[5th October update below] The UK Government’s ‘explanation’ for why it has found it imperative to retire the entire tendering and contracting process for the West Coast rail franchise utterly lacks credibility.
The ‘mistake’
We are expected to believe that three middle ranking civil servants who have been suspended pending an enquiry somehow ‘forgot’ to add an estimated inflation rate commensurate with the fifteen year timespan over which it was testing the bidders figures.
FirstGroup was heavily ‘back ending’ its absurdly generous payments to the government for the franchise – ‘back-ending’ being loading the payments towards the latter years of the contract. The absence of inflation testing may therefore have enabled the government’s acceptance of FirstGroup’s proposals which, from the outset, Sir Richard Branson of the incumbent Virgin Rail described as ‘insane’.
The principle of paying a little at first and a great deal later on leaves open the possibility of a contractor who proves not to be up to the job just walking away in the early years, having at that stage paid a very small fee for the privilege of having a shot at it.
This is hedged by a sort of indemnity bond. The department for Transport asked FirstGroup for £190 million of this security. Branson choked on his Virgin breakfast and claimed it should have been £600 million. Looks like he was right. No inflation figure, you see.
There are supposed to have been other straightforward miscalculations involved in the mess but the government’s explanation is intended to satisfy the innumerate majority of the electorate.
Civil servants may make wrong decisions, they may even do this deliberately for whatever reason, but they are intelligent people.
Adding an inflation figure is baseline procedure in presenting and testing financial projections.
Civil servants involved will be mathematicians, some with accounting qualifications and experience, Moreover, it is inconceivable that there is not actuarial input into the department’s work in preparing tender specifications and certainly in scrutinising the financial ability of bidder’s proposals.
If this was indeed the nature of the ‘mistake’, the Department for Transport must be reduced to letting work experience students loose on multi-billion pound tender bids.
The unravelling
The ‘mistake’ involved in this process cannot credibly have been as the government describes. But mistake of some other order there has definitely been.
Remember when Richard Branson declared that he was going to launch a legal action, stopping the issue of the contract and challenging the process which had led to its award to FirstGroup?
Then Transport Secretary, Justine Greening, announced that she was going to sign the contract by midnight that night, presumably before the legal stoppage could come into effect.
It was always curious why a Cabinet Secretary should be so impetuously defiant.
Virgin’s lodging of a request for a Judicial Review could not easily be set aside. Branson’s success is born from the courage of a genuinely entrepreneurial spirit, a first class team and a meticulous grasp of procedure, facts and figures. He was so clearly furious at what he saw as the error factor in the figures said to have led to the award to FirstGroup that his anger was seen to be well beyond disappointment and born of a flaming opposition to injustice.
The department tried to outface the challenge in public in an astonishingly confrontational stance with Branson; but when the Prime Minister’s reshuffle came, with Greening moved to International Development and Patrick McLaughlin to Transport, he paid serious attention to checking out the relative strengths of his department;’ and Branson’s legal cases.
Counsel opinion informed McLaughlin that the government could not stand up a case that the contract had been fairly awarded. He pulled the plug on the whole shebang – retiring from a defence to the Branson challenge and binning the entire tender and contract process for the West Coast franchise.
The question now is whether the reason to get Greening out of Transport was more immediate than her opposition to a third runway at Heathrow. It is not credible that government remained unaware of the insupportable process that had led to the award to FirstGroup.
As well as ascribing this gigantic wrong to ‘a mistake’, albeit acknowledged as massive and unacceptable one, the other curious feature of McLaughlin’s account was the haste of the unequivocal attribution of the ‘mistake’ to civil servants and the immediate raising of a firewall around Ministers.
Greening is an accountant, Saying that she was only a year into her job at Transport takes no cognisance of the fact that as soon as she hit the International Development department – a job she did not want – she began a line by line investigation of its budget and accounts, highlighting major abuses of the aid funding the department handles. With this modus operandi and this financial expertise, she was never simply being advised by officials when she was at Transport.
The most senior civil servants are being protected by sleight of hand in that it is three relative juniors who have been suspended. But even if the excuse of a ‘mistake’ were credible, the basic nature of this ‘mistake’ and the scale of its consequences should absolutely have been picked up by line managers. In normal business, line managers would automatically be required to check and sign off on figures and analyses produced by lower ranks.
