Government cancels West Coast rail franchise competition after "flaws" identified

The announcement means that the Government's preferred bidder, FirstGroup, will no longer take control of the line when the current franchise period ends on 9 December. The Government will also, it said, no longer contest a judicial review of the procurement process brought by the line's current operator Virgin Trains. All four bidders for the franchise would have their bid costs reimbursed, it added.

Transport Secretary Patrick McLoughlin said that two independent reviews, one into "what went wrong" with the West Coast franchise competition and a wider review of the DfT's rail franchise programme, had been ordered "urgently". Staff involved in the procurement process would be suspended while an investigation took place, he said, while the DfT would take action to ensure that train services on the line "continue uninterrupted" while officials examined options for operating the service beyond 9 December.

"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," he said. "The tickets that people have booked will continue to be valid and passengers will be able to make their journeys as planned."

The "mistakes" made by the DfT in the way that it managed the process were "deeply regrettable and completely unacceptable", he added.

Infrastructure law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said that challenges by disgruntled bidders against public authorities were comparatively rare in the UK compared to other European jurisdictions. Court action by Virgin and the DfT's subsequent announcement, however, "dramatically highlighted" that "there are occasions when public tendering processes can go seriously wrong and litigation, or the threat of litigation, can be the only way to bring this out into the open".

"Like any pain/gain share arrangement, the payment mechanisms under the latest generation of franchise agreements are complex arrangements requiring equally complex evaluation criteria for comparing rival tenders," he said. "This appears to be at the heart of the issues with the procurement problems on West Coast. Whether this is a wider problem remains to be seen. DfT's announcement has not only scrapped FirstGroup's preferred bidder status and called for a fresh procurement, but has also halted all other franchise procurement processes for the time being."

Three outstanding rail franchise competitions - Great Western, Essex Thameside and Thameslink - would be "paused", the DfT said, pending the independent review. Richard Brown, chairman of Eurostar, will report back by the end of December on whether changes are needed to the DfT's bidding and evaluation processes and the way it manages risk. The review of the West Coast decision itself will deliver an initial report into the process by the end of this month, it said.

The announcement of FirstGroup as preferred bidder for the franchise, to run for a period of up to 15 years, was made by the Government on 15 August. The company had pledged to introduce around 12,000 extra seats a day on the line, expand the range of stations covered and cut the cost of its 'Standard Anytime' fares by an average of 15% within the first two years of the new arrangement. It had also planned to spend "at least £22 million" on a station investment programme at 17 maintained stations along the route.

Announcing its judicial review application later that same month, Virgin said that although its rival had promised to make higher premium payments overall to the Government in return for the contract it was unclear whether the DfT had "correctly risk adjusted" for the fact that "all of its supposed incremental value would not fall due until after 2022". Its own bid, it said, had been assessed by the DfT as being "more deliverable and a lower risk".

According to the DfT, evidence of "significant flaws" stemming from the way the level of risk in the bids was evaluated emerged during evidence-gathering in preparation for the judicial review. Its mistakes related, it said, to "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 DfT said that it could not be "confident" that, without its mistakes, the competition would not have had a different outcome.

Improving its procurement processes has been on the Government's radar for some time now according to infrastructure law expert Graham Robinson of Pinsent Masons, who pointed out that the rail sector had been "heavily consulted" on a paper on innovation in procurement by the House of Lords Science and Technology Committee last year. Although the problems with the West Coast competition related to technical issues, he said, the "challenge" for the Government was to embed the concepts identified by the Committee successfully.

Jonathan Hart added "immediate practical concern" of the Government would be to establish a "new procurement timetable" for the number of current rail franchises coming towards the end of their current terms with limited opportunities for contractual extension.

"In a repetition of the experience in respect of the Cross Country franchise, Virgin may well end up running the West Coast Main Line on a temporary, and less risky, 'contract management' basis," he predicted.

In a statement, Virgin Trains welcomed the DfT's "frank announcement" that the West Coast franchise competition had been cancelled.

"We are ready to play a full part in assisting the review to help deliver a franchising system that better serves passengers, taxpayers and the interests of all bidders," he said. "In the meantime, we will assist the Department for Transport in ensuring continuity of service for the millions of customers who depend on train services on the West Coast mainline."

FirstGroup said that it was "extremely disappointed", adding that the company had had "absolutely no indication" that there were any problems with the process. The company had, it said, "received assurances from the DfT that their processes were robust".