In the last edition of the Baker & McKenzie Public Law Newsletter, we examined the failings in the Department for Transport (the "DfT") tender process for the West Coast Main Line franchise (the "Franchise").

On 29 October 2012 the DfT published an interim report of the Laidlaw Inquiry (the "Inquiry") setting out the Inquiry's initial findings into what went wrong with the procurement process which resulted in the cancellation of the award of the Franchise to First West Coast Limited and the decision being taken to re-run the tender at significant expense. 

Sam Laidlaw, a senior business figure and DfT non-executive director, led the Inquiry and was assisted by Ed Smith, a non-executive DfT board member along with teams from Linklaters LLP and Ernst & Young LLP (the "Inquiry Team"). Mr Laidlaw released the following statement on the publication of the interim report:

"In the limited time available this is necessarily only a preliminary report. What is clear however is that in seeking to run a complex and novel franchising competition process, an accumulation of significant errors, described in the report, resulted in a flawed process".

"These errors appear to have been caused by factors including inadequate planning and preparation, a complex organisational structure and a weak governance and quality assurance framework".

Initial Findings

The interim report's principal findings centre on what is known as the Subordinated Loan Facility (the "SLF"), which essentially relates to how much money would be put up by the parent company of each bidder by way of collateral to mitigate against the risk of each bid failing to meet its financial forecasts and/or the risk of the franchisee's insolvency.

In summary, the Inquiry Team found that the DfT: 

  • was aware of a lack of transparency in the process for determining the level of  SLF required but nevertheless continued with the tender process;
  • provided bidders with inadequate information which did not allow them to reliably predict the likely level of the SLF requirement, making it difficult for bidders to properly determine the optimal capital structure necessary for their bids;
  • did not comply with its own published guidance in calculating the SLF requirement in respect of the two leading bids;
  • adopted a method to calculate the SLF requirement which was influenced by extraneous factors and which caused the two leading bidders to be treated inconsistently; and
  • used a technically flawed model to determine the level of the SLF requirement.

What happens next?

The Transport Secretary, Mr Patrick McLoughlin has assured commuters that the same train service will continue to run; passengers will be served by the same frontline staff and the same services and will be able to use the same tickets with enhanced future timetables. Virgin Trains will continue to operate the franchise for a period of up to 14 months after its contract ends on 9 December to allow the Government to run a new procurement process for an interim agreement.

A final report is due to be published at the end of November.  In the meantime, a second interim review into the whole of the DfT franchise programme is still being conducted. Pending the outcome of the independent review process, the DfT has suspended all its other outstanding franchise competitions - Great Western, Thameslink and Essex Thameside and all bidders for the Franchise shall have their bid costs reimbursed, at an estimated cost to the Government of £40 million.

The Inquiry's interim report is available here.