Are we supposed to accept – and sleep happily in our beds – the notion that the entire civil service at all levels does not know to add an inflation figure in procurement contracting – and that no one, including a qualified minister, did not notice that this had not been done? Believable?
If this was a ‘mistake’ – which of course it wasn’t – it was not a mistake these three persons. It was a series of repetitions of the same mistake all the way up the ladder to the Cabinet Secretary who is an accountant, who energetically brings those skills to her job and who saw fit to slam Richard Branson’s complaints as no more than those of a sore loser.
What McLaughlin’s retreat from legal defence and retirement of the whole process has achieved though, is the burying of the detail that would have been excavated at Judicial Review.
Judicial Review is not concerned with the decision nor with readjudicating it. It is wholly focused on examining the process by which the decision was arrived at. In this case it is within the process that the disabilities are hidden from public view and McLaughlin’s decision may mean we never get to know them.
If not a ‘mistake’ then what?
Procurement is the fatball of government. It’s always worth watching which ministerial jackdaws wangle a posting to Procurement.
It is also worth watching which Procurement ministers are most popular with the senior business community.
These facts have their stories to tell.
It is naive in the extreme to believe that where such vast suns of money are being spent on state procurement across the spectrum of need, there is not dirty work going on at some likely cross roads.
Thia can be the case in any part of the food chain and it is hard to accept that it is not silently tolerated, so long as it does not become too blatant or someone commits the real political crime of being found out.
Defence procurement is the honeypot for givers and takers. We will never know all of the stories buried in that snakepit but the ones we do know about remain unexplained – like the massive Al Yamamah defence contract signed under Margaret Thatcher’s regime and with competing teams of greaseballs bidding against each other to earn the immense backdoor ‘commission’ as enablers. One of these groups involved her own son.
We should not dismiss straightforward corruption as potentially being involved in this flagrantly wrong process. These contracts are worth billions. FirstGroup proposed to pay the UK Government £13.3 billion in today’s prices over the 15 year period of the contract.
Where there is money there are sticky fingers.
Alternatively, you have a government desperate to cut costs, an ambitious young minister, a surprise appointment to so senior a post, keen to make her mark by delivering the right goodies to the top table. Was Greening simply seduced by the approvals he would earn by delivering so unexpectedly massive a fee from First Group for the franchise?
In the harem of politics, there are also well tended grudges biding their time. Did the markedly unhumble [and why not?] Richard Branson offend some quill pusher somewhere in the depths of Horseferry Road? Did they take their opportunity to shaft him with a newbie minister in charge?
Who knows and it would be foolish to expect the enquiry to come up with anything other than the need for more procedural check boxes.
The point is that this was not a ‘mistake’ of the kind announced. The likelihood is that there was ministerial responsibility of some kind – possibly a new and overly ambitious minister bucking compliance regimes to get a good result for herself to serve up to her political masters.
Greening was conveniently in Kenya yesterday when McLaughlin made his announcement. Naturally this was a visit arranged long in advance. Naturally neither she nor her department had any advance information on what Mclaughlin was going to do and say.
The cost
Today’s edition of The Independent is suggesting that the total cost of this collapse will be north of £100 million. Possibly well north of it. There is the total £40+ million cost of preparing the tenders to be repaid to the four competing bidders.
There is the considerable cost of granting extensions to a cluster of rail franchises due for renewal over the next year or so. With the blame being put on accounting ‘mistakes’ by departmental civil servants, no tender process can credibly be allowed to go ahead until the neatest fitting codpiece has been crafted.
There will be compensation claims for work done by bidders at work on some tenders already published.
FirstGroup’s share price fell by £244 million yesterday – 20% down, as its winning of the contract was simply binned. It is a disaster not of their making, There is no suggestion of FirstGroup having done anything wrong in this mess. But they are serious losers in this outcome.
They must have had to agree to leases for rolling stock to fulfil their anticipation of taking over the service on 9th December – and to make many more commitments to the same end. They will face financial penalties that will have to be repaid.
They will have to claim compensation for the impact on their share price and for penalties payable for pulling out of commitments necessarily entered into.
Where will the bill for this stop?
Governments are good at locating and replacing sacrificial anodes – but the true source of corrosion in this will never be known. That would be a price higher for a government to pay than a couple of hundred million of our money.
A last thought
It was Richard Branson who brought the legal action challenging the Department for Transport’s process.
