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Thursday 6 December 2012

Virgin Trains Twice Resurrected

The findings from the investigation by non executive Department for Transport (DfT) board member Sam Laidlaw into the shambles that was the bidding process for the InterCity West Coast (ICWC) rail franchise have now been published, and make only moderately grim reading for all concerned. In the meantime, Virgin Rail Group (VRG), far from being down and out, will operate ICWC for another two years.

New paint job stood down once again

That makes two extensions to a franchise term that was supposed to have ended by this year at the latest. And, as Christian Wolmar has pointed out, the deal to run ICWC until late 2014 is for VRG to operate under a management contract for a fixed percentage fee – which means the operation is a concession, rather than a franchise. How the Great Western franchise is handled now will be interesting.

So what of Laidlaw? Well, “the DfT used flawed and inconsistent methodology when guiding bidders on the amount of risk capital (known as the Subordinated Loan Facility) they would need to offer to guarantee their franchise against default ... the Subordinated Loan Facility figures resulting from the flawed methodology were then varied in a way that contravened franchise competition rules” is the important bit.

Translated into plain English, this means that First Group’s bid, which was riskier – it assumed growth would keep on climbing even after disruption due to HS2 construction – did not result in their being asked for a far larger guarantee in case of default. VRG estimated that the amount was short by at least £400 million. First’s share value fell by about £400 million after the award was pulled. Go figure.

However, Laidlaw also manages the most expertly diplomatic explanation to the apparent bias against VRG: “while there were inconsistencies in the way First Group and Virgin Trains Ltd were treated during the franchise process, the report finds that there is no evidence of a culture of bias against Virgin at the DfT”. That means it was only a few civil servants who wanted to see the back of VRG, not all of them.

The result, of course, was that ministers were told the deal for First to take over ICWC was sound, and when VRG gave notice of a legal challenge, were unaware of the problems until a last minute demand by the minister to look again and confirm the numbers brought the admission that caused him to pull the whole exercise. So what is Laidlaw recommending for the future?

I hate to relay this news, but “there is nothing in the report to suggest that the flaws discovered in this franchise competition exist in any other DfT procurements”, which is only going to encourage the DfT to carry on franchising. After all the expense of ICWC, one might expect them to at least pause and think. How would I call it? It’s fouled up once, and it has all the potential to do so again.

But using a concession system does seem so much easier. Small hint there, DfT.

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