Posted 3rd October 2012 | 32 Comments

Franchise chaos as DfT cancels West Coast award

THE DEPARTMENT FOR TRANSPORT has cancelled the award of the West Coast franchise to FirstGroup. The transport secretary Patrick McLoughlin has admitted that there were 'significant technical flaws in the way the franchise process was conducted', and announced two official inquiries. Some civil servants face suspension, and the decision is set to disrupt the future franchising programme.

It also seems likely to cost taxpayers £50 million or more, because the DfT has said it will refund the costs incurred by the four shortlisted West Coast bidders.

In a midnight statement, the DfT conceded that the concerns raised by Virgin Trains about risk assessment were justified. Virgin had claimed that the £200 million financial buffer required from FirstGroup had not been calculated correctly, and that the degree of risk involved in First's £5.5 billion bid should have called for a deposit, known as a 'subordinated loan', of £600 million.

This claim had been denied by FirstGroup and also the DfT, which had described its calculations as 'robust'.

As the West Coast competition has been cancelled, there is no longer any need for a High Court hearing to test Virgin's case against the DfT, which had been set down for three days starting on 17 October.

The implications are considerable, because the DfT's admission must now put the 2013 franchising programme in jeopardy. Four franchises were due to be renewed next year – Essex Thameside (currently c2c), Greater Western, Thameslink and East Coast, but the letting processes are now suspended.

The costs are also yet to be calculated, but Virgin has said it alone spent £14 million on the contest.

Apart from Virgin and FirstGroup, the Dutch operator Abellio and a partnership of SNCF and Keolis had also been shortlisted.

The DfT is arranging two inquiries into what went wrong. The first will be an 'urgent independent examination' conducted by independent advisers and overseen by Centrica chief executive Sam Laidlaw and former PricewaterhouseCoopers strategy chairman Ed Smith, who are both DfT non-executive directors. Their initial report is expected by the end of the month.

The second review will be undertaken by Eurostar chairman Richard Brown, and examine the wider rail franchising programme. The DfT said it will 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 as soon as possible'. This will report back by the end of December.

Some civil servants' jobs may be at risk. The DfT said: 'The flaws uncovered relate to the way the procurement was conducted by department officials. An announcement will be made later concerning the suspension of staff while an investigation takes place.'

Transport secretary Patrick McLoughlin added: "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.”

It is not yet clear who will be running intercity services on West Coast from 9 December. The DfT could take over, using its subsidiary Directly Operated Railways, or ask Virgin to carry on for the time being.

Reader Comments:

Views expressed in submitted comments are that of the author, and not necessarily shared by Railnews.

  • david c smith, milton keynes

    For the f irst few years of privatisation, franchises were just a minimum service requirement beyond which TOC's were free to develop and expand ; many of them did start to do this.

    Then along came the SRA, followed by DfT, who effectively stopped all this. I wonder what innovative bew services and products might have been ?

  • Melvyn Windebank, Canvey Island, Essex

    Andrew Neil interviewed Philip Hammond on to-days Sunday Politics and questioned him about the WCML and it seems that he was actualy in charge when the tendering system was changed and so further investigation has to also include him.

  • Voice of reason, Nottingham

    As a career railway man of 28 years, I have to say that nothing the DfT does surprises me. They seem to be completely staffed with (possibly well meaning but) totally incompetent staff. Everything they touch is a shambles. This is not necessarily the Goverment of the days fault as they are unable to completely control the civil servants in the department.
    The McNulty review sadly did not seem to properly address the fact that to take a chink out of the industry's costs, all you need to do is free the industry from the incompetent meddling of civil servants looking to maintain their own employment and pension prospects!

  • Geoff Steel, Northampton

    Jim Cambell (Birmingham) is quite correct that a significant amount of investment has taken place to increase capacity since privitisation through the successful Evergreen projects, with hopefully more to come. But, as the Ed correctly points out the foundations for the line's success was indeed laid by BR through route modernisation and resignallling. I also accept that parts of the route had earlier been reduced to single line during BR days. This was due mainly due to pressure to reduce operating and maintenance costs against a background of falling ridership across the whole network at that time.

