Transport secretary announces competition has been cancelled following discovery of flaws in franchise process
The future running of one of Britain’s most prestigious and lucrative rail services, the West Coast main line, was thrown wide open after the transport secretary, Patrick McLoughlin, announced that the competition had been cancelled following the discovery of significant technical flaws in the franchise process.
The news could potentially put other franchises due to be settled in the next two years on hold and will raise questions over the whole system, with unions and Labour considering calling for renationalisation.
The shock move means that the Department for Transport will no longer be awarding a franchise contract when Virgin’s current one expires on 9 December, and will not contest the judicial review that Sir Richard Branson’s firm sought in the high court.
In a climbdown that appears to vindicate Virgin’s angry reaction to losing the franchise on 15 August, the DfT has indicated key staff will be suspended, apparently for incorrectly calculating the risk involved in the winning bid.
A spokesman for FirstGroup, which had been awarded the franchise, said: “We are extremely disappointed to learn this news and await the outcome of the DfT’s inquiries. The DfT have made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT’s terms.
“Our bid would have delivered a better deal for West Coast passengers, the taxpayer and an appropriate return for shareholders.”
The DfT said it had uncovered serious flaws in the procurement process. FirstGroup’s winning bid, with payments heavily loaded towards the back end of the 13-year franchise, offered premiums far in excess of the bond it was offering as security. Virgin had described the winning bid as a recipe for bankruptcy.
An investigation will be conducted by the department, which is likely to speed ahead with plans to pass the running of the West Coast line into the hands of state-owned company Directly Operated Railways to ensure that train services continue uninterrupted.
McLoughlin said passengers would continue to be served by the same trains and frontline staff. The transport secretary has ordered two independent reviews to be undertaken urgently: the first into what went wrong with the West Coast competition and the lessons to be learned, the second into the wider DfT rail franchise programme.
McLoughlin has asked officials to examine the options for the operation of the service after 9 December taking into account procurement and competition law. Meanwhile he has frozen all other outstanding franchise competitions – Great Western, Essex Thameside and Thameslink – pending the independent reviews, which the Dft hopes will ensure future competitions are robust.
McLoughlin said: “I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process.
“A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held.
“I have ordered two independent reviews to look urgently and thoroughly into the matter so that we know what exactly happened and how we can make sure our rail franchise programme is fit for purpose.”
He added: “West Coast passengers can rest assured that while we seek urgently to resolve the future arrangements the trains that run now will continue to run, with the same drivers, the same staff and timetables as planned. The tickets that people have booked will continue to be valid and passengers will be able to make their journeys as planned.”
The most senior civil servant at the department, Philip Rutnam, said: “The errors exposed by our investigation are deeply concerning. They show a lack of good process and a lack of proper quality assurance.
“I am determined to identify exactly what went wrong and why, and to put these things right so that we never find ourselves in this position again.”
The first independent review will be overseen by Centrica chief executive Sam Laidlaw and former PricewaterhouseCoopers strategy chairman Ed Smith, to work out what went wrong with the award of the west coast franchise. The second review, to be undertaken by Eurostar chairman Richard Brown, will examine the wider rail franchising programme and look in detail at whether changes are needed to the way risk is assessed and to the bidding and evaluation processes, and at how to get the other franchise competitions back on track.
The Dft said it found evidence of significant flaws as its officials were gathering evidence in preparation for legal proceedings.
These flaws stem from the way the level of risk in the bids was evaluated. Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.
The department said it could not be confident that these flaws would not have changed the outcome of the competition or that any of the four bidders would not have chosen to submit different offers.
The four bidding companies – First, Virgin, Keolis-SNCF and Abellio – will all be compensated, and have been assured a fresh competition will be started.
Siim Kallas vows to push ahead with reforms requiring national rail networks to open up to competition
A single European rail network with genuinely open competition and common standards is urgently needed to let trains relieve congested roads, according to EU transport commissioner Siim Kallas. He has vowed to push ahead with reforms requiring national rail networks to open up, which could lead to direct trains from Britain to destinations across the continent.
