to award the InterCity West Coast franchise to First Group due to errors in the procurement process. The Department’s failure to properly manage the competition will directly cost taxpayers at least £50 million, the majority of which will be spent on compensating bidders. There is also a significant opportunity cost resulting from delays in investment in the franchise.
The Department spent £1.9 million on staff costs and external advisers to run the franchise competition—significantly less than the estimated £10 million each bidder spent on their bids. The Department’s attempt to make cost savings in running the competition, for example by not employing external financial advisers, ended up costing the taxpayer tens of millions of pounds. These figures relate only to the West Coast Franchise. It is not yet clear whether other franchise competitions will be affected.
Failures in the process
The Intercity West Coast competition failed because the Department did not get basic processes right and had failed to learn from mistakes made in previous projects. Recommendations made in our 2010 report 'The failure of Metronet' (PDF 356 KB) to prevent a lack of oversight and information were clearly not applied in this competition. We are concerned the Department could yet again fail to apply basic processes, which could affect its future projects, including HS2 and Thameslink.
The Department made a number of mistakes when identifying the amount of risk capital (called the subordinated loan facility) it required from bidders to balance the riskiness of their bid. It failed to include inflation in its calculation and also applied discretion in deciding the amount it asked from bidders which was not allowed in the stated process.
These errors led to the Department asking First Group for a lower subordinated loan facility than was needed to protect itself from the recognised additional risk in the bid. A higher subordinated loan facility was requested from Virgin Trains. This opened the Department to the risk of legal challenge and ultimately led to the cancellation of the franchise competition.
Responsibility for the project
There was a lack of line management and leadership on the project. This project had no single SRO (Senior Responsible Owner) who was responsible for the project from beginning to end. The Department divided responsibility between developing the policy and implementing the competition.
Confusion in the handover between the SROs at the policy and implementation stages, which was meant to happen when the invitation to tender was issued, led to a situation where no SRO was in place for three months. Lack of leadership was made worse by the Department’s unique application by General Counsel and others of anonymity for bidders in the franchise competition. As a consequence, the Permanent Secretary was deliberately not allowed to see the details of the competition and commercially confidential information.
Despite warning signs, including from industry, the Department’s senior management did not sufficiently probe the information provided by the project team. They failed to apply common sense and challenge the outcome of the competition.