4 Oct 2012

How a flawed process sank the government’s rail strategy

Five days before before the new west coast main line franchise announcement, ministers were sent a report exposing flaws in the process. Was that report ignored because it was commissioned by Virgin?

It was the process that sank the government’s rail strategy. While the figures may have made matters worse, the west coast franchise award to FirstGroup had to be abandoned because the entire process turned out to be illegal.

Five days before the announcement on who would run the west coast main line, a report was sent to ministers at the Department for Transport. It exposed the flaws in the rail franchise operation – flaws that have now halted the whole process, flaws that have cost the taxpayer at least £40m.

Yesterday we were told that responsibility for this epic “rail fail” lay with three relatively junior civil servants.

Problem identified

Today Channel 4 News has seen a report that was sent to the Department for Transport’s most senior civil servants. It identifies precisely the problem admitted to yesterday – but two months ago, five days before the award of the contract. So who knew about this? And when?

The report, by Europa Partners for Virgin, went to the then ministers at the transport department.

Its author, Rupert Darwall, told Channel 4 News his first impression of the bid process was that it was very complicated and hard to understand.

“It seemed geared to selecting the bid most at risk of going bust,” said Mr Darwall. “And so risk appraisal was absolutely essential to the integrity of the process – and proper risk analysis was not at the centre of the appraisal.”

On 10 August, the department was told of fundamental flaws in the bid process, identified in the report. An expected announcement was delayed four days later.

Cabinet reshuffle

But on 15 August, FirstGroup was awarded the franchise. Accountants PWC were called to audit the numbers by the then transport secretary, Justine Greening. The report confirming problems emerged after the cabinet reshuffle last month.

The core of each bid were giant spreadsheets, which were projections from each bidder of ticket revenues, passenger numbers, and investment plans.

But not just that. They also projected the economy: GDP and inflation up until 2026. The spreadsheets were a giant “black box”, a game where the outcome was to promise the most amount of money, some time in the future, to the government.

Notes for the bidders, obtained by Channel 4 News, show that the economic assumptions were only checked at a late stage, when the transport department calculated the size of the security paid by the bidder – the so-called risk bond.

The key for the Department for Transport was to spot the risks in the bids – and that is where the error came.