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Lessons from cancelling the InterCity West Coast franchise competition

The Department for Transport competition to let the Intercity West Coast franchise lacked management oversight and the governance of the project was confused, according to the National Audit Office. The spending watchdog has concluded that the full cost to the taxpayer is unknown but likely to be significant, with at least £1.9 million in staff and adviser costs, £2.7 million in legal costs and £4.3 million on external advisers for the reviews that it has commissioned.

The report identifies five essential safeguards against poor decision making in major projects. These are necessary to enable officials to assure Ministers and Parliament that decisions are sound and are value for money. However, in the case of the Intercity West Coast competition, none of these lines of defence operated effectively.

The refranchising process was a major endeavour, with considerable complexity and uncertainty. Nevertheless, the objectives of the Department for Transport were insufficiently clear during the franchise competition. The Department delayed the issuing of the invitation to tender by eight months because it had not finalized how it would implement recent policy changes, such as operators being responsible for stations. There was also confusion among Department staff about some aspects of the process.

The subordinated loan facility was a particular area of confusion. A subordinated loan is capital provided by the parent company which guarantees franchise payments will be made to the Department should the franchisee get less passenger revenue than expected. However, there were significant errors in the tool the Department used to calculate how big a loan it would require bidders to have. The model had been designed to inform internal discussions and received no extra quality assurance once the Department decided to use it to calculate the loan, a key commercial decision.

The competition lacked strong project management and there was no clear route for the project team to get approval for major issues in the project. No one person oversaw the whole process or could see patterns of emerging problems. In addition, there has been considerable turnover in senior positions in the Department. It has had four permanent secretaries in two years and changes of Directors General.

"Cancelling a major rail franchise competition at such a late stage is a clear sign of serious problems. The result is likely to be a significant cost to the taxpayer. "The failure of essential safeguards raises questions about the Department's broader management approach, as well as this specific matter. "It is commendable that, once it uncovered the problems on the franchise, the Department sought to be open about what happened and to investigate further. Among the lessons to be learnt is that staff with line-management responsibilities should be clear that assurance processes are not a substitute for proper supervision and management controls."

Amyas Morse, head of the National Audit Office

Notes for Editors

  • Having awarded the franchise to First Group in August 2012, the Department cancelled the award on 3 October 2012. The Department commissioned two independent reviews. The first, by Sam Laidlaw, published its interim findings on 29 October 2012. The second, led by Richard Brown CBE, will report by the end of 2012 on the wider franchise programme. The NAO study team had access to the same evidence as the Laidlaw inquiry team.
  • The five safeguards are as follows: clarity of objectives which can be referred back to; strong programme management coordinating different streams of work; senior oversight which acts as a sense check; effective engagement with stakeholders; and internal and external assurance processes.
  • Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
  • The National Audit Office scrutinizes public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 860 staff. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of more than £1 billion in 2011.

PN: 73/12