The Prime-Minister’s office released a statement rejecting
Richard Branson request for a review of the decision to award the West Coast rail
network franchise to FirstGroup. Virgin
have now forced a delay by requesting a judicial review?
Branson’s reaction does not come as a surprise to anyone
with experience of large project bidding.
He claims that FirstGroup cannot create enough new seats to generate the
extra revenue. The deal seems to include
higher payments to the government in the final years of the contract and Branson
implies that they will hand back the franchise before these fall due. Tim O’Toole states that their bid is
deliverable and FirstGroup point to Virgin’s service record, implying that they
will do better.
Here are three reasons why the Government may be missing a
golden opportunity to:
1. Demonstrate that
they are wily business men and women.
The real question in the public mind is - should any contract
licence be awarded to the “highest bidder” without a full examination and
public explanation of the winning bidder’s business model?
The same public review should apply to large government
sponsored projects that are awarded to the “lowest bidder”. Perhaps this should apply to any deal where
success can only be measured after the tenure of the incumbent government. Here is a true story that highlights why a
process needs to be more than just “fair and robust”.
A competitor won a bid with an 8-figure price that was 20%
below most of the other experienced bidders.
Bids were sealed and opened publicly to avoid any concern of impropriety. We were keen to understand how, with a very
fixed specification, the winning bid was so much cheaper than everyone else.
The answer was not hard to find. Engineer’s time and salaries represented a
major part of this 10 year project. Their
engineering costs were one-fifth of the rest of us. Essentially, they were gambling their profit
and reputation on a number of factors occurring during the delivery of the
project:
-
they planned to use local, less experienced
workers to do more of the work than we felt appropriate (no I’m not talking
about G4S);
-
they would load the inevitable contract
variations (that normally did not go back out to open tender) with higher than
required engineering and material mark-ups to add back profit, and increase the
bill to the tax-payer (no I am not talking about the Channel Tunnel);
-
they could sacrifice quality because it would be
more than 10 years before anyone could start to measure their work from a
reliability or performance basis.
I am not complaining.
You could say that Virgin have also been out-smarted by a wily
competitor. Once the numbers are that large,
it is a war and “nothing is fair”. You
could argue business ethics and reputation are more important in the long run,
but which set of shareholders do you think will be happier in the short-term?
2. This is another
industry at risk of dominant player behaviour. I worry about the “largest UK operator”
winning this contract. So much for the
competition we were promised when the rail network was privatised.
The reality is that customers and employees are impacted by higher-than-inflation
price increases across almost all the privatised industries. This extends to situations were a dominant
player controls the supply chain and transfer pricing.
Over 150,000 customers have signed the petition, so I
am delighted that pen and paper will be left dry today.
If FirstGroup’s business model is sound (and I have no
reason to suppose that it is not) then they should not object to levelling out
the repayments to the Government over the life of the contract, placing sums in
escrow or including a substantial penalty payments clause in the contract for
any early return of the licence.
3. Demonstrate
to the public that the outcome of their bidding process is correct. "As far as the prime minister was
concerned, there was a fair and robust process and the right decision has been
made," Prime Minister David Cameron's spokeswoman told Reuters.
It is often easy for a
leader to ask the wrong question of those who need to justify a decision. Of course, everyone will confirm to him that
the right decision has been made… but do 150,000 people believe it? History suggests that the decision-makers of
long-term contracts are seldom around when the tax-payer or customer has to
pick up the bill.
The
Government should choose a different path for this and any other major contract. They should buy themselves a little time on
this one to prove to the British Public that this decision is correct rather
than appear to rush it through during the holiday season.
