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.


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

    Comment number 343.

    "How does gov run down private companies?"

    Dunno - the evidence actually seems quite sketchy.
    Further reading: http://en.wikipedia.org/wiki/Railways_Act_1921

    Beeching's supposed "destruction" or annihilation of the railway system is rather unbecoming for an engineer although Quentin Letts describes him merely as a "beancounter" ("Fifty People Who Buggered Up Britain").

  • rate this

    Comment number 342.


    How does gov run down private companies?

  • rate this

    Comment number 341.

    3rd October 2012 - 15:59
    @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.
    I can fly to Leeds, Drive to Leeds, get a Taxi to Leeds, a bus to Leeds, or go by Canal.

  • rate this

    Comment number 340.

    Rail problems stem back to Government running private railways into the ground during the wars, then using that excuse to Nationalise them. When I was at Railtrack the old pre war company areas were still recognisable, they should have been put back in place track & stock as private companies. Although I remember a Union official horrified when I suggested Unions ran them as Co-ops!

  • rate this

    Comment number 339.

    "Looks like it's time to privatise the civil service. We need people with real business acumen making these important financial decisions."

    Not really, we just need someone - anyone - who is trustworthy, honest and loyal to the best interests of the country and taxpayer.

    Civil Service is near-as-dammit privatised anyway.

  • rate this

    Comment number 338.

    327.Neil Postlethwaite
    2 Hours ago
    Also are the financial modelling figures for HS2 anything but pie in the sky rubbish too now ? Judicial Reiew for that too !! HS1's were total rubbish.
    that is why the stop HS2 campaign have engaged lawyers for a judicial review. They know the assumptions and the model forecasts are wrong.

  • rate this

    Comment number 337.

    I wonder if Greening will be catching the same train to Coventry as Mitchell next week?

  • rate this

    Comment number 336.

    Looks like it's time to privatise the civil service. We need people with real business acumen making these important financial decisions.

  • rate this

    Comment number 335.

    Interesting too, that in all the R4 interviews with Greening & others around the time of the announcement of the bid winner, the Beeb interviewers completely overlooked the fact that HS2 would have eventually undermined the WCML business.

    Meejah corrupt? Hmmn, maybe. Extremely incompetent at times: possibly ... er, ... probably.

  • rate this

    Comment number 334.

    325 Sutara
    It is always good in a healthy democracy when politicians hold there arms up and admit their mistakes
    But in this case the timing is important this would be coming to court about 1 year before an Election which would not be good and could even have been taking place right in the middle of a early Election
    This was more having there arm twisting than good wholesome honesty

  • rate this

    Comment number 333.

    I have yet to hear of a financial model that has been proved to be accurate. If you have would you please enlighten me. Consultants and so called experts have made a fortune by pulling the wool over our eyes. No doubt outside consultants were employed to assist in the construction of this model and the evalaution process.

  • rate this

    Comment number 332.

    Anarchists, of course, are never in charge.

  • rate this

    Comment number 331.


    The List...

    You forgot The REVOLUTION!

    I was expecting at the very least banksters swinging from the lamp posts by now...Anarchists in charge...

    Never mind, I'm sure something will happen. By 2100.

  • rate this

    Comment number 330.

    Thank heavens this whole process isnt open to the same corruption that we've seen in the banking industry, where 'the right people' are dropped into high ranking positions so that they can make decisions to benefit interested parties.

  • rate this

    Comment number 329.

    I mean she wasn't even in post for a whole year! And that's pretty typical of Gov't ministers.

    But it sure does boost the old pension up....clouds and silver linings

  • Comment number 328.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 327.

    ex Transport Secretary Justine Greening needs to be held up to public Scrutiny, as all this was done on her watch. She has been quietly sidelined to International Development - nice jollies round the world.

    Also are the financial modelling figures for HS2 anything but pie in the sky rubbish too now ? Judicial Reiew for that too !! HS1's were total rubbish.

  • Comment number 326.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 325.


    True, but it still must have been tempting - and he did do the 'right' thing.

    I'd happily see more politicians doing that.

    Currently, I mostly only see that in my dreams.

  • rate this

    Comment number 324.

    3 Minutes ago

    I mean she wasn't even in post for a whole year! And that's pretty typical of Gov't ministers.
    Sutara, surely you can't be asking for a government minister to be experienced and qualified for their job. That is expecting too much from a Westminster style govt? I bet you thought 'yes Minister'/'Yes Prime Minister' was a TV comedy - it was a documentary!


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