What derailed the Transport Department

 
Sir Richard Branson Sir Richard Branson's Virgin fought the Department's decision to award the franchise to First Group

In awarding a contract to run a public service, such as a railway, there is a balance to be struck between making the contract long enough to encourage serious investment and not so long that the forecasts built into bids for the contract become highly speculative.

What the Department for Transport appears to have got chronically wrong in the case of the West Coast Main Line franchise is its assessment of the risk that attaches to projections by bidders of revenues in the latter years of the 15-year franchise.

To put it in terms that we can all understand, if I expect to earn a pound from my work tomorrow, that pound is much more likely to materialise than a pound that I might expect to earn in 2025 (if anyone will still employ me then).

By extension, when First Group and Virgin made their bids to run the line that connects London with Manchester and Glasgow, it would have been reasonable to expect the Department for Transport to put a much greater weight on revenues the companies expect to generate in the first five to ten years than in the latter five years.

However the Department seems to have understated the long-term risks when awarding the contract to First Group.

Or to put it another way, the Department made unrealistic assumptions about the growth of passenger numbers and inflation towards the back end of the franchise period - which had the effect of making First Group's bid seem significantly more attractive, because First Group was massively more optimistic about how passengers and revenues could grow after 2021 than was Virgin.

This error seems to have occurred both when Virgin was eliminated from the bidding contest, and when First Group's bid was reassessed against the Department's own forecasting model for future revenues.

The basic point is that although there are powerful arguments for awarding longer term contracts, so that the successful bidder has an incentive to spend serious money on the best kit, a healthy scepticism needs to be attached to forecasts of the health of the economy and of the relevant public service over a time period as long as three parliaments.

Without such healthy scepticism, the government would tend to demand too little in the way of guaranteed money for taxpayers from bidders who are particularly optimistic about long-term prospects.

UPDATE 16:20 BST

Rarely if ever in the history of private provision of public services has there been such a bungle by Whitehall in the awarding of a highly valuable and important contract.

There appear to have been two giant errors by the Department for Transport in the way it adjudicated on who should receive the 15 year contract to run the West Coast Main Line.

First it unfairly discriminated against the incumbent, Virgin, by attaching far too great a probability to the projections by the rival bidder First Group that its revenues in the later years of the contract would be much bigger than Virgin's.

This mistake was compounded in the department's own internal forecasting model, which also attached too little risk to the possibility that passenger numbers and inflation would be significantly different from what First Group was projecting after 2021.

As a result, the government demanded too little guaranteed money for taxpayers from First Group.

But perhaps all this can be forgiven as an unfortunate technical error. What is perhaps more shocking is that Virgin has been complaining about the flaws in the bidding process for months, and yet the government pressed on with awarding the contract to First Group.

It was only after Virgin demanded a judicial review - after it sued - that the department was forced to acknowledge that it had made an egregious error.

Junior heads may now roll - in that three department officials have been suspended. But some would say that it is incumbent on the permanent secretary, Philip Rutnam, and the previous transport secretary, Justine Greening - reshuffled out only last month - to explain how they came so close to awarding a contract worth around £5bn on such a flawed basis.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 43.

    The wonderfull truth about competition within the rail industry.
    Micheal gove be warned we are all watching!

  • rate this
    0

    Comment number 42.

    21.ComradeOgilvy

    "Rail is not a good candidate for privatisation."

    I disagree. The same was once said about telecomms yet de-regulation of the sclerotic GPO spawned myriad of companies, some better than the others, and sped up innovation and service levels.

    You need to have the underlying monopoly (Network Rail = BT Openreach) and create even playing field for all entrants, not just one.

  • rate this
    +2

    Comment number 41.

    Just heard the Taxpayers Alliance complaining about £40m going down the pan! They would be the first to complain if high salaries were paid by the Civil service to attract the best people. The fact that we don't do that means that contractual cock ups will continue to cost the taxpayer a huge multiple of savings made on squeezing civil service salaries. If you pay peanuts you get monkeys

  • rate this
    0

    Comment number 40.

    Questions:

    If Virgin were able to (rightly) challenge the original decision, can First Group challenge the decision if the Government ask Virgin to continue to run the franchise?

