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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 63.

    @Exiledblade56

    To simplify for you...
    6 month Wait
    No other vendors handsets could be attached.
    Desperately poor choice of handsets from sole source:GPO

    Where you drag the other stuff from I don't know.

  • rate this
    +2

    Comment number 62.

    This government has boasted about the numbers of civil servants it has cut. Many senior and experienced civil servants rushed to take redundancy and left on very good terms early in the life of the coalition. We need to know exactly who screwed up here and how, but my guess is that i. ministers are at fault ii. if so, this incompetent government will do everything possible to avoid admitting it.

  • rate this
    +1

    Comment number 61.

    I smell "corruption" in high places

  • rate this
    -5

    Comment number 60.

    I am no lover of Mr Branson, not enough grey hair for reality. But he has the cajones to first square up to government cartel of BA and win, now he has squared up to dept of transport smoke filled room behaviours and looks like another result. Both times this occured was when the government promoted markets as their preferred way of doing business. Brind on Red Ed get this omnishambles out

  • rate this
    +2

    Comment number 59.

    Did the bid process involve anyone just using the trains of both companies in all situations over,say, a month or so and gaining a general impression of how the companies performed, how the customers felt about the service, the general feel? That should be a major component of the process.....or am I naive?

  • rate this
    +2

    Comment number 58.

    The £40m bill for this foul up is as nothing compared to the £30 billion plus to be spent on HS2; a project whose justification rests largely on highly questionable Department of Transport projections of passenger numbers and business hours saved. I'd rather rely on a taxpayer funded astrologer.

  • rate this
    -3

    Comment number 57.

    Thats another 40 million wasted on private enterprise.
    renationalise now, then we can keep the money we make from the railways or use it to lower fares. If branson wants it so bad it must be worth having.

  • rate this
    +2

    Comment number 56.

    #50 - absolutely right Gusgog! How dare the GPO in 1973 not offer you Broadband, Fax and email facilities! Disgraceful!
    But wasn't Betamax developed by private enterprise???

  • rate this
    +2

    Comment number 55.

    @6. ComradeOgilvy "Opened up markets don't promote efficiency. They promote lying and cheating for the profit. Who's most to blame? Lying executives, or conniving officials?"

    MOST to blame are the self-serving Ministers - who do dodgy deals with lying executives and instruct/encourage officials to connive.

    Now see this dodgy Govt try to blame civil servants, to get yet more power over them...

  • rate this
    +10

    Comment number 54.

    Henry Quimper

    Was this the same government minister who told the House of Commons on the 12th September that he was satisfied all bids were considered fairly and with "due diligence"? This only came to light because Virgin went to court and some "incompetent" civil servant told the minister the government would lose the case. Honesty from ministers? Get real, he knew it would come out in court.

  • rate this
    +1

    Comment number 53.

    I would have thought that it would have been relatively simple to evaluate both of the two final contenders using the same forward assumptions? Run Virgin's assumptions through the FG bid profile and vice-versa and so require each to restructure their bids on the two different assumptions to see which is better in each scenario? Then the position becomes much clearer and this mess avoided

  • rate this
    0

    Comment number 52.

    Seriously the risk/reward is all over the place here - Civil Servants should lose their jobs and pensions for this, Greening you wouldn't trust with the housekeeping, privatising a natural monopoly for ideological reasons? insane. The issue is one of management competence private or government, to which sacking is the normal response whatever the organisation.

  • rate this
    +1

    Comment number 51.

    No whatgoon.

    You can only challenge a decision that is clearly wrong / flawed. If the decision is not clearly wrong / flawed, a court cannot stop it.

    The fault lies with some as yet unknown civil servants and politicians. An inquiry should reveal who these nitwits are and permit the necessary retribution against these people.

    All this shows is that Branson is still a really nice guy.

  • rate this
    0

    Comment number 50.

    For those extolling the virtues of nationalisation, lets look at the GPO circa 1973 when my parents went on the waiting list (6 months) to have a telephone line installed. You could only attach a GPO phone. The choice was: Cream or Red (1950's model) with analogue dial or the dreadful Trimphone in bile green or grey.
    Do we really want that again?

  • rate this
    +1

    Comment number 49.

    I thought the Government mandated Gateway reviews for this sort of spend. This process should have been checked and signed off at every step.

  • rate this
    +3

    Comment number 48.

    @42 there is no competition though so your wrong on that. one company is going to get to run the west coast main line for 15 years and no one else can get a look in. so there can be no competition for better service or innovation as you are going on about.

  • rate this
    +1

    Comment number 47.

    Whilst we take stock on this mess up can we please refrain from a Virgin/Branson 'Love In?' First Group have every right to be disappointed and every right to compete, as have other companies. Otherwise Virgin will just have a clear run for ever on the back of their wondrous PR machine.

  • rate this
    0

    Comment number 46.

    25 Seymour Tutti, You would like to think they could but in practice because they are a part of government get bogged down in all sorts of nonsense. This example of the inability to assess 1 tender is a prime example.
    There is no ultimate accountability in Gvt. Ultimately Virgin could go bust if it gets it wrong. The civil service struggle with the decision making process to get best results.

  • rate this
    +3

    Comment number 45.

    42.TI

    Telecoms remained poor until mobile telephony, internet and cable services introduced competition from outside.

    The equivalent for rail might be road, but rail is not starting in a comparably dominant position.

  • rate this
    +3

    Comment number 44.

    What a shocking way to run a government. The civil servant is there to support the Minister, not to be the fall guy when it all goes wrong. It only took a couple of paragraphs for Robert Peston to explain this in a way that an idiot could understand so how stupid must Greening be?

 

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