UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 537-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Rail 2020: West Coast Main Line franchise

Wednesday 31 October 2012

Rt Hon Patrick McLoughlin MP and Philip Rutnam

Evidence heard in Public Questions 579 - 717

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

Oral Evidence

Taken before the Transport Committee

on Wednesday 31 October 2012

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Julie Hilling

Kwasi Kwarteng

Mr John Leech

Iain Stewart

Graham Stringer

________________

Examination of Witnesses

Witnesses: Rt Hon Patrick McLoughlin MP, Secretary of State, and Philip Rutnam, Permanent Secretary, gave evidence.

Q579 Chair: Good afternoon and welcome to the Transport Select Committee. Could we have your name and position? We do know who you are but we would just like it recorded, please.

Mr McLoughlin: Absolutely. Patrick McLoughlin, Secretary of State for Transport and Philip Rutnam, Permanent Secretary, Department for Transport.

Q580 Chair: Thank you very much. Secretary of State, I think you wanted to make some introductory remarks.

Mr McLoughlin: Just a very brief opening comment, if I may, Chair. I fully understand why the Transport Committee today has called this evidence session. The mistakes that were made on the InterCity West Coast franchise should not have been made, are very regrettable and, indeed, very serious for the Department. We have already apologised to the bidders involved and to the taxpayers, who have a right to expect better, and I do so again today.

I fully realise that a lot has changed since I last gave evidence to the Committee about this matter on 12 September. Thanks to the rapid work that has been done initially by the Laidlaw inquiry, we have an interim report. That is very much an interim report, but we will get the full report hopefully by the end of November, which I know that everybody will await with interest.

It was on 2 October I was advised that technical flaws in the conduct of the West Coast competition were so serious that the competition would have to be cancelled and I announced that as soon as I could after I received that advice. I will leave it at that and await the questions of the rest of the Committee, Madam Chair.

Q581 Chair: Thank you very much. Indeed on 12 September, when both of you came in front of the Committee, you both said that you were content with the way the Department had acted. Since then we have had the interim Laidlaw report, which can only be described as a damning indictment of the Department. The report found that the Department knew the process was flawed and lacked transparency, that it changed the rules at the last minute without telling the bidders, acted unfairly and was aware it was open to legal challenge. In view of all of that, Secretary of State, do you wish that you could have asked more questions within the Department before you came to the conclusion that you were content with the way things were being dealt with?

Mr McLoughlin: I would just like to go back on one point. The Laidlaw inquiry is a damning inquiry; I certainly accept that. I don’t think it is a damning inquiry into the Department; it is into one section of the Department. I am very keen to say that there are a lot of people who work incredibly hard in the Department who have nothing to do with this particular West Coast franchise and I wouldn’t like them all to be condemned in the way that certain people are blanketing the Department. I, as Secretary of State, certainly would like to qualify the nature of the Laidlaw report to one section where the Department went wrong, as opposed to everybody who works in the Department, some of whom work incredibly hard and work well for the Department.

Do I wish I had asked more questions? Well, I did ask questions and I was assured when I came here, in the little time that I had-it was fairly shortly after my appointment, within a week, that I was here and for various reasons I wasn’t in the Department for the whole week-that the award of the franchise was technically safe. But do I regret not asking more questions? Although there were some small issues that had come to light, I was assured that that would have no change on the overall awarding of the franchise.

Q582 Chair: What were these small issues that you have been told about now?

Mr McLoughlin: I wasn’t given specific details. There was work being done. I was not given the specific details of where they thought the problems were.

Q583 Chair: Didn’t you feel, in the light of the furore and the gathering storm that there was around this franchise, that you should have asked what those issues were? If you were told that there were small issues, there was a public storm brewing, there were allegations being made, documents had been disclosed, Virgin had already published to this Committee and generally statements and allegations about unfair treatment and miscalculations-in view of all of that-don’t you think you should have asked what the small problems were that they described to you as small?

Mr McLoughlin: I was told that there was a lot of work going on as a result of the judicial review and I was told, as I say, that they would not have had an impact on the overall outcome of the franchise. Now, could I have asked more questions? Perhaps I could have asked more questions, but I probably would still have got the same answer, because at that stage that is what the Department believed.

