Procuring new trains report published

• Report: Procuring new trains
• Report: Procuring new trains (PDF 140KB)
• Inquiry: Procuring new trains
• Public Accounts Committee

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The Department for Transport’s decision to buy the new trains for Intercity Express and Thameslink itself has left the taxpayer bearing all the risk.

The Department has no previous experience of running a procurement of this kind, let alone two with a combined value of £10.5 billion. Yet it has chosen to break with its previous approach of leaving it to rolling stock companies and train operators to buy trains, transferring risk away from the rail industry back to government.

This means that if passenger forecasts are wrong and fewer new trains are needed in future taxpayers will have to pick up the bill.

The only way the Department can limit this risk is by requiring train operating companies to use these new trains to run their services regardless of whether they best fit the services they would like to offer.

We are concerned that the Department did not appear to have looked at whether there were better ways of achieving its objectives. For example, it could have addressed the lack of incentives that mean train operating companies do not have an interest in buying trains which minimise maintenance costs to Network Rail.

Furthermore the Department’s decision to take over the procurement has led to confusion over the respective roles and responsibilities of government and the industry which need to be clarified.

The Intercity Express Programme was poorly managed from the outset.

After Sir Andrew Foster completed a review into the value for money of Intercity Express in 2010, the original successful bidder Agility Trains came back with a revised bid that was 38% cheaper than its original one. Had it not been for the Foster review, the taxpayer could have been badly ripped off.

The Department had begun the procurement without a clear idea of how many trains would be needed, which routes they would run on and what form of power would be required. In 2009 it had to change the specification for the trains so that they could handle both diesel and electrified options, which is likely to mean higher fares for passengers.

Yet again we see that the Department has limited capacity and capability to manage large scale procurements, and that it remains overly reliant on consultants.

Whilst we welcome Hitachi’s decision on Intercity Express to invest in the UK, it is extremely disappointing that Siemens will not also be manufacturing the Thameslink carriages in the UK, when the £2.8 billion contract is funded by the UK taxpayer and farepayer. In future the Department must be much more assertive in ensuring that the UK economy benefits from large public sector capital investment programmes."

Margaret Hodge was speaking as the Committee published its 24th Report of this Session which – on the basis of evidence from Philip Rutnam, Permanent Secretary, Department for Transport, Michael Hurn, Director, High Speed Rail and former SRO for both Thameslink and Intercity Express programmes, DfT and Lucy Chadwick, former SRO for Intercity Express (currently DG International, Security and Environment Group), DfT – examined Procuring new trains.

Break from previous form

The Department for Transport’s (the Department’s) decision to lead on two major train procurements itself, despite having no previous experience of doing so, was a significant break from its previous approach of leaving it to the rolling stock companies and train operators to buy trains. The Department has stated that it intends to leave some operational decisions to the market and to intervene in others. But it has not set out when these different approaches will apply, which is confusing for the industry. The Department’s decision to buy the trains itself has constrained the options available to future train operating companies as they will be required to use these trains to run their services.

It is open to question as to whether the negotiations with preferred bidders provided best value. It is surprising, to say the least, that Agility reduced their price by 38% after Sir Andrew Foster reviewed the issue. By buying the trains directly the Department has taken on the risk of passenger demand forecasts being wrong. If demand proves to be lower than forecast taxpayers would have to cover the costs of any financial shortfall. These two major projects also demonstrate yet again that the Department has limited capacity and capability to manage large scale procurements, and that it remains overly reliant on consultants.

Whilst we welcome Hitachi’s decision on Intercity Express to invest in the UK, it is extremely disappointing that Siemens will not also be manufacturing the Thameslink carriages in the UK, when the £2.8 billion contract is funded by the UK taxpayer and farepayer.

Conclusions and Recommendations

The Department awarded two large contracts to private sector consortia to supply, finance and maintain new trains for Intercity Express and Thameslink with a combined cost of around £10.5 billion, which will be paid by train operators. The Department has opted to lead these procurements itself, rather than have rolling stock companies finance the trains and lease them to the train operators, which has been the usual model for train procurement. The 866 new carriages procured from the Hitachi-led consortium (Agility Trains) under the Intercity Express programme will replace ageing trains on the Great Western and East Coast lines.

Siemens, in the Cross-London Trains consortium, will supply 1,140 new Thameslink carriages which are needed as part of a wider improvement programme, increasing the capacity and improving the frequency of this cross-London commuter service. The contracts will run for 27.5 and 20 years respectively. The Department awarded both contracts more than two and a half years later than intended, largely because of pauses to the procurements and the challenge of securing finance for these projects during the financial crisis. The Intercity carriages are now expected to enter service between June 2017 and 2020, and the Thameslink stock between 2016 and June 2018.

