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Wednesday 3 October 2012

Team Shambles Award For DfT

Back in the 1970s, when Formula 1 racing was, shall we say, not quite as organised and sophisticated as it is today, Autosport magazine would regularly award the title of Team Shambles to whichever entrant was having a particularly bad race. A number of teams found themselves the unwilling recipients of this dubious gong. But it never, but never, went to the race organisers.

A Virgin Pendolino train passes Tamworth

So to see the Department for Transport (DfT) award themselves a modern day Team Shambles trophy after sticking to their guns on the award of the InterCity West Coast (ICWC) franchise to First Group, and thus ending the tenure of Virgin Rail Group (VRG), only to bin the whole process and thereby admit they fouled up, makes one wonder what on earth is going on in Whitehall.

Quite apart from the continuing uncertainty, there is the £40 million plus in bid costs which will be reimbursed to First and VRG, and which will be stumped up from – as ever – the taxpayer. And then we get to the nub of the affair: the VRG legal challenge, which will not now be contested, suggesting that this was not only the reason the process was dropped, but also that VRG would have won.

So what was the basis for the challenge? It has to be stressed at the outset that it was not First’s bid being disputed by VRG: as Roger Ford of Rail Business Intelligence has noted, “Virgin’s challenge centres on the penalty for default.  First’s largest financial commitment is a £190 million subordinated loan facility.  There is also a £45 million performance bond. When National Express defaulted on its NXEC franchise, the Group forfeited a subordinated loan worth £40 million plus a £32 million Performance Bond”. The potential for default is central to the dispute.

That’s because VRG lost two bidding rounds for InterCity East Coast (ICEC), and both times, the winner was forced to default and hand back the keys, the latter occasion (National Express, above) being clearly due to an over-optimistic bid.

Back to Roger Ford: “The central issue is risk mitigation, given the heavy back-loading of the premium profile with Virgin challenging the size of the subordinated loan facility from the parent group to the new franchise. Virgin claims that had ‘the criteria set out in the Invitation to Tender’ been followed, First’s loan should have been set at more than three times the £190m required.  DfT is charged with failing to use the required ‘risk adjusted view of the premium offered by the bidder’, in line with the ITT”. So DfT bailed out before they were shot down.

Essentially, this calls into question not only the franchising process, but also the whole way that passenger rail operation is managed by the Government. As Christian Wolmar has asked on many occasions, “what is franchising for?”.

And now we need an answer, although Team Shambles may not supply it.

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