UK’s West Coast Main Line Franchise Cancelled

In a move that vindicates Sir Richard Branson’s Virgin Group, the franchise for the West Coast Main Line which links London, Birmingham, Manchester, Liverpool and Glasgow has been cancelled due to “significant technical flaws” during the franchising process.

The announcement was made in the early hours of the morning (3rd October) by recently appointed transport secretary Patrick McLoughlin who 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”.

McLoughlin went on to explain “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.”

Sir Richard Branson and Virgin Group Vindicated in West Coast Main Line Franchise

The flaws discovered by the DfT (Department for Transport) were uncovered during preparation for the High Court hearing which Virgin Group demanded after it lost the 13 year, 4 month franchise to First Group on 15th August (2012). Virgin Group founder Sir Richard Branson criticised the way the West Coast franchise was assessed and awarded immediately, and described the process as flawed.

Until McLoughlin’s earlier announcement, the DfT had insisted that it would fight Virgin Groups claims and McLoughlin told Parliament on 12th September he was satisfied that the bidding process was fair, the decision made with due diligence and that they would stick with their decision to award the contract to First Group who won the franchise with a £5.5 billion bid.

However, the DfT has subsequently confirmed that it will no longer contest the judiciary review of the the franchise which was due to start tomorrow in the High Court. McLoughlin in the meantime is examining whether to ask Virgin Trains, who currently operate the West Coast franchise until 9th December, to continue after this date or whether the DfT’s own team will be brought in to run it.

The flaws uncovered during the preparation for the High Court hearing relate to the way procurement of the franchise was conducted by its officials and more specifically, the evaluation of the level of risk in each bid, mistakes in the assessment of inflation and passenger forecasts and how much money bidders were asked to guarantee.

McLoughlin has ordered two independent reviews to find out what exactly happened, with the first being overseen by two DfT non-executive directors, Sam Laidlaw, CEO of Centrica, and Ed Smith, former strategy chairman of PricewaterhouseCoopers who will examine the whole process and determine what went wrong. Their initial review is due by the end of October. Richard Brown, Chairman of Eurostar will conduct the second review which will report on whether changes are needed to the way risk is assessed in franchise bids, the bidding and evaluation process, and how to resume passenger rail franchising. This report is scheduled for the end of December.

Three Department for Transport Officials Suspended

Subsequently, three DfT officials have been suspended who are all believed to be involved in procurement and McLoughlin has paused the competitions for other franchises currently underway for Great Western, Essex Thameside and Thameslink.

McLoughlin has apologised to the four bidders (First Group, Virgin Group’s joint venture of Virgin and Stagecoach, Abellio and Keolis/French National Railways) for the cancellation of the franchise and has said they were not to blame in anyway. He also confirmed that the bidders will have their bidding costs reimbursed, which is likely to cost around £40 million with Virgin’s share expected to be around £14 million. The DfT could also face further claims for compensation from First Group as it’s shares plummeted by 20% this morning reducing their value by around £230 million. First Group could claim compensation if its profitability is affected by not winning the franchise.