  • Jim Campbell, Birmingham

    Geoff Steele says the investment in teh Chilterns route was carried out by BR before privatisation.
    Sorry, Geoff I think you will find quite the opposite. Chiltern have re-doubled the line south from Aynho Junct; they have tweaked track lines to raise speeds along the route; they have developed Moor St station and opened platforms closed by BR. Expanded Marylebone; Opened Warwick and Haddenham & Thame Parkway stations; together with innovative ideas on the trains.
    West Midlands passengers have a real choice in routes and trains to London (3 if you include London Midland) with Chiltern now challenging the older West Coast timings.
    All this development has meant Virgin have had to respond and up their game as well.
    Please don't suggest this is all down to BR.

    (In fact, there was substantial investment in the Chiltern route by BR's Network SouthEast — amounting to 'total route modernisation' — before privatisation. Chiltern has since improved the upgrade still further by increasing capacity and adding stations.—Editor)

  • Tony Pearce, Reading

    Nationalise the railways and let it be run by railwaymen ? What like Bob Crow in charge ? Belgium railways completely paralised by a National Strike yesterday. No Eurostars running to Bruxelles. French trains always on strike. British railways are a lot better than most of their European counterparts. Why does Deutsche Bahn keep buying into our freight and passenger services ? Goodwill on behalf of the Germans ? Yes our railways could improve and learn something from our Airlines and Coach Operators for a start off. But no they are not bad.

  • PeterB, Cheshire

    At least Virgin on the WCML recognised that they were in competition and they had to provide a better service and good fares to attract new passengers or retain existing travellers.
    On my regular journey (WML - EUS on a weekday peak service) for a central London meeting. the fares I have paid (1st class booked a few days in advance via Virgin website) have fallen over the past 10 years from £230 to £215 in April this year (up and back) and were never more than 5% above the 2002 figure. Compare that to any other franchise, the regulated fares, or a nationalised route. The journey time has also been reduced by 20 minutes over that period, but Northern Rail's car parking charges have gone up from £3 to £5!
    The fares now almost exactly match the air fare which has almost exactly the same journey time, while the car journey (which would normally take 50% longer) at the HMRC approved mileage rate plus M6 tolls congestion charges and car parking now costs approximately £230 plus the cost of meals and refreshments on route.
    I am sure this is not coincidence on Virgin's part. It will be interesting to see if Virgin Atlantic delay the introduction of their MAN- LHR air service if Virgin Stagecoach are still operating the WCML next April!

  • Tony Pearce, Reading

    First Group are a well-run profitable company. They do not employ idiots to calculate their bid for the West Coast Main line. These analysts would have drawn up a worst-case scenario in the bid and First should still have been able to make money on it if that happened. When it was announced that First were not getting the West Coast Franchise as expected their shares fell 22%. This meant that all the clever people in the city reckoned that First were not going to be able to make the pots of money out of the franchise as expected. So it was a viable bid. But all the above also applies to Virgin Trains. So £700 million difference between the bids is interesting. Normally it would be around £20-30 million difference. Were Virgin and First told the same information ? If not whoever loses would have a claim on the Government for a lot more than just their costs.

  • Al McNicol, Wirral

    The Bearded One did not offer to run WCML "for free" whilst things were sorted out. He offered to run it on a "Not for Profit" basis. We may find some creative ideas on the definition of "profit" underlying that offer.

  • Adrian Bond, Stoke-on-Trent

    How can a new competiton take place? Everyone now knows each others bids and their 'carrots' in terms of service enhancements etc.

    Unless some carve up and merge of different franchises takes place to make a completely new franchise to bid against - re-introduction of Birmingham to Scotland services to Cross Country, and TPE Scottish services into the West Coast franchise anyone?

    First can now reduce their bid closer to the Virgin one, thus trousering more profit to themselves, whilst Virgin can increase theirs slightly, hopefully out-bluffing the First team to win the prize!

  • Graham, Hook

    When will people learn that FGW did not take up the optional that they could have taken to extend their franchise with the mutual agreement of the government, in doing so it meant that the new trains, electrification, Crossrail, etc. all came in towards the beginning of a new franchise. In doing so all the assumptions about disruption in these projects coming online is taken into account as part of the tender. It also means that the benefits are also taken into account. All of this results in it costing the government less and will results in higher payments to the government.

    The railways are only privately run, rather than the government running them. In doing so the private sector pays the government (or is paid by the government depending on how profitable the lines are), this means that the government ensures that they are getting the best value for money. As without putting it out to tender the organisation which runs the trains would have a monopoly and therefore would have little incentive to improve services or run more efficiently. If I know I've got a job regardless of what I do and can pay myself what I like (knowing that it will get paid) what is stopping me from doing the right thing for the country?

