Virgin loses West Coast Franchise to First Group

Transport Secretary Patrick McLoughlin has today announced that the competition to run trains on the West Coast Main Line has been cancelled following the discovery of significant technical flaws in the way the franchise process was conducted.

The decision means that the Department for Transport (DfT) will no longer be awarding a franchise contract to run the West Coast service when the current franchise expires on December 9. It is consequently no longer contesting the judicial review sought by Virgin Trains Ltd in the High Court.

The flaws uncovered relate to the way the procurement was conducted by department officials. An announcement will be made later today concerning the suspension of staff while an investigation takes place.

The Government is resolving urgently the future arrangements for operation of the West Coast and will ensure that train services continue uninterrupted. Mr McLoughlin stressed today that passengers will continue to be served by the same trains and frontline staff.

The Transport Secretary has also:
Ordered two independent reviews to be undertaken urgently: the first into what went wrong with the West Coast competition and the lessons to be learned, the second into the wider DfT rail franchise programme, both overseen by leading business figures;
Asked officials to examine the options for the operation of the West Coast service after December 9, taking into account procurement and competition law;
Paused all the other outstanding franchise competitions (Great Western, Essex Thameside and Thameslink) pending the independent reviews which are designed to ensure future competitions are robust and deliver best value for passengers and tax payers.

Mr McLoughlin said:

“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.”

He added:

“West Coast passengers can rest assured that while we seek urgently to resolve the future arrangements the trains that run now will continue to run, with the same drivers, the same staff and timetables as planned. The tickets that people have booked will continue to be valid and passengers will be able to make their journeys as planned.”

DfT permanent secretary Philip Rutnam said:

“The errors exposed by our investigation are deeply concerning. They show a lack of good process and a lack of proper quality assurance.

“I am determined to identify exactly what went wrong and why, and to put these things right so that we never find ourselves in this position again.”

The first independent review will be an urgent independent examination into the lessons to be learned from the Department’s handling of this competition. Conducted by independent advisers and overseen by Centrica chief executive Sam Laidlaw and former PricewaterhouseCoopers strategy chairman Ed Smith, both DfT non-executive directors, this review will look as soon as possible at what happened and why with a view to delivering an initial report by the end of October.

The second independent review will be undertaken by Eurostar chairman Richard Brown CBE, and examine the wider rail franchising programme. 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.

Evidence of significant flaws in the Department’s approach emerged while officials were undertaking very detailed evidence-gathering in preparation for legal proceedings in the High Court.

These flaws stem from the way the level of risk in the bids was evaluated. Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.

The Department cannot be confident that these flaws would not have changed the outcome of the competition or that any of the four bidders would not have chosen to submit different offers.

The DfT has spoken to the four bidding companies to inform them of the flaws that the Department discovered. The DfT will reimburse their bid costs and has assured them that a fresh competition will be started as soon as the lessons of this episode are learned.

The Stock Market clearly has a view that even using the First Group figures which Virgin regarded as unsustainable there was a big profit to come from the WCML franchise. At the time of writing the First Group share price is just shy of 20% down on last night's close.

Virgin in talks on West Coast route contract extension

Virgin Trains will be asked to continue to run services on the West Coast Mainline for at least another nine months after the latest decision on the route franchise was scrapped.

The Department for Transport says it will enter into negotiations with Virgin for the "temporary" contract.

A competition will then be run for a new franchise agreement.

The decision to give FirstGroup the route from December was withdrawn over "technical flaws" in the bid process.

In an announcement to the London Stock Exchange, the DfT said it hoped Virgin would remain as the West Coast Mainline operator for between nine and 13 months while a competition was run for an interim franchise agreement.

This interim agreement will then run until a new long-term franchise agreement is in place.

"The government believes that this is the best way to ensure services are maintained and that there is no impact on passengers," it added.

The competition to run the line was cancelled on 3 October and led to the suspension of other franchise programmes including bids for Essex Thameside, Great Western and Thameslink.

The government has announced two independent reviews to focus on the West Coast competition and the wider DfT rail franchise programme.

Three civil servants were suspended over the way the West Coast franchise process had been conducted and the government has said the estimated cost of reimbursing Virgin, FirstGroup and two other companies for the cost of their bids will be about £40m.

