Spreadsheet modelling errors are being blamed for the botched bidding process on the £9bn West Coast Main Line rail franchise contract.
The unravelling of the franchise bidding process was the result of frenetic legal and political lobbying last week. But informed sources pointed their fingers at a flawed Department for Transport (DfT) forecast model as the main reason for its humiliating and costly U-turn.
The four bidders will be refunded a total of around £40m; with three other franchise bids put on hold, the ultimate cost to the taxpayer could rise to as much as £300m.
After awarding the contract to FirstGroup on 15 August, the department faced a very public counter attack from current franchise holder Virgin Rail.
Virgin commissioned specialist transport lawyers at Europa Partners to report on the DfT analysis and their criticisms of the forecasting and risk models formed the basis of Virgin’s application for a judicial review of the decision.
The then transport minister Justine Greening called in auditors from her old firm PwC to review the process and data. She was moved in the ministerial reshuffle on 4 September but PwC alerted her successor Patrick McLoughlin that errors had been found in the way the risks were evaluated in each bid.
“Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result,” the DfT said when it reversed its bid decision.
At the heart of the bid process were spreadsheet projections of ticket sales, passenger numbers, and investment plans from each bidder. According to Channel 4 News, these forecasts were matched against projections of gross domestic product and inflation until 2026 to convince the DfT that money would be forthcoming from the franchise holder at some point in that timeline.
The issue has been debated on the European Spreadsheet Risk special interest group (EuSpRIG) Yahoo! forum. Some suggested the forecasting errors and risk assessments were procedural and would affect any computation, whether in a spreadsheet or not.
One of the flaws in the process was that the economic assumptions were only checked at a late stage, when the transport department calculated the size of the risk bond to be paid by the bidder.
When FirstGroup was initially awarded the contract, an up-front £200m security payment had been factored into the deal in case it walked out; Virgin claimed its calculations showed this should have been nearer £600m.
Another member of the EuSpRIG group commented, “When there is a financial incentive to put in assumptions that may get past the scrutiny of those with less insight than the proposers, bad data sometimes does get in.” In other words, an incorrect figure may not always be a mistake.
Three civil servants were suspended as a result of what the new transport minister called “deeply regrettable and completely unacceptable mistakes” in the way the bid process was managed.
Government spokesmen insisted that ministers could not be expected to spot errors in highly technical spreadsheets, but Margaret Hodge, chair of the Commons Public Accounts Committee, said ministers were to blame as the DfL has a “lousy record” for rubber-stamping inflated passenger growth numbers. Her committee, and the Commons Treasury select committee, will be examining the episode in more detail.
In the meantime, the DfT and PwC are reviewing what happened and why, with a view to delivering an initial report by the end of October.
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