At the opening of Innotrans, Europe’s largest transport convention, in Berlin, Kallas said €20bn (£16bn) of a €50bn European infrastructure fund could be made available for national transport projects to make the networks interoperable, helping stimulate growth. He proposed a single central rail agency to certify all new rolling stock built to a single standard across the continent.
“There must be a genuine single market,” he said. “Eighty per cent of people and goods are taken by Europe’s roads, and they are saturated. People expect railways to provide some alternatives.”
The German transport minister, Peter Ramsauer, said such reform was needed but would be “incredibly difficult” to implement and would cost €4.5bn for the German track alone. He urged Kallas to think further, suggesting that achieving common standards should be intercontinental, with China drawing up plans for a high-speed connection from Europe across Russia to Xinjiang.
Kallas said he believed opening up national markets along the lines of Britain’s franchising model was beneficial to passengers and had provided better value for money. He said few other EU states had truly opened up their markets to competition, despite previous directives, with conditions skewed in favour of domestic operators, particularly where train companies still operated the track. In Germany and France the state firms Deutsche Bahn and SNCF still dominate.
Ramsauer said he would welcome competition, but accused the French of dragging their feet. “If we want to travel by ICE (the German fast train) from Frankfurt to London, we need France to open up and so we absolutely have to do the same in Germany,” he said.
However, the minister said he did not believe that Britain’s experience had provided a good model for regulation of the network. “In Britain, they took it to excess and failed. We will not make that mistake. We will keep a government role.”
The Deutsche Bahn chairman, Rüdiger Grube, welcomed the idea of more competition – “so we can show how good we are,” he said.
The convention in Berlin is expected to pull in 100,000 trade visitors from around the world, with 115 new trains on display on tracks outside 26 large conference halls filled with global exhibitors ranging from Bombardier and Siemens to small suppliers of parts. Network Rail also has a presence here as its new, deregulated private consulting arm touts for business abroad. Gwyn Topham Berlin
Department for Transport concerned judicial review may delay or throw off course rail franchising system
Virgin tycoon Sir Richard Branson could be facing MPs in parliament next week to make his case that the award of the west coast mainline franchise was flawed, as doubts grow that the government can stick to its rail franchising timetable.
After the 11th hour application to the high court from Virgin’s lawyers last Tuesday stopped the planned signing off of the west coast contract to FirstGroup, the rail minister, Theresa Villiers, told the Commons on Monday: “As a result of a legal challenge, which the government intends to defend robustly, we have not yet signed the contract with First West Coast, and consequently the competition remains live.
The transport select committee will on Tuesday discuss bringing representatives of Virgin Trains and FirstGroup before them to answer questions about the process that saw the incumbents lose the franchise they held for 15 years after being outbid by up to £2bn for the rights to run trains from London to Glasgow until at least 2026.
Branson, who would be one of the more high-profile witnesses ever to appear before the committee, has indicated he would fly to London to attend. Tim O’Toole, the chief executive of FirstGroup who has frequently faced MPs before, would also answer questions.
The transport secretary, Justine Greening – should she survive the cabinet reshuffle – will also face questions at a separate session next Wednesday. The chair of the committee, Louise Ellman, had asked her to delay the franchise award for parliamentary scrutiny.
Meanwhile, there are growing concerns within the Department for Transport (DfT) that the judicial review may delay or throw off course the rail franchising system.
The 11th hour application to the high court from Virgin’s lawyers last Tuesday stopped the planned signing off of the west coast contract to FirstGroup. Should judges decide that the DfT needs to defend the process in court, the timetable for other planned awards is likely to slip.
Four major franchises are due to be decided in 2013, including the currently state-run east coast mainline and two operated by FirstGroup – the Great Western and Thameslink services.