    Will this mean even more expensive court cases?

  • rate this
    +3

    Comment number 39.

    @33, the minister is meant to know enough to be able to read and understand the report. The fact that Greening appears to have not understood the report and signed it anyway lays equal blame with the minister.

    Ministers are responsible for their departments. The buck stops either with them or PM.

    Honestly, I'm tired of the "well the civil servant did it, I'm fine here" of this administration.

  • rate this
    +1

    Comment number 38.

    To use the time-honoured method of assessment.....FAIL! Fundamentally, they don't know what they are doing and so £40m down the pan. Is someone carrying the can for this cause it's incompetence full stop!

  • rate this
    +24

    Comment number 37.

    I truly shudder to think what goes on in Defense tendering.

  • rate this
    0

    Comment number 36.

    #26 Bruce, I'm sure that the previous minister did sign off this before it was announced, however do you imagine that they sit on the assessment panels or compare the reams of documentation that form each submission? They simply use the data provided by their staff as a summary and endorse the selected route.
    Also please note "previous" minister, Justine Greening has already moved on

  • rate this
    -7

    Comment number 35.

    Sadly these privatizations are done for one reason and one reason only, which is the only one that makes sense, which is to break the power of the unions over the service. In other countries which see social disparity for the corrosive influence that it is, rail services are much better and much cheaper.

    Want better train services? Pay more tax, close tax havens, focus on society.

  • rate this
    +2

    Comment number 34.

    So if I guarantee to lose millions for the first 15 years, but make billions in the last 5 minutes - I will get the franchise?

    Surely the projected figures to use are the Governments own (as they should be the most accurate). You can then level the playing field by letting all the competitors know what they are.

  • rate this
    +2

    Comment number 33.

    #13 whilst it may be PR, this time it does seem to be correct. Sadly it is also depressingly familiar. There are plenty of examples from the Lab govt, where projects were administered dreadfully (NHS IT). It is not the minister's fault, he/she acts based on recommendations from the Civil Services and all too often it is the civil service at fault

  • rate this
    +3

    Comment number 32.

    The basis of privatisation is competition. Once a franchise has been won by making dubious promises to gullible civil servants, a monopoly exists on the railway route concerned. How can this possibly make sense?

  • rate this
    +2

    Comment number 31.

    @28.trainfare
    I suspect a larger cut would have helped. Fewer people assuming someone else had done what they were supposed to.
    What caused this was rank incompetence possibly overshadowed/aided by a back hander to ensure that the bid went a certain way.

  • rate this
    +3

    Comment number 30.

    Robert Peston strikes again, clearly explaining a complex financial subject in terms we can readily understand. Thank you!

  • rate this
    -3

    Comment number 29.

    @26, "accountability" according to this Gvt seems to be "knowing who to sack to cover one's rear*.

    Is that better than the previous gvt's "sacked under guise of resignation"?

    I know which one I prefer, but doesn't address the fundamental problem of each gvt using it's own interpretations of the non-binding ministerial code and non-existent constitution.

    Easy to fix, though..

  • rate this
    -6

    Comment number 28.

    Can't help but wonder whether an imposed 33% cut in DfT staff since 2010 has played a part in this?

  • rate this
    +21

    Comment number 27.

    Kudos to Richard Branson for sticking to his guns and forcing the issue....without his tenacity this deal would no doubt have stayed in place with any negative consequences for the traveller and the taxpayer not evident until everyone involved in the decision was cosily tucked up in the House of Lords.

  • rate this
    +2

    Comment number 26.

    As I assume that the goverment minister had to sign this off can anyone tell me why they are still in a job?

  • rate this
    0

    Comment number 25.

    Flybymike. Thanks for the reply!

    Why is it impossible for a publicly owned utility to do the same then? The private company have to grow business so that they can cover the shareholders profit, plus some. Why not run the publicly owned utilites using the same practices that apparently make private companies so efficient.

  • rate this
    +3

    Comment number 24.

    Plan for the worst, hope for the best.

    That snippet of wisdom seems lost on successive governments and the senior civil service.

    When one bid, and the team assessing the contract, plan for the best, something's going to give.

    Getting tired of First Group and their "cheap" prices here in Southampton, too.

 

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