West Coast Main Line: Taxpayers 'at risk' in rail bid

A Virgin train Virgin Trains are the current holders of the West Coast Main Line franchise

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All bidders for the West Coast rail franchise were offering too little protection for taxpayers against potential losses, the BBC has learned.

The BBC's Robert Peston says all four bidders were given erroneous information by civil servants.

As a result, taxpayers would have been exposed to potential losses.

The decision to award the West Coast Main Line rail franchise to FirstGroup was scrapped because of "technical flaws" in the bidding process.

Writing in his blog, the BBC's business editor says that the "entire bidding process was flawed".

One consequence, he says, is that all the bidders were offering far too little protection to taxpayers against the risks of collapse by a franchise holder.

Therefore, if the mistake had not been picked up, taxpayers would have been excessively exposed to potential losses at some point during the 15-year life of the franchise.

The nature of the department's errors, with all the bidders given flawed data, explains why the Department for Transport has said it cannot be certain that the outcome of the bidding process would have been different if the process had been robust, Robert Peston adds.

This means that FirstGroup might still have won, which might make the company "marginally less hostile to the idea that Virgin may be asked to keep running the service for an additional 18 months to two years, until a new tendering process can be completed and the new franchise holder can be in place - because there is no evidence that Virgin as the incumbent would have had an advantage if the last contest had been run properly".

FirstGroup had beaten current operator Virgin Trains to win the 13-year franchise.

A spokesman for FirstGroup said: "We have not yet had the full and detailed briefing from the Department for Transport for us to understand exactly what happened and therefore, as you would expect, we are exploring all of our rights and options."

Financial models

The West Coast route serves 31 million passengers travelling between London, the West Midlands, the north-west of England, North Wales and the central belt of Scotland.

A decision on whether the franchise will stay with Virgin for an interim period, or go into temporary public ownership, will be taken in the next few days.

Civil servants construct their own financial model when preparing to award long-term contracts such as the West Coast Main Line franchise. This contains certain assumptions about what is likely to happen to important economic variables, such as inflation and passenger numbers, over the contract period.

West Coast Main Line franchise

  • 15 August 2012 Virgin Rail loses franchise as FirstGroup awarded it by Department for Transport
  • 26 August Virgin Rail boss Richard Branson offers to run franchise "for free" while process is reviewed
  • 28 August Virgin Rail launches legal challenge over contract process
  • 3 October Department for Transport unexpectedly scraps contract with FirstGroup after flaws in process discovered. Two reviews ordered, and process to be re-run
  • 9 December New contract for West Coast Main Line due to begin, lasting till 2026

The model helps the civil service and ministers evaluate bids against their own benchmarks, when those bids are submitted, and also helps the bidders to submit bids on a basis that allows them to be compared.

Robert Peston describes it as creating a "level playing field for the bidders".

The model produces what is known as a "ready reckoner" which tells each bidder the financial implications of their respective forecasts of how much they think they can increase revenues.

In particular, it tells a bidder how much capital its so-called Train Operating Company (TOC) would have to hold as a protection for taxpayers against the risk that in the course of operating the franchise the TOC went bust or risked going bust.

To minimise this risk, of all the bidders are told that they have to endow the TOC with sufficient capital to protect taxpayers from potential losses.

Bidding implications

But the Department for Transport recently discovered that the capital protection being offered was far too little.

That was because of flawed assumptions in the department's own model about what would happen to inflation and passenger numbers - which in turn meant that the "ready reckoner" given to bidders was wrong.

And the department's mistakes meant that all the bids were offering far too little protection to taxpayers against the possibility of a franchise holder being unable to hold the franchise for the full 15 years.

Robert Peston adds that the implications of this situation are serious for the whole process of tendering for rail franchises.

It explains why the department has suspended the competitions to run the Great Western, Essex Thameside and Thameslink services, just in case the financial models underpinning those contests are flawed in a similar way, he adds.

West Coast Mainline map

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