INFORMED SOURCES e-Preview November 2012
You can imagine that it has been a hectic past three weeks, triggered by the late night phone calls on 2 October from Transport Secretary Patrick McLoughlin telling the Intercity West Coast (ICWC) franchise bidders that the competition had been cancelled. So for the second month running the column is dominated by the West Coast.
Franchise Armageddon
Intercity West Coast - Virgin vindicated.
A culture of incompetence
ICWC what happens now?
e-Voyager binned?
But before getting into the ICWC fiasco, I set the scene with an overview of where franchising had got to before the biggest shambles to hit the railway since the demise of Railtrack. Theres a table of the aborted, or paused in DfT speak, franchise replacement programme. Another table lists which Train Operators are currently receiving revenue support under Cap & Collar.
While First Group based its growth forecasts for ICWC on Trans-Pennine Express, a better indication of how the Intercity rail market is performing is provided by Government-run East Coast which helpfully published its Report & Accounts for 2011-12 just before the balloon went up.
The accounts are given the usual Informed Sources analysis. One conclusion is that if East Coast were a TOC eligible for Cap & Collar it would be qualifying for the maximum 80% revenue support.
Dont overlook the third little Table which compares the premia NEXC committed to pay, the service payments which DfT thought East Coast could pay and what has really happened. I have also converted these service payments into a profile graph. No prizes for guessing what it looks like!
ICWC - DfT 100% guilty
Trying to nail down this column when fresh revelations on the ICWC franchise replacement metashambles were emerging by the hour has been, to put it mildly, fun. Fortunately, the dénouement came hours before we went to press and the news that DfT is now negotiating a 9 to 13 month extension of Virgin Rails West Coast franchise just made it into the magazine.
When Mr McLoughlin spoke to Sir Brian Souter just after 23.30 on 2 October, he recalled that the Stagecoach chief had once described DfT as dysfunctional. No need to repeat here what happened after the ICWC competition was cancelled, which most subscribers will have been following in real time. But for me the smoking gun is that when accountants PricewaterhpuseCoopers (PwC) were reviewing DfTs response to Virgins High Court Case (Informed Sources October) they found that the calculations on which the franchise award decision had been based were not available.
They had either been lost, not been saved or deleted. And when PwC re-ran the numbers, like Virgin and another unsuccessful bidder, they could not replicate the outputs. Given that billions of pounds were at stake, this loss of data is inexplicable.
You may remember in last months column I explained why I always prefer to use cash, or real figures for analysis, rather than Net Present Value or Nominal. There are reports that in evaluating the ICWC bids DfT confused real and nominal values.
Lots of questions to be asked and the initial findings of the independent Review of the debacle, led by DfT non Executive Director Sam Laidlaw is due to be delivered on 26 October the day Modern Railways appears on the bookstalls.
Meanwhile, the Departments proposals for what happens next on West Coast defy ridicule.
Having agreed an extension with Virgin, DfT plans to use the time to invite bids for a short (two year) interim franchise). Then, during this interim franchise bidding starts for a new long term franchise.
Lets say four companies bid for the interim franchise thats £20 million in bidding costs and I bet DfT wont spare the consultants, so add another £3-5 million of our money. Then theres serious bidding for the long term franchise. Say £30 million in bidding costs. And this is the same DfT that keeps reminding us of Sir Roy McNultys claims that the railway costs too much!
Ministers missed precursors
In the May 2012 column I wrote this:
For some time now, this columns default assumption has been that the Department for Transport is dysfunctional. This has shown up in the repeated corrections Aviation & Rail Minister Theresa Villiers has had to make after misleading the House of Commons with incorrect answers to written questions. And sometimes, blatant errors have not been corrected (this column passim).
Misleading Parliament is, supposedly, a serious offence. Minsters who have done so usually apologise to the House when issuing the ensuing correction.
As you will have noted in past columns, DfT, and former Transport Minister Theresa Villiers have had to publish several correction to her written answers which contained blatant errors. What puzzled me was why Theresa never seemed to twig that she was regularly issuing corrections.
In her shoes, the first correction would have resulted in a bollocking for the official who had provided the incorrect answer. After that a repeat would have produced a rapid move out of the Department, with a ministerial reprimand on the individuals civil service record.
Apologists claim that it would be unreasonable to expect Minister to have checked the calculations behind the ICWC franchise award. But any minister should have noticed that they were having to correct misleading information generated by their department and done something about it.
By letting this sloppiness continue, ministers were, in aviation safety-speak, normalising deviance. And if civil servants couldnt get simple things right, like the track access charges for IEP, what chance did the Department stand of managing something really complex like a franchising model?
As I say, the Laidlaw Review should be reporting as the magazine goes on sale. But here are some questions I would have expected to have been asked. And note that as of 17 October the Laidlaw team had not spoken to either to First or Virgin Rail.
Key questions
Given that at least two of the franchise models run by bidders highlighted the flaws in the DfTs model exposed by PwC, what did Firsts modelling show?
Did DfT officials apply subjective judgement to inputs and outputs? Did bid teams discuss the crucial Subordinate Loan Facility the hedge against long term risk with bidders?
Is there documentary evidence in bid team files that Virgin raised queries on the bidding process? Did DfT respond? Remember that then Transport Secretary Justine Greening said on 31 August Virgin raised no concerns with process until it emerged that they had lost the bid.
What next for ICWC?
Well, we know, sort of. But this section of the column, though in part overtaken by time, remains relevant because the halt to franchise replacement means that the same situation will be faced by the paused franchises Essex Thameside (c2c) Great Western and Thameslink. What happens when these, like Virgin West Coast expire? And East Coast was also supposed to be re-let in 2013
DfT has Directly Operated Railways (DOR), as its operator of last resort. So as soon as Virgin said it would challenge the ICWC award DOR began recruiting a team to run ICWC should it be necessary. Because of the uncertainty, and the expectation that Firsts take-over would simply be deferred for only a short time, DOR and First worked in parallel with Virgin on the mechanics of mobilisation.
Mobilisation is not cheap. The DOR takeover of East Coast cost around £3million.
With DfT hiring head hunters to search for suitably qualified rail managers, it was clear that DOR was struggling to put together a second team following East Coast. But McLoughlins announcement on 3 October took DfT and DOR into uncharted waters. With the competition cancelled there was neither a failed TOC to be rescued, nor an eventual handover to First Group to be facilitated.
Instead we had a franchise coming to an end with no replacement appointed. Even worse, the current agreements for the four franchises due to be let in 2013 will also expire. And Great Western and Thameslink vie for this columns soubriquet of franchise of death because of their extensive upgrades. If DOR was struggling to staff ICWC, what chance with four more franchises?
Civil servants have been telling ministers that you cant just extend franchise once you have already exploited the seven reporting period extensions in all franchise agreements. Under EC law you have to put the extension out to tender or else let DOR take over.
Lets apply a commonsense test to the DOR option. Who would you rather have running the Great Western Main Line as total route modernisation kicks in Mark Hopwood and his team or DOR with veteran old-BR managers turned self employed consultants who havent run a 21st century railway?
So, two year management contracts all round, say I, with an additional half a percent of revenue above an agreed income line to encourage a commercial attitude.