  • Melvyn Windebank, Canvey Island, Essex

    Never mind civil servents surely the outgoing Transport Secretary Justice Greening should be held to account and sacked from her cabinet post and sent on knitting leave!!

    As to calls for re-nationalisation the fact is this would not provide the amount of capita needed to fund our expanding rail network which now carries nearly twice as many passengers as when they were privitised.

    However, leaving control with DFT that is GREATER than in BR days is also out we need a new BR Board made up of Network Rail, Franchises, ROSCOs and other bodies that have people who understand railways in charge and who knows as has often been said Chris Green was one of the best Chairmen that BR never had, so perhaps his time has come!!

    As for franchises then we need a mix similar to to-days with London Overground expanded and controlled by the Mayor of London with maybe representation from counties around London, Merseyrail and Private companies like First and Virgin. However ownership by foreign nationalised railways (not Private ones!) should be based on a free market in their countries first!!

  • Martin Nield, Derby

    The railways should be run by railwaymen and women, not by civil servants. The last government was right to set up the Strategic Rail Authority to handle the award of franchises and wrong to abolish it.

  • phil gaskell, manchester

    i work for a railway company? french owned. when the system was privatised so many drivers and experienced railway staff told me this would never work it would cost the tax payer a hell of a lot more than when the railways were british rail it seems this has come to pass. no wonder european countries look at us and laugh

  • John Harper , Edinburgh

    The problem is the very narrow selection criteria for senior civil servants where if one makes an error they all do. As for railway get Christopher Garnett to get a management team together to recreat the excellent GNER service on all Inter City routes for a management fee.

  • lorentz, London

    Further proof, as if it was required, that the railways should be fully privatised; it is no good allowing unelected, non-idustry, pe-pushers manage a railway.

  • Geoff Steel, Northampton

    How much more chaos and waste of public money has to occur before the government does the right thing and brings it all back into one integrated organisation. Clearly on recent evidence the DfT has demonstrated that they don't appear to be fit to let franchises or purchase trains but I don't think it is right that civil servants should be singled out to take the rap for a franchising process that in my view was flawed from the start. And, to those that might argue that the success of Chiltern and c2c are shining examples of rail privatisation at work should be aware the high level of performance achieved today is largely down to the huge investment made by British Rail on both routes in the early 1990's and NOT through privitisation. It is also no coincidence that the current MD's of both companies are ex BR managers.

  • John H Zebedee, Crawley

    "foreign railways must be looking on and shaking their heads in dis-belief!"

    More like laughing their heads off at our total stupidity for the way the railways were privatised in the first place and operated since. Britain's railways must be the laughing stock of Europe.

  • Billy Bell, Beith, UK

    All ther credit must go to Richard Branson and Virgin trains for bringing this to the public's attention. After believing in the DfT and Miss Greening for the past 6 weeks, it pains me to say this,but Richard Branson emerges with all the credit and the government with absolutely none.

    The DfT have cost the taxpayer £50M. How many nurses, police, etc could this have paid for? In these times of austerity it seems cutting the money of pensioners, the disabled and local authorities is essential,meantime the DfT is at liberty to squander millions of pounds. The Incompetence of this department has rendered the cuts faced by millions as pointless. Heads need to roll, the lack of accountability will not be tolerated by the public this time. David Cameron and Nick Clegg need to get seriously involved and not just put out worthless statements pretending they care.

    The whole process is an insult to the individuals who work day in, day out, only to see their income tax being deducted every month to contribute towards this farce. We are being robbed blind - it's undefendable!

  • Craig, Lancashire, Blackburn

    What a shambles. Millions wasted without batting an eyelid. Just think how many new trains could have been bought to replace Pacers in northern England with this money.

  • Leslie burge, leicester

    Pity Branson didn't challenge the franchising system sooner, Who knows, Cross country might still be in Virgins hands.
    It stinks that the government have backed down before court proceedings.
    I only hope that the reviews will show up what really has gone wrong and those people who have cost the taxpayer £40 million will get sacked with no compensation and have their pensions reduced for doing such a poor job.

  • James Mac, FarFarAway

    A thought. The comment by McLoughlin isn't another attempt to discredit Justine Greening (which would allow HS2 cancellation and Runway Three at Heathrow), is it?