Branson is highly capable, rich, determined, media savvy and someone who commands attention. He was screaming ‘Wrong’ to the heavens and providing the evidence for it.
No government and no court is going to fail to take seriously and to attend seriously to any challenge he issues.
Supposing it hadn’t been Richard Branson who went for a Judicial Review, challenging the process of a government public transport contract award?
Supposing it had been Gareth Crichton, the MD of Streamline Shipping Group, the parent company of Shetland Line [1984] Limited? Hardly a household name, man or company.
Supposing it hadn’t been the UK but the Scottish Government, in an even more parochial power nest?
And supposing the contract to be let was that for the Northern Isles Ferry Services, with Transport Scotland declaring as preferred bidder the private sector behemoth, Serco, supplier of a wide spectrum of services to the public sector – and markedly to the UK government?
Branson put the fear of God into the UK government. Crichton was swatted aside in a complacent judicial opinion in favour of the Scottish Government that failed to consider adequately some critical issues.
This is a matter to which we will return but the bottom line is that the UK government knew that the law would pay attention to Branson; where the Scottish Government knew that Crichton would barely be in the frame.
And this was not the first occasion where the law failed to protect the public interest in a ferry contract. We are returning to the vexatious issue of the Ballycastle-Rathlin ferry contract and to the Scottish Government’s strange role in that fully bizarre affair.
The public interest in how government’s ‘manage’ procurement tenders is running high and keen.
5th October update: It seems as if a contributory factor to ‘the mistake’ was our ‘grudge’ option above. This has just been published: Anyone But Branson: Rail-bid civil servants ‘exchanged derogatory emails about tycoon. The article is incorrect in saying that the mess of this tendering came to light because Branson ‘made a successful legal challenge on the grounds that the Government “got its sums wrong” ‘ Branson launched a legal challenge which would clearly have won but was never tested in law since Transport Secretary Patrick McLaughlin retired the government’s defence; and conceded that the process was ‘flawed’.
From what I’ve read this is what I understand about this debacle:
There was nothing wrong with the way the bids were produced and submitted.
There was something seriously wrong with the way the bids were assessed.
Why,then,just not re-assess the already submitted bids properly? Why is there a need to compensate the original bidders to the tune of £40m? If the bidders thought their bids were good enough then, surely they will submit exactly the same bid. Unless……………
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This seems eminently sensible and constructive.
The problem is that, since the cover story is that this was down to a flawed process, until they come up with some sort of face saver of a housekeeping tidy up on this, whatever decision was taken could again be under challenge.
They are now in a position where they have to come up with a procedural solution to a problem that cannot have been procedural – at least in the say McLaughlin has had to claim it was.
And a solution identifies a specific problem.
This is going to be – interesting?
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There are other informed comments worth thinking about:
1 – Franchising has been all about government making it up as they go along, in response to flaws in its vague concept
2 – What is franchising for anyway? Concessions are one more manageable alternative, and are already proving successful at a relatively small scale in the cases of Merseyrail, London Overground and the Docklands Light Railway systems.
3 – The longer the franchise, the dimmer the crystal ball, so how can anyone predict with any confidence what Britain will be like in 15 years’ time?
4 – The civil service lacks the real expertise to specify workable franchises (possibly because it’s infinitely difficult, and recent government cost savings have cut back the number of staff to manage franchise renewals just when the workload is rocketing)
5 – Franchising is collapsing under its own contradictions, and is no way to run a long term, stable railway.
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All absolutely germane. And point 5 is the heart of the problem.
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To pick up on your point 3; rail tendering has parallels with ferry tendering, the procurement cycle is completely out of sync with the needs of operator tendering. Trains, like ships, generally have a life of 20-30 years, the optimum length of contract for a service operator is generally 5 years.
The argument for 15yr contracts swung primarily on the grounds that no TOC would invest in rolling stock if at the end of 5 years they had to hand it over to a rival for a song, and the ROSCOs would not do the necessary investment alone. This completely confounds one of the original objectives of privatising BR in the first place, which is to foment competition.
A return to 5 year contracts for TOCs and relieve our zombie banks of the train leasing companies by nationalising rolling stock would seem an expedient measure to remove this problem while stopping short of politically indigestible full nationalisation.
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Justbto re-assess the bids is not enough. As I understand it some of the errors in DfT bid processv relate to assumptions of growth in traffic,GDP and other important matters that will have influenced the bids submitted.