Q584 Chair: One of the most serious findings in the Laidlaw report, and I accept it is an interim report but nevertheless there are some very serious findings there, is that the Department or the relevant section of the Department-I accept your comment on that, Secretary of State-decided to proceed with the franchise competition when it was known that it was open to legal challenge. Who took that decision? Can you answer it or, Mr Rutnam, can you tell us? That is a very serious charge. The Department knew it was open to legal challenge yet decided to proceed with the franchise. Who took that decision?

Philip Rutnam: Let me say, first of all, that I would just like to echo the Secretary of State’s comments about the seriousness of the Laidlaw conclusions-the initial findings that he has made. These are indeed damning in relation to certain decisions made by the Department and these have very significant implications for us as an organisation. However, I would also like to point out one thing, which is that, as Mr Laidlaw has observed, he has not sought in this report to identify the level at which decisions were made within the Department. He refers to this in paragraph 1.6.

Q585 Chair: I am asking you the question, Mr Rutnam. If he had stated in his interim report who it was, it would be a different discussion. I am now asking you here who took that decision in the knowledge that the Department was open to challenge?

Philip Rutnam: I am afraid I am not going to be able to answer that question because, in parallel with the Laidlaw inquiry, we have an HR investigation into the conduct of individuals within the Department, the purpose of which is to establish the facts in relation to which individuals did what, so that on the basis of establishing those facts then decisions can be made as to whether disciplinary action is appropriate. That investigation is continuing, it has not yet completed and it would be wrong to pre-empt that investigation by my saying now who I believe made decisions in relation to each of the initial findings that Mr Laidlaw has made.

Q586 Chair: If you don’t wish to name or are unable to name any individuals, and I am not seeking the names, could you then tell me, on process, once that decision had been made, was that then signed off by a Minister?

Philip Rutnam: That decision, I have to say, relates to a period before I was in the Department, so I can’t give you personal testimony in relation to that decision. I have to say I am not aware that it was a matter that Ministers were consulted on, but I cannot give you an authoritative answer now because the investigation process is continuing.

Q587 Chair: We would like an answer on not just who took the initial decision but was that reported to a Minister? Was it signed off by a Minister? It is a very crucial point, isn’t it?

Philip Rutnam: I completely understand that. Just to reassure you, the Department is seeking to proceed on this matter with absolute vigour, determination and speed. The fact that we now have a set of initial findings from Laidlaw, produced before the end of the month in which we had to make the decision to withdraw this award, is evidence of the speed with which we are trying to progress. But I completely take the point that you would like to know who was responsible for what.

Q588 Chair: Yes, I want to know who took the decision and who signed it off. Would you expect a Minister to be aware of a decision of this sort?

Philip Rutnam: I would like to make a slightly broader point. On matters such as the points identified in the initial findings where major decisions are being made in relation to risks that the Department is running, where major issues around process are being identified, where there is the risk that something is going awry, I would expect those issues to be escalated to the top of the Department.

Q589 Chair: Does that mean a Minister?

Philip Rutnam: If a decision requires ministerial involvement then, yes, it would. I would expect that, but that is what would be my expectation in terms of the professional standards to which we would work. Laidlaw has clearly made a general finding that we have not worked to the professional standards expected on this matter. The question of who knew what and when is something that will come out when these investigations, including the HR investigation, are complete.

Q590 Chair: You have referred to the HR investigation-the ongoing one being undertaken by the Department. Mr Laidlaw makes reference to that in his report in the context of saying that he hasn’t been able to see all the documents or interview all the people he wanted to because of this parallel investigation going on. Is there any suggestion here that he has been denied access to individuals or to information?

Philip Rutnam: I am not aware that there is an issue in relation to access-the ability of Mr Laidlaw to interview any individuals in the Department. I am not aware of that as an issue at all. Issues I am aware of have been in relation to his access to information that is not in fact the Department’s but third parties’ information, which is commercially confidential. We have to go through due process before releasing that. That is something which is well under way. Also, there is an issue about access in relation to legal advice, which is covered by general issues in relation to legal and professional privilege, which is also being actively addressed.

Mr Laidlaw has, I believe, made clear that he feels he has benefited from the full cooperation of the Department, and in the very short time that this inquiry has been under way he has received an immense amount of information. I don’t think he has actually been able to process all the information yet received. He also refers to that in the report.