  • Roderick Brodie, Prestwick

    I agree fully with Adam Warr, Peterborough. Transfer the franchises as they expire to Directly Operated Railways (DOR Ltd) and I think there will be a few surprises as to profit raised for the DfT. East Coast under DOR have manged a small profit when previous ECML operators could not...

  • Ben, London

    I wouldn't say privatisation has been a disaster as initially we saw a lot of investment which otherwise wouldn't have been forthcoming as well as other improvements that on the whole have seen passengers starting to be regarded as customers

    The current problems started when the strategic rail authority was abolished and its responsibilities transferred to the dft, we went from an industry run by people who knew about railways and allowed toc's a realitive free reign to civil servants who know nothing about railways and yet want to micromanage them.

  • Tom Watson, Milton Keynes

    The privatisation process has not been a complete failure as some would have you believe.

    Overall it's been good for the railways and brought investment where none would have been forthcoming. It is unfortunate that the original idea was flawed from day one, and that since 1994, the mandarins at the DfT and their civil servant chums have insisted in putting their fingers in the pie, rather than let the railway companies use their expertise and innovation to make the railways work.

  • Bob Grundy, Lancing

    Easy enough to castigate this government, without doubt they haven't shone here. But isn't this kind of thing inevitable in our politics? We need transport every day, while education lasts only quarter of our lives, NHS occasionally, defence when there's a war on. Yet when we vote, we listen to politicians' blather about 'ring-fencing the NHS' or 'education education education', not what they'll do for roads, rails or airports. Hence Phil Hammond's move to MoD was considered a promotion. How can we have sensible long-term thinking - nowhere more important than transport - if the top office has a revolving door? We need to get our political priorities straight.

  • Tim, Devon

    The taxpayer does not pay for every piece of rolling stock. The vast majority is paid for with private funds from the leasing companies. The new IEP trains are not being paid for by the tax payer. The government provides certain guarantees, such as the trains being used, but they then force the franchisees to use the trains so it doesn't cost the government anything.
    I'm not a big fan of the franchisee system though, I would go for a more open-access system whereby you could have multiple operators on the same route, they would bid to network rail for access at certain times and so you could have first, virgin, cross country all running the same route bringing in true competition. All operators would be required to accept 'standard/open' tickets bought at the station/ticket machine but would be free to set advance tickets below that price for use only on their services. Any routes which are not profitable would be put out to tender, eg London to Penzance every two hours and whichever company's bid is the best (lowest subsidy / reliable service) would be given the contract.
    All stations would be owned and operated by Network Rail.

  • Philip Whiteman, Birmingham

    This announcement clearly raises further questions:

    1. The second tender will be substantially compromised by the first exercise. Unless government substantially amends the specification for the franchise, the bidders for the second exercise will no longer be sealed. Effectively this means that each tenderer will have gained knowledge from each other's bid during the first and now abortive first exercise. So, how can government effectively secure a tender process that is sealed and also meets OJEU standards?

    2. This second is conspiratorial question. The last minute announcement seriously questions the current Ministerial team's ethicacy. Was the delay created by a last minute discovery of a flawed process or was timed to avoid Miliband's keynote Conference speech or even worse, timed to avoid the last Cabinet reshuffle and thereby circumvent an embarrasing ministerial resignation?

  • jak jaye, sutton coldfield

    Re-Nationalization by another name? doesn't ANYONE want to admit that the whole privatization of BR has been a complete failure? foreign railways must be looking on and shaking their heads in dis-belief!

    How can you call a railway 'private' when its the Government i.e. the taxpayer who pays for every piece of rolling stock,digs out companies who cant handle it(Southern,East Coast,FGWR) then gives back billions in payments to the same, priceless!!

  • Paul Martin, York

    Will the bearded pullover be running this for free while it is sorted out or has that offer gone?

  • Adam Warr, Peterborough

    Transfer all franchises to East Coast Operator, DOR as they come up for renewal.It's a no-brainer, really.

  • Lee, Manchester

    I wish I had put money on this outcome. This does raise concerns regarding how franchises have previously been awarded and how the DfT currently handles franchising. Still at least a list of sacrificial junior civil servants is being prepared for iminant sacking and the West Coast biddrs will be recompensed at the tax payers expense. If the four short-listed preferred operators are to be compensated for their losses, would the three unsuccessful bidders also ahave been similalry compensated for not being appointed as the operator had the franchise process been succesful?