Confusion caused in industry

The Department’s failure to articulate its role in the rail system has caused confusion in the rail industry. The Department considers that in taking the lead it is best able to secure value for money for taxpayers in procurements of this scale, but it has not set out when it intends to use this approach, causing confusion in the industry. The Department believed that it should lead these procurements because of their scale and complexity, and the need for greater uniformity in the fleet which would bring economies of scale and other operational benefits.

It also believed that the train operating companies did not have the right incentives to buy trains which minimised maintenance costs to Network Rail. However, the Department’s role in this procurement appears to be at odds with its previous policy of transferring responsibility for procuring trains to the industry. The Department did not appear to have examined alternative ways of achieving its objectives, such as providing the train operators with the right incentives. The Department has no clearly stated rationale for the aspects of rail where it will simply set policy and strategic goals, and those where it believes it has an additional responsibility to intervene in operational decisions.

Recommendation: The Department needs to work with the industry through the Rail Delivery Group to clarify the respective roles and responsibilities of government and industry, and to address weaknesses in the system including the lack of appropriate incentives to achieve a high-performing network, including good quality trains and low track maintenance costs. 

The Department’s decision to purchase the trains leaves all the risk with the taxpayer. By deciding to buy the trains directly the Department has taken on the risk that if fewer new trains are needed in future taxpayers would need to cover the costs of any resulting financial shortfall. The Department’s decision to procure the trains itself and guarantee that they will be leased for defined periods has left it bearing the risk that passenger numbers may be lower than predicted. The only way the Department can mitigate this risk is to constrain the options available to future train operating companies by requiring them to use these new trains to run their services rather than having the flexibility to choose trains that best fit the services they would like to offer.

Recommendation: The Department needs to calculate the potential impact of its decision on the taxpayer and put in place plans to mitigate that impact, if demand for train services means it is not economical for train operating companies to use these trains as expected. More broadly, the Department needs to develop with the industry a rolling stock strategy, setting out what rolling stock will be replaced, when and by whom to provide certainty to the industry.

Value for money was undermined by the lack of certainty at the start of the procurement process. The Department began the procurement of Intercity Express trains without a clear idea of how many trains would be needed, which routes they would run on and what form of power would be required. The Department’s original procurement notice was for between 500 and 2,000 trains, a very wide range, and it requested bids for trains on routes which were later excluded from the procurement. In addition, the Department decided in 2009 to electrify the Great Western main line which significantly changed the requirement, as there was no longer a need for diesel trains. Its specification therefore is goldplated to handle both diesel and electrified options and this is likely to mean higher prices and higher fares.

Recommendation: The Department, working with key partners such as Network Rail, train operating companies and rail manufacturers, should develop a long-term, integrated strategy covering infrastructure, rolling stock and franchising, so that major decisions can be taken in a logical order which provides the industry with greater certainty.

The procurement process for the Intercity Express Programme was poorly managed from the outset. Agility Trains’ offer of a large unsolicited reduction at a late stage in the procurement process, when it was the only bidder for the Intercity Express programme demonstrates that the procurement process was poorly managed and that the Department’s oversight of the likely programme costs was weak. The Department selected Agility in 2009, but in 2010 the Government put the programme on hold as part of its overall spending review and commissioned a re-evaluation of the programme’s value for money, including potential alternatives. Agility then submitted a revised bid with a 38 per cent reduction in price. The Department admitted that this raised questions about whether the original tender was inflated. The Department would have needed to cancel and re-run the procurement if Agility had not reduced its bid.

Recommendation: Before starting any procurement the Department should develop its knowledge of the supply market and underlying costs to inform its procurement strategies, to determine whether bidders’ proposed prices are reasonable, and to help negotiate prices with suppliers.

We welcome Hitachi’s commitment to invest in County Durham so that trains are assembled in the North East and support is given to the UK supply chain. However, we are disappointed that Siemens will not be manufacturing the 1,140 new Thameslink carriages in the UK.

Recommendation: The Department should be more assertive in using its powers to require information on, for example, the supply chain proposals, the use of SMEs and the employment in apprenticeships to ensure that the UK economy and UK-based industry benefit from large capital public sector investment programmes.

The Department still lacks the skills needed to manage complex procurements. The Intercity Express Programme illustrates once again our concerns about the very small number of senior staff in the Department with the skill and experience to oversee large complex procurements, resulting in frequent changes to the senior officials responsible and a reliance on consultants to manage these programmes. This is evidenced by the fact that there have been 7 changes of Senior Responsible Officer for the Intercity Express Programme since November 2007. The Department recognises that it lacks the in-house commercial and project management skills that it needs to manage complex procurements and noted that it has proposals in hand to recruit more permanent staff and to develop commercial skills in new graduate recruits. However, the Department accepts that these will take time to develop.

Recommendation: The Department must develop, set out and implement a clear strategy for developing the capability needed to deliver its rail strategy and address the concerns we have raised over many years about its senior management capacity and its commercial skills.

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