Q591 Chair: But you are actively seeking to deal with the requests he has made.

Philip Rutnam: Absolutely.

Q592 Chair: Is that what you say?

Philip Rutnam: Indeed; of course.

Mr McLoughlin: He issued a statement to that effect this morning, bearing in mind some of the comments that are being made. He actually said that he had not been held up from the information that he needs.

Q593 Mr Leech: Secretary of State, it is easy with hindsight to say, "Yes, I could have asked more questions of my officials." Is it not the case that those officials should have been telling you the facts rather than waiting for you to ask questions?

Mr McLoughlin: You are saying "with hindsight". With hindsight, I could say a lot of things, but that is on the background of the information we have given. What becomes obvious in reading so far the interim report of Laidlaw is that decisions were taken and probably not referenced far enough up the seniority of the service; discussions were taken. Information was given to different bidders in different ways, which meant that they would have put in different figures because of the information they actually received. So what we are seeing is, I am afraid, a very big breakdown in the way in which the process was conducted.

Q594 Mr Leech: What concerns me is that it would appear on the face of it that officials were withholding information from Ministers and from you as the Secretary of State for which ultimately you have to take responsibility. Would that be a fair assessment?

Mr McLoughlin: I am not sure, Mr Leech, that that is a fair assessment in that it was a deliberate process. It is rather difficult to be absolutely clear on this until we have the final report from Mr Laidlaw, but the implication behind what you are saying is that it was deliberately concealed. I am not prepared at this stage to say it was deliberately concealed, either from Ministers or more senior up the Department. Time will be needed to see, when we get the full report, whether that’s the case or not.

Q595 Mr Leech: Finally, is there any question about whether any of the previous franchises that have been awarded may have had similar problems where things were withheld from Ministers, either deliberately or otherwise, that could ultimately have finished up with the same outcome, only for the fact that no one has actually done a legal challenge?

Mr McLoughlin: I don’t think so because the truth is that this is a new process. Moving to the longer franchises, in the main, was a new policy process. Don’t forget, the Department, irrespective of Government, was always trying to learn lessons from when things went wrong. In the exchange that I had with the former Secretary of State in the House of Commons on Monday, when he talked about the longest of franchises, he thought that that was a problem. That is the former Chancellor, Mr Darling; I can’t remember his seat. When he talked about longer franchises it was drawn to my attention, I must admit, after I got that question, that Chiltern Railways, for instance, was actually a 20-year franchise, which was actually concluded just before Mr Darling arrived at the Department. So we have examples of very long franchises, and people who use that line will say that there has been a remarkable improvement since that long franchise has been given.

But we have the experience of the collapse of the East Coast franchise, so obviously we always look to develop and improve the franchising system, both for the benefit of the passenger and also the taxpayer. When we come to the West Coast Main Line, as you, Mr Leech, know, who use it-in fact several members of the Committee use it quite a lot-there has been a huge amount of investment on that line.

Q596 Chair: In this case the application for the judicial review prompted the work that led to you discovering the major problem. So would you say you owe a debt of gratitude to Richard Branson?

Mr McLoughlin: The country owes a debt of gratitude to Richard Branson for all he has achieved in the rail and the aviation industry. Look, I don’t make light of what has gone wrong, because what has gone wrong has been very serious and it’s very serious as well for the train operating companies to have confidence in the way in which future franchises are going to be conducted. That is why we have two-well, actually three-inquiries. As we say, there is the HR inquiry going on, but there is the Sam Laidlaw inquiry and the Richard Brown inquiry, which I hope will report by the end of the year.

Q597 Iain Stewart: I would like to ask a couple of supplementaries on the response that Mr Rutnam gave to your initial questions. Mr Rutnam, you became permanent secretary in April. The interim Laidlaw report finds that it was in the first three months of 2012-before your appointment-that concerns about the transparency of the SLF process were known to the Department. Were you personally briefed by your predecessor or any other official that this was an issue?

Philip Rutnam: No, I was not briefed that there was an issue.

Q598 Iain Stewart: Thank you; I just wanted to clarify that. The other supplementary I had relates to the information that the Laidlaw review will be considering. In his interim report, in paragraph 2.4.5, he says: "I considered that there was insufficient time to conduct an email capture and review in advance of preparing this report and have not instructed that to be done." You will be aware that there are serious concerns in the press that there were emails circulating in the Department on an "anyone but Branson" campaign. Do you not think that there should be a review of emails sent between officials?

