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.