Rail shambles: More than a dodgy government calculator

I’m piecing together what I think is a sensational story of Whitehall and Westminster incompetence over the award of the west coast mainline franchise.

The process is still rather murky. But I am led to believe that the specific problem relates to the way in which First Group’s bid incorporated inflation into the computer model it supplied to the Department for Transport.

Earlier this year, four bidders lodged a bid to the Department for Transport (DfT). That involves supplying an Excel spreadsheet with various parameters around passenger projections, prices, capital investment but also economic projections for GDP and inflation.

The bid is governed by what some insiders refer to as a “puritanical interpretation” of EU procurement rules. The Department for Transport rail procurement team works behind a Chinese wall, taking the bids and processing them into anonymised summaries that are in turn presented to the contract award committee (CAC), formed of senior DfT officials.

Two immediate implications: Justine Greening at this point is off the hook, as this process was anonymised, and did not reach her. More worryingly, the raw numbers and assumptions underpinning the bid were not interrogated by top DfT officials until Virgin went to the courts.

First bid £700m more than Virgin in real terms over the course of the contract. In theory it wins, but if it was decided on that alone, then the contracts would always go to the company most likely to go bankrupt. Indeed First Group’s (FG) extra payments arise entirely between 2021 and 2026.

FG has got form for walking away at the end of contracts. To stop this the bids are “risk-adjusted” by the DfT on a variety of parameters. And then a calculation is made of the security deposit lodged by the bidder with the government.

That calculation is an output of the DfT spreadsheet, dependent on your assumptions. Virgin’s lower risk bid required a £40m security. First’s £200m. Virgin contend that First’s security should have been at least £600m, which would have hugely altered its finances.

What happened today was that the DfT admitted that the £200m risk bond was wrong because of a basic mathematical mistake, as basic as not factoring in inflation. But appearing at the Treasury select committee last week, First boss Tim O’ Toole said that the company’s calculations on this were the same as the DfT’s.

So what happened? Did the DfT and First make exactly the same mistake? Or did the DfT just waive through the assumptions on inflation that First had made? Clearly if the bidders know that the bid is in fact a game where the winner is the one that gets the spreadsheet to come out with the highest possible premium payments to government, there are incentives to game the spreadsheet.

At this point things get a little dark. Did DfT officials harbour lingering resentment about Virgin running rings around them? (as recently as the 2011 one year contract extension insisted by then Transport Secretary). Did ministers over-complicate the franchises by introducing adjustments to account for the state of the economy? At what point did Justine Greening know that all was not well in the bid process (Patrick McLoughlin said today he had been briefed on some technical problems on his first day as transport secretary)?

Virgin claims to have lodged all these objections with department in mid-August. Above all, why did it require a legal challenge for the entire bid methodology to crumble? It certainly seems like the lawyers defending the government must have discovered they did not have a leg to stand on.

All this will be the subject of inquiries for government, and of course by us. But this is about a lot more than a dodgy DfT calculator.

Follow @faisalislam on Twitter.