4 Oct 2012

Signal failure at the Transport Department

Right now we don’t even know who will be running the west coast mainline trains in two months time, but today more questions about who is to blame…

Right now we don’t even know who will be running the west coast mainline trains in two months time, but today more questions about who is to blame…

Yesterday we were told that the responsibility for this epic rail failure lay with some relatively junior civil servants. But we’ve seen a report, provided to the department, including ministers, which identified precisely the problem with bid risk calculations. It was sent to the department two months ago, five days before the botched award of the contract to FirstGroup. So who knew about it and when?

The report, by Europa Partners for Virgin, did go to the then ministers at the transport department. Its author Rupert Darwall today took me through the bid process that went so badly for the government. He said the process seemed designed to pick the bidder “most likely to go bust”, and provided an incentive for “financial doping” – providing overinflated estimates of passenger numbers, ticket revenues, and economic projections such as GDP and inflation.

Flawed timing

The timing is interesting. On 10 August the department was told of these fundamental flaws in the report. An expected announcement was delayed four days later. But on the 15th August, FirstGroup was awarded the franchise, mistakenly. That was followed by the move for judicial review, before accountants PWC were called to audit the numbers by Justine Greening, the ex- transport secretary. But the report confirming problems emerged after the cabinet reshuffle last month, so did Justine Greening know that the bid maths were faulty while in office?

To get to the bottom of the problem you need to understand what the bids actually are. Massive spreadsheets for each bidder, including their own GDP and inflation predictions into 2026. Clearly such projections are risible as bases for this decision, as the OBR has shown it can’t even predict two years. I’d have expected a constant economic projection underpinning all the bids. Bafflingly, this does not happen.

Face value

So, the spreadsheets become a massive black hole, a game, where the winner needs to come out with the highest projected payments to government. I did get to see some notes for the bidders. They show that the economic assumptions were only be to checked at a late stage, when the transport department calculated the size of the security paid by the bidder – the so-called risk bond. It is highly likely that no senior officials saw the core numbers behind the bid until Sir Richard Branson went to the courts.

Mr Darwall believes that it is remarkable that most of the bidder numbers were simply taken at face value by the department. But what basis is there for sound judgment over revenues from 2021-26, required because the government extended the franchise period?

So questions, yes, about the civil servant’s numbers, but also why was this signal failure was not picked up earlier?

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