DfT was aware of risk of legal challenge over West Coast franchise: report

The Department for Transport was aware that a lack of transparency in the competition to run the West Coast Main Line meant it risked a legal challenge but decided to continue anyway, the head of an independent review has said.

In a report on his initial findings, submitted to Transport Secretary Patrick McLoughlin, Sam Laidlaw said an accumulation of “significant errors” resulted in a flawed process for the competition.

At the heart of the problems was the issue of the required subordinated loan facility (SLF), risk capital that the operator would forfeit if they walked away from the franchise.

Laidlaw's initial findings were that:

  • The DfT was aware of a lack of transparency in the process for determining the level of required SLF and decided nonetheless to continue with the InterCity West Coast franchise process and to accept the risk of a bidder challenge.
  • Bidders in the ICWC franchise process were not provided with adequate information reliably to predict the likely size of any SLF requirement to be imposed by the DfT. “This made it difficult for bidders properly to determine the optimal capital structure for their bids.”
  • The amount of the SLF ultimately required by the DfT in respect of the two leading bids was not determined in compliance with the DfT’s own published guidance.
  • The DfT’s ultimate determination of the level of SLF required in respect of the two leading bids was influenced by extraneous factors with the result that the bidders were treated inconsistently.
  • The model that the DfT told bidders it would use – but did not ultimately use – to determine the level of the SLF that it required in respect of the two leading bids provided numbers in real terms which were used by the DfT as if they were in nominal terms. “Had they been converted to nominal terms as they should have been, significantly increased SLF levels would have been required.”

The report said that a variety of factors, operating together, appeared to have caused or contributed to the issues raised in these initial findings.

These were:

  1. The inadequacy of the planning and preparation undertaken in respect of the financial risk evaluation of bids for the ICWC franchise, including during the period prior to the release of the Invitation to Tender on 20 January 2012;
  2. The novelty of the risk transfer arrangements and their introduction in the particularly challenging context of the complex ICWC franchise;
  3. The matrix organisational structure of the DfT and a lack of clarity and continuity in roles and responsibilities;
  4. The significant resourcing challenges faced by the DfT during the ICWC franchise process;
  5. The lack of efficacy of the applicable governance framework; and
  6. The inadequacy of the quality assurance processes.

Laidlaw said: “In the limited time available this is necessarily only a preliminary report. What is clear however is that in seeking to run a complex and novel franchising competition process, an accumulation of significant errors, described in the report, resulted in a flawed process.

“These errors appear to have been caused by factors including inadequate planning and preparation, a complex organisational structure and a weak governance and quality assurance framework. The full causes and the lessons to be learnt will be addressed in the final report of my independent Inquiry to be published at the end of November.

“Firm judgments should not be made based upon what are provisional findings or wider conclusions drawn at this stage.”

The Transport Secretary announced on 3 October the cancellation of the competition to run the InterCity West Coast franchise after the discovery of “unacceptable flaws” in the procurement process. The award of the contract to First Group had been the subject of a judicial review challenge by Virgin.

In a written ministerial statement this week, McLoughlin said: “To be blunt, these initial findings make uncomfortable reading but they provide a necessary and welcome further step in sorting this out.

“The Government will need to see the full and finished report before it can comment in detail on any conclusions.”

A copy of the Initial Findings Report can be found here.