A serious blunder by officials at the Department for Transport (DfT) has forced new minister for transport Patrick McLoughlin to scrap the competition for the West Coast mainline franchise, sending shares in FirstGroup (FGP) plunging 20 per cent. It's not only hugely embarrassing for the government, coming just weeks after the G4S Olympic security guards fiasco, but a massive shock for FirstGroup, which until last night thought it would be running the line in two months' time.
Mr McLoughlin admitted to "significant technical flaws" in the franchise process that have prompted the suspension of three civil servants and has ordered two independent reviews into why things went so badly wrong. But a review on the wider rail franchising programme - risk assessment and the bidding process - won't report until the end of December. Until we get the result, the minister has suspended competition for the other three franchises currently up for renewal - Great Western, Essex Thameside and Thameslink. FirstGroup is on the short-list for those, too.
"These flaws stem from the way the level of risk in the bids was evaluated," explained the DfT. "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." These, it admitted, could have changed the outcome.
Indeed, FirstGroup offered £265m in guarantees for West Coast, including a £190m subordinated loan. Critics said that level of forfeit for walking away from the franchise if it ran into trouble was too low. Rules have already been changed for the Great Western tender process and, if implemented for West Coast, would have meant First stumping up nearer to £400m.
Clearly, the decision is bad news for First. True, the bid that beat incumbent operator, Richard Branson's Virgin Trains joint venture with Brian Souter's Stagecoach (SGC), was massively optimistic and, some say, unachievable, yet the back-end loading of premium payments to the government would have meant big profits in the early years and some analysts reckon West Coast was worth over 70p a share to First. It put talk of a rights issue to bed, too, and guaranteed the promised 7 per cent dividend growth for the current year, which First had reiterated in an update just the day before.
