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The West Coast Fiasco: How cost-saving cost £50 million

27 February 2013
Back in August 2012, the Department of Transport (the "DfT") announced that, following a tender process, it was awarding the franchise contract for the InterCity West Coast mainline to First Group. The existing holder of the franchise, Virgin Rail Group, immediately announced its intention to launch a judicial review of the DfT's decision and, in a humiliating climb down, in October 2012, the DfT was forced to cancel the award.

Yesterday, the House of Commons Committee of Public Accounts has published a short report (the "Report") that investigates the DfT's handling of the tender for the franchise, identifying the errors and mismanagement that led to the cancellation.

According to the Report, the immediate problem with the DfT's approach was its calculation of the amount of the subordinated loan facility that it required from each bidder to guard against operator default and to guarantee premiums under the contract. First, it used a bespoke tool designed for another purpose to perform this task, failing to realise that it did not take into account expected inflation over the life of the contract. As a result, it underestimated the loan it required from First Group by over £100 million. Secondly, rather than following the set process the Department had told bidders it would use, the DfT applied its own discretion in a way that treated bidders unequally. The result was that it asked Virgin for a £40 million loan, when none should have been required, and it reduced the loan required of First Group from £252 million to £190 million.

But behind these errors, the Report identifies a number of management failings, made even more significant by the report's estimate that the franchise is worth £5.5 billion to taxpayers. First, the DfT did not devote enough resources to the tender. Whereas each bidder spent an estimated £10 million on its bid, the DfT spent just £1.9 million on staff costs and external advisers. Its "overoptimistic" decision not to employ expensive external financial advisers, in particular, looked extremely costly.  Secondly, senior managers were "seduced by [their] technical models rather than using common sense", and this, in particular, led them to miss clear warning signs that the loan calculations had gone wrong.  Finally, during three crucial months of the tender, there was no senior civil servant in charge of the project. This lack of accountability was made worse by the DfT's practice of anonymising information from bidders, which resulted in senior figures, such as the Permanent Secretary, not being able to see a full set of information that might have enabled them to challenge the processes and the result.

These errors which, the Report calculates, will cost the taxpayer over £50 million, prompts the Report to express concerns about a number of future DfT projects.

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