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Cost to taxpayer of failed West Coast procurement will be significant, says watchdog

The failure of essential safeguards intended to prevent poor decisions on major projects will result in a "significant" final bill to the taxpayer for the failed West Coast procurement, according to the public spending watchdog.07 Dec 2012

The National Audit Office (NAO) said that spending by the Department of Transport (DfT) as a result of the cancelled franchise competition would amount to at least £1.9 million in staff and adviser costs, £2.7m in legal costs and £4.3m for external advisers and Government-commissioned reviews. In a report, it identified five "essential safeguards" against poor public decision-making that did not operate effectively, resulting in the cancellation of the competition.

The DfT announced yesterday that incumbent operator Virgin would continue to run trains on the Scotland to London link for a maximum of 23 months, until a new long-term franchise could be agreed. The announcement coincided with the publication of Centrica chief executive Sam Laidlaw's report into what went wrong during the previous competition, which was cancelled in October following the discovery of "significant technical flaws" in the procurement process.

FirstGroup was announced as the Government's preferred bidder to run the franchise, for a period of up to 15 years, on 15 August. Virgin announced that it would be pursuing a judicial review of the decision later that same month. Evidence of mistakes by the DfT in the procurement process, stemming from the way the level of risk in the bids was evaluated, emerged during its evidence-gathering in preparation for the case.

Infrastructure law expert Patrick Twist of Pinsent Masons said that the NAO's report "could hardly be more damning", although he pointed out that the impact of the spending watchdog's reports into historical failures tended to be limited.

"The report identified in detail five elements necessary to ensure a successful procurement, and assesses that the Department for Transport's process was seriously deficient in all of them," he said. "It portrays a lack of senior management oversight, no individual with clear responsibility for the project, poor project management, a failure to identify objectives and incompetent use of new evaluation tools, together leading to a waste of public money."

"The department has a further independent investigation to come in the form of Richard Brown's review of the whole franchising process. There are some strong views, frequently expressed by those in the rail sector, as to the desirability of franchising, but it would be surprising if there is a change of policy rather than a reorganisation to make the process more efficient," he said.

The NAO's five 'safeguards', as identified by the report, are clear objectives that can be referred to, strong programme management, senior oversight to act as a 'sense check', effective engagement with stakeholders and internal and external assurance processes. In concluding that all five of these checks had failed in the case of the West Coast procurement, the NAO said that the DfT's objectives for the project were unclear. It noted that the department had delayed the original invitation to tender by eight months because it was yet to finalise how it would implement recent policy changes.

As with Laidlaw's report, the NAO concluded that errors in the tool used by the DfT to calculate the guarantees to be provided by bidders were a significant factor in the failure of the project. These guarantees were to be provided in the form of a subordinated loan facility, with the bidder's parent responsible for guaranteeing franchise payments in the event that passenger revenue was less than expected. The model used by the DfT had been designed to inform internal discussions, and received no extra quality assurance once it decided to use it to calculate bidder loan requirements, the NAO said.

In addition, the NAO said that the franchise competition lacked strong project management and a clear approval route for major decisions to be taken by the project team. The DfT itself had seen considerable turnover in senior positions over the life of the project, it added; with four permanent secretaries in two years as well as changes of director general.

NAO head Amyas Morse commended the DfT for its openness after the problems with the procurement process were uncovered.

"Among the lessons to be learnt is that staff with line-management responsibilities should be clear that assurance processes are not a substitute for proper supervision and management controls," he said.

"Cancelling a major rail franchise competition at such a late stage is a clear sign of serious problems. The result is likely to be a significant cost to the taxpayer. The failure of essential safeguards raises questions about the Department's broader management approach, as well as this specific matter," he said.