The flaws in the bidding were discovered as the DfT was preparing to contest a legal challenge by Virgin to the decision not to award it the contract.

Transport Secretary Patrick McLoughlin said: "My priority now is to fix the problem and the first step is to take urgent action to ensure that... services continue to run to the same standard and passengers are not affected.

"I believe Virgin remaining as operator for a short period of time is the best way to do this and my officials and I will be working flat out to make this happen."

'Messy solution'

Mr McLoughlin is due to give further details on the plans in the House of Commons at 15:30 BST.

The West Coast route serves 31 million passengers travelling between London, the West Midlands, the north-west of England, North Wales and the central belt of Scotland.

FirstGroup had initially beaten current operator Virgin Trains to win the 13-year franchise.

BBC News transport correspondent Richard Westcott says the interim contract will last for two years while the longer franchise will be handed out around the time of the next general election.

The decision was a "messy solution to a mistake that is costing the taxpayer tens of millions of pounds" but the transport secretary feels it is the best way to keep services running without disruption, our correspondent added.

Opens a can of worms that does....

Peter

" said:

Opens a can of worms that does....

Peter

...and no doubt m'learned friends are looking forward to the feast!

.......but we all know the franchised "competitive" railway is costing the taxpayer three times as much as the "inefficient" BR.

You cannot have a railway which is horizontally integrated.

A certain Stephenson, G. proved that over 170 years ago.

I always take issue with the " European railways are better" comment. Yes the French have shiny TGVs and we need those, but in terms of frequency of regional services and quality of stock on urban services (LOndon and Paris compared) Britain wins hands down. Can't argue with the price though.

Stephenson at the outset put out the track maintenance to outside contractors and had open access for any operator.

With the former, he found either a) they were subbing out to others who were not really qualified and b) the job was not being done to his standards.(does this sound familiar) He gradually let the contracts lapse and did the jobs "in house " - and did them better and cheaper. In the latter case, he found companies with low powered and/or unreliable engines and poor rolling stock blocked the line for other profitable traffic, so he stopped the open access. These are matters of historical fact.

For some of the reasons why you cannot run a horizontally integrated railway, please refer to the above.

In 1990 the railways received £586m in public subsidies to provide unprofitable, but socially necessary services. (approx £1.3bn at 2011 prices)
Last year, the TOCs alone received a net rebate of £2.7bn of your money.

" said:

In 1990 the railways received £586m in public subsidies to provide unprofitable, but socially necessary services. (approx £1.3bn at 2011 prices)
Last year, the TOCs alone received a net rebate of £2.7bn of your money.

I'm struggling to find the source of these figures and what the full facts behind them are. For example what was the relative investment into fixed assets.

Peter

" said:

I always take issue with the " European railways are better" comment. Yes the French have shiny TGVs and we need those, but in terms of frequency of regional services and quality of stock on urban services (LOndon and Paris compared) Britain wins hands down. Can't argue with the price though.

however all that shiny london stock is at the expense of us northerners! we still have to put up with pacers

" said:

Stephenson at the outset put out the track maintenance to outside contractors and had open access for any operator.

With the former, he found either a) they were subbing out to others who were not really qualified and b) the job was not being done to his standards.(does this sound familiar) He gradually let the contracts lapse and did the jobs "in house " - and did them better and cheaper. In the latter case, he found companies with low powered and/or unreliable engines and poor rolling stock blocked the line for other profitable traffic, so he stopped the open access. These are matters of historical fact.

For some of the reasons why you cannot run a horizontally integrated railway, please refer to the above.

EU legislation requires vertical dis-integration.

Peter

" said:

" said:

Stephenson at the outset put out the track maintenance to outside contractors and had open access for any operator.

With the former, he found either a) they were subbing out to others who were not really qualified and b) the job was not being done to his standards.(does this sound familiar) He gradually let the contracts lapse and did the jobs "in house " - and did them better and cheaper. In the latter case, he found companies with low powered and/or unreliable engines and poor rolling stock blocked the line for other profitable traffic, so he stopped the open access. These are matters of historical fact.

For some of the reasons why you cannot run a horizontally integrated railway, please refer to the above.

EU legislation requires vertical dis-integration.

Peter

But we could pay the same lip service to that as the rest of Europe does