The derailing of a department

Tuesday 30 October 2012

BY re-running the competition for the West Coast Main Line (WCML) rail franchise, the Department for Transport (DfT) has already admitted the original process was disastrously flawed.

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The interim report by Sam Laidlaw, chief executive of Centrica, into the fiasco reveals a government department which broke its own rules and took shortcuts to meet a tight deadline. Any rail franchise is a highly complex financial forecasting exercise. The 13-year WCML contract, however, covered a longer timescale than previous bids, posing significantly higher risks in determining future levels of demand and costs. It also had a very tight deadline because the existing franchise expired in December this year and the new one had to be awarded in August. It is clear that the DfT was simply unable to meet these challenges. In the time frame available, it was not able to develop a modelling tool for specifically determining the loan funding risk of the bidders. Instead it used its own internal system but was unable to reveal this to the bidders. This meant there was a lack of transparency which risked a legal challenge but in a decision which suggests a lack of experience, the department decided to go ahead with the flawed system and risk it being challenged.

The bidders were not provided with adequate information to determine the best capital structure for their bids. In effect they were bidding blind because risk adjustments to cost and revenue projections were made by the DfT after the bids were submitted. The report highlights a number of far-reaching technical flaws but most serious is the fact the department's calculations did not comply with its own guidance.It told bidders it would use one model for calculating funding required but used another. The additional factors taken into account also meant the two main bidders, FirstGroup and Virgin, were not treated even-handedly. Mr Laidlaw's inquiry is yet to publish its final report but on the evidence now available it is clear that the current rail franchise system requires a radical overhaul. The report identifies "potentially significant issues about the ability of the DfT effectively to conduct rail franchise competitions". The catalogue of inadequacy, incompetence and failure raises questions which go beyond the immediate issue of awarding rail franchises. The report notes that a number of senior, experienced individuals had left prior to important stages of the franchise process. At the same time, the department had significantly reduced the use of external financial advisers. Not only was the process carried out by inexperienced staff but the framework for oversight through committees and governing boards was unclear, so the departure from the authorised procedure was not referred to a higher authority.Transport is not the only government department to have undergone a significant reduction in size and frequent changes in leadership at a time when its agenda is expanding. A similar loss of continuity and experience is mirrored across much of the civil service as a result of government cuts. Mr Laidlaw's final report promises to outline lessons. It is already clear that they must be acted on swiftly.

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The derailing of a department

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