Most pressing question is what happens on 9th December when the existing contract expires?
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No government can afford to let public transport services simply come to a halt for this sort of reason. we have no doubt that, by whatever means, the trains will run.
Richard Branson is also reported as having said that the UK Government has been in touch with him on the subject of Virgin continuing to run the service until the retendering process is eventually complete.
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There’s clear provision for ensuring services continue uninterrupted, either by extending the existing contract or by transfer to a new company formed by the government (as currently running the East Coast services).
It’s worth noting that Branson is so adept at hogging the limelight that it’s easy to forget that he shares the West Coast operation equally with Brian Souter/Stagecoach – who seem to be keen on a low profile, and let Branson make the running. It’s also worth remembering that he’s undoubtedly had himself a very good deal with this franchise, that when he started he tried to run it like an airline with fairly shambolic results – and that the new trains would have come anyway, regardless of who’d won the franchise.
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The Editor in the Observer is seeing parallels between the trains and the tendering of the Dunoon Gourock ferry.
To me it does seem that Civil Servants in both cases had their own agendas and were incompetent to boot.
Regarding the trains for some reason there was an “Anybody But Branson” (ABB) culture. To achieve their ends inconvenient details like inflation were ignored.
Regarding the Dunoon ferry, over many years, there seems to have been an objective to get rid of the vehicle service. Laterally this extended to producing a contract that ignored the inconvenient truth that small ferries cannot cope with the weather. They underestimated how bad things would be though (in itself stupid since the Ali Cat was know not to be able to operate reliably on the route).
In both the rail and ferry cases the contractual and tendering deficiences are coming back to haunt the civil servants.
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With regard to Newsroom’s comments about civil servants’ possible grudges, and the 5th October update, I’m not really surprised if there’s an ‘anyone but Branson’ mood within the DfT.
Branson & Co definitely had the better of the government over the renegotiation of their franchise after the West Coast route modernisation was spectacularly bungled by Railtrack (as was) – an infrastructural disaster as bad as the Edinburgh tram construction fiasco.
I have to declare my own prejudice against Branson – for many years I’ve being occasionally travelling to the southwest of England by train from Glasgow, and there were around six Virgin Crosscountry direct services every day via the West Coast route as far as Birmingham and then down through Bristol.
Since the Virgin franchise renegotiation there have been none, with just a couple of the Arriva Crosscountry services still starting from Glasgow but routed around by Edinburgh, Newcastle, York, Leeds, Sheffield and Derby to Birmingham. This adds up to three hours to an already long journey, but was famously justified by the junior transport minister – a Glasgow Labour MP – as being because ‘we’re not in the business of carrying fresh air around the country’.
I’d never noticed any shortage of passengers on the West Coast route, but apparently Branson & Co negotiated what was effectively a limitation of competition agreement on the route to protect their Glasgow – Birmingham service, and the DfT was under political pressure to increase services between Birmingham and Leeds (and the hell with people travelling through to & from Glasgow).
I can’t help thinking that Branson & Souter’s negotiating skills ran rings around those of the DfT team – Souter’s famous for his ruthless treatment of competing bus operators (regardless of his professed religious and moral principles, just ask WCM) and I always think of Branson as ‘the pullover with teeth’.
I know for a fact that the Scottish government was unhappy at having no real say in the provision of long distance cross-border train services (other than the sleepers), and perhaps the current debacle offers the opportunity for getting a more equitable deal for the West of Scotland.
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‘Pullover with teeth’ – can you draw? There’s the eye of a good cartoonist here.
Of course Scotland should have been part of the negotiations on the long distance cross-border services. the imperialist legacy is deep rooted.
The change in the arrangements for the service to Birmingham are patently ridiculous; and there has to be a strong business case for a good connection between Glasgow and Birmingham.
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I should explain, there is a fairly good Virgin service between Glasgow and Birmingham, but these days the trains go no further and unless you want to take your chances on one of the Crosscountry services that tour northeast England you have to change trains, usually in Birmingham, which can be a horror story.
To put it bluntly, the effect of the combination of the DfT’s inept micro management and Branson & Souter’s negotiating skills is to greatly favour Edinburgh over Glasgow for trains to anywhere other than Virgin West Coast route destinations and the Transpennine services to Manchester.
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