Interim Report on West Coast Rail franchising disaster – worse than we expected

Sam Laidlaw, a Department for Transport (DfT) non-executive director, published the interim report into the West Coast Rail franchise issues yesterday. I’ve just had a quick read through and it is a real shocker. Arguably worse than I expected, for one key reason; this wasn’t “just” a genuine error in a spreadsheet, but rather the Department choosing to proceed with the competition even though it knew it was flawed in one key respect.

DfT was aware that its model to calculate the Subordinated Loan Facility (SLF), which would give the government comfort that the bidder could withstand downturns,  was not fit for purpose, having been originally designed for other purposes. But rather than sort this out, or disclose the issue to bidders, they decided to try and get away with it. There were then three problems:

1.            This model for internal use wasn’t disclosed to bidders. Instead, a “ready reckoner” was provided to bidders to try and re-assure them that they didn’t need to see the “real” model. That invited a challenge straight away, even if nothing else had gone wrong, because the bidders could reasonably claim they didn’t have transparency around how their bid would be evaluated (lesson 1 in “how to run a tender that will get challenged”).

2.            But then neither of these two models – the internal one or the ready reckoner - was actually used once the bids came in, directly contradicting the published evaluation methodology!  Instead, the Department appears to have invented some new way of calculating the required SLF  - it’s not yet clear to me exactly what that mechanism was – but it led to “inconsistent treatment of First and Virgin”.

3.            And, if I’m reading it correctly, if they had used the model that they said they would, officials would have misunderstood the data anyway because they thought the output was expressed in nominal terms, when the model actually calculated it in real terms (regarding future inflation).

What a mess.

Laidlaw’s initial analysis of why this happened supports some of our early theories we published a few weeks back:

  • He talks about the change in structure in DfT whereby no single Directorate had responsibility (Spend Matters – “Rather than a single Rail Directorate, responsibility seems to be spread across several areas”).
  • He mentions a loss of capability (Spend Matters- “Just those four guys represented a huge loss of corporate memory, knowledge, wisdom and experience in the rail and franchising area, all disappearing within months of each other”).
  • And then there are the rushed nature of the programme, headcount reductions, and lack of consulting support in key areas - all arguably consequences of the cost reduction programme, as we suggested. (Spend Matters – “the reduction in consulting spend in government has had at least some negative consequences”).

I didn’t know however until this report that the programme had three senior responsible officers through the competition’s relatively short life – a good indicator of likely disaster.

One other point- it’s clear some drawbridges have already been pulled up, a sign that officials and Ministers think there are going to be serious consequences for someone.

“parallel employment related investigation has meant that witness interviews so far conducted.. have been subject to constraints..”

“the Inquiry team has not been given access to certain of the DfT’s external lawyers because of concerns as to a possible waiver of legal professional privilege”.

“Ernst and Young has not yet been given access by the DfT to the full base case and risk adjusted bidder models”.

So the central questions in terms of blame allocation will be these:

  • What was the decision making process, and who signed off the decision, to carry on with the competition despite the known issue with the internal model?
  • Who accepted the obvious risk of challenge because of the lack of transparency in use of the various models?
  • Who then decided to calculate the SLF figures in a different way entirely?
  • Was there institutional bias against Virgin (that is hinted at in the interim report but not made explicit)?

Those first two are such fundamental issues, I would be amazed if they didn't go up to Ministerial or at least Permanent Secretary level for sign-off. And I’d love to see the legal advice (assuming there was some) in terms of the challenge issue. But certainly, when I was a Procurement Director in government, I wouldn’t have taken responsibility for those sort of decisions, knowing that if it went wrong, I’d be in the newspapers or worse!

Voices (5)

  1. eSourcingSensei:

    Having read through the initial report in full I think one of the key things Sam Lailaw highlights – which is a key activity in any tendering process – is the apparant lack of proper preparation – the whole procedure being “rushed” through.
    When you add to it what appears to be a very high turnover of key leaders during the time of this tender’s life, what at this stage looks like a complete lack of understanding in their own tools for deciding SLF levels and a complete dissregard for “legal advice” given – it was doomed Mr Mannering, doomed I say before it even started.
    Sensei

  2. Clark Kent:

    Maybe this also speaks to the status of “procurement” as a function in organisations. where a significant proportions of the business are dependent of the delivery of outsourced services perhaps it isn’t enough that procurement is simply embedded in a finance or legal function rather than occupying a board position.

    by the way, I totally accept that using different models and being opaque about their use is a fundamental error.

    that said, whilst the risk of success of a legal challenge is frequently well understood, the risk of that challenge materialising is more difficult to assess and is frequently taken less seriously by accountable officers. although in this case, and given the monetary values and the corporations involved, that assessment seems a little naive.

    unfortunately in the public sector, where the glare of publicity is that much more intense, the impact of the reputational risk of saying “stop” is often perceived as greater than chancing it on a risk of challenge that might not materialise.

    in my view the culture, and the public/political/press response, does not and has never supported a climate which allows the admission of errors during the lifecycle and stopping to rectify them. this is because stopping means “delay” and “delay” is as bad as failing to deliver, but more immediate. publicly stated deadlines are everything.

    imagine a circumstance where a minister or official was able to come out and be able to say “you know what, this risk has actually materialised” or “this has turned out to be a lot harder to get right than we anticipated and as a result we’re going to take some time to think about it and get it right”. imagine being able to do that and have it congratulated (to a degree) as good governance and not being hauled over the coals as a cock up of some sort.

  3. Final Furlong:

    I particularly liked this ‘contributing factor’….
    “the novelty of the risk transfer arrangements and their introduction in the particularly challenging context of the complex ICWC franchise”

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