UK: Intercity West Coast: Report Of The Laidlaw Inquiry

Last Updated: 20 December 2012
Article by Clyde & Co LLP and Nigel Taylor

An inquiry into the cancellation of the Intercity West Coast (ICWC) franchise tender has presented its final findings and has identified a series of failings at the Department for Transport (DfT). The report was due to be published at the end of November but its release has been delayed while its contents were carefully considered by the DfT. Sam Laidlaw, the Centrica chief executive and a non-executive director of the DfT, who conducted the inquiry has already noted that the cancellation of the ICWC bid stems from "inadequate planning and preparation, a complex organisational structure and a weak governance and quality assurance framework".

The ICWC tender was the first to utilise a new risk sharing mechanism proposed by the DfT's Rail Value for Money study in 2011 (Risk Mechanism). Under the Risk Mechanism, the annual franchise payment made by the franchisee is adjusted based on national gross domestic product (GDP). This method is intended to make the franchise payment system more responsive to wider economic conditions. The previous "cap and collar" method, where payments are varied according to revenue levels set at the time of the bid, had been criticised for reducing train operator incentives to maximise revenue.

Where the DfT considered there to be a risk of franchisee insolvency under the Risk Mechanism, a subordinated loan facility (SLF) would be required by the bidder's parent company as a hedge against default. The findings highlight the lack of transparency in the process for determining the level of SLF required, as the DfT did not disclose its models to the bidders, a result of which was their inability to reliably predict the size of the SLF requirement.

Tellingly, the inquiry concluded that the amount of the SLF required of the two leading bidders, First West Coast and Virgin Trains, was not consistent with the DfT's own models. Instead, the final SLF required was based on the DfT's view of what was an appropriate level of capital to be injected into the bid vehicles. The inquiry also finds that the determination of the SLF was influenced by extraneous factors and that the bidders were inconsistently treated.

The report points out that a number of opportunities for a full and proper explanation of how the SLF requirements had been determined to be formally escalated and reported within DfT were missed. In addition, the senior decision makers and the Minister of State who ultimately made the decision to award the ICWC franchise to First Group were given inaccurate reports as to how the SLF numbers were calculated.

Technical modelling flaws were discovered in the DfT's model to determine the SLF numbers, including confusion between numbers in real terms and nominal values. Therefore, to the extent that the numbers generated by this model were taken into account in calculating the final SLF, they were understated by almost 50%.

Factors stated as contributing to these errors and omissions include a failure to formally escalate or report within DfT, inadequate planning and preparation, an ineffective and inflexible process timetable, the failure of the organisational structure to set out roles, responsibilities and accountabilities, quality and robustness being subordinated to completing the process on time and a culture of limited ownership and ineffective oversight.

Going forward, the report includes the following key recommendations to ensure that confidence and trust are restored to the DfT procurement process:

  1. Discipline is applied in the allocation and balance of time and resource to officials in procurement
  2. A review is made of the use of SLF as the means of mitigating the risks of franchisees walking away from the franchises
  3. A reconsideration of the commercial flexibility of the process takes place
  4. A credible timeline, incorporating contingency plans, is put in place, with reference to the complexity of the procurement
  5. The franchising programme structure is redesigned to establish clearer roles and methods of escalation of risks and concerns
  6. A skills review is carried out and a needs assessment is undertaken to identify capability, experience or leadership gaps in the DfT
  7. A review is carried out into the terms of reference of the bodies responsible for governance of the franchising programme
  8. A review is carried out into internal and external quality procedures at the DfT

Margaret Hodge, Labour chair of the public accounts committee, responded to the report explaining that the "ultimate failure of this completion was sealed by a rich mix of the department's feeble and forever-changing management and almost non-existent oversight."

A Downing Street spokesman said: "What it makes clear is that, if the problems had been properly escalated and brought to the attention of the senior civil servants and ministers, then we probably could have got this right. We wouldn't have been in the mess we are in."

The ICWC operates 26 million passenger journeys and 3.2 billion passenger miles per year, and is one of the largest rail franchises in the UK. Transport Secretary Patrick McLoughlin has confirmed that the existing operator, Virgin Trains, will continue to operate the ICWC route until 9 November 2014.

The DfT has currently suspended its outstanding rail franchise competitions for Great Western, Essex Thameside and Thameslink pending the outcome of the review process.

A wider review of the DfT's rail franchise programme, carried out by the Chairman of Eurostar Richard Brown, is expected to be published in late December.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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