Philip Rutnam: First of all, yes, you are right; there have been comments in the press that there is somehow some set of emails within the Department. I can tell you that, from all I have seen, I have seen no evidence of such emails. As to whether or not an email capture process should be undertaken, we have regarded that as a matter in the first instance for the external investigations-both the HR investigation and the Laidlaw investigation. We have taken the view that if they ask us to do one we absolutely will do one, and they have now asked us to do one.

Q599 Iain Stewart: In your opinion should there be one to clear up this matter, to prove or disprove that such emails existed?

Philip Rutnam: Let me put it this way. I was rather expecting that they might ask for one to be done.

Mr McLoughlin: I am just giving clarification because Mr Stewart missed it. They have asked for it to be done, and therefore it will be done. That was missed in Philip’s answer.

Philip Rutnam: I did say that. We have now received a request.

Q600 Steve Baker: Mr Rutnam, you mentioned earlier that a significant event was before your time at the Department. That prompted me to check that you joined the Department in April. We know the history of Secretaries of State; we are on our third Secretary of State in two years. How deep into the organisation do we have to go before we find one or more senior members of staff who have been around the Department for Transport for, say, five years?

Philip Rutnam: How deep into the organisation do you have to go for-

Q601 Steve Baker: At what point do we start finding senior members of staff who have been involved with these processes for any significant length of time, and I would suggest, say, five years?

Philip Rutnam: Do you mean this process or do you mean in the Department?

Q602 Steve Baker: In the Department. Where do we start finding people with significant numbers of years of experience?

Philip Rutnam: Immediately at the level below me. I have a director general who has been in the Department for many, many years. There are, at the level below that, directors. We have a good many directors who have been in the Department for many, many years. We have a good, broad blend of experience-people who have, if you like, grown up in the Department for Transport; people who have, like me, external experience, both private sector and public sector; people who have spent time in other Whitehall Departments facing not transport issues but issues that are not wholly dissimilar. We have a good, broad blend of experience and backgrounds.

Q603 Steve Baker: So are you satisfied that there is sufficient stability at senior levels of the Department for Transport to ensure quality processes within the Department?

Philip Rutnam: Mr Laidlaw makes some comments in fact in section 6 of his report about changes in continuity of leadership and the desirability of more stability in leadership. I will await with great interest to see what he concludes on those points and other matters in his final report. If you would like my personal view, there is much to be said for having strong and stable leadership in a large and complex organisation, while none the less also having the right approach to performance management, to make sure that people are, even if they have been in an organisation a long time, continuing to perform to the very high levels we expect.

Q604 Chair: Do you have a director of procurement in the Department now?

Philip Rutnam: Do we have a director of procurement?

Chair: A director of procurement.

Philip Rutnam: Yes, we have a group director of procurement.

Q605 Chair: How long has this person been there?

Philip Rutnam: I can only speak from my knowledge. As you know, I have been the permanent secretary in the Department only since April. The group director of procurement arrived in the summer. It may have been May or June-that sort of time.

Q606 Chair: May or June of this year.

Philip Rutnam: From recollection. It may have been July but before the summer break. I think it was May or June.

Q607 Chair: Do you have financial advisers-

Philip Rutnam: Financial advisers?

Q608 Chair:-to help to assess the bids?

Philip Rutnam: On what-on the West Coast franchise?

Q609 Chair: Working on that bid.

Philip Rutnam: We did not have external financial advisers, no.

Q610 Chair: Why was that?

Philip Rutnam: Well, again, that is a decision that was taken long before my time. I expect, given the comments Mr Laidlaw has made in section 6 of his report, that that may be something that he will come back to in his final report. I’m afraid I can’t give you now, authoritatively, the reason for that, but I would expect that it was a judgment that the Department had sufficient internal capability to make the financial assessments required.

Q611 Kwasi Kwarteng: I have a couple of questions to Mr Rutnam. You have said three or four times already that you have only been in post since April, but members of the public would be interested in the mentality of someone coming into a new job. It’s a big job and you have a very high profile case. The suspicion would be that you would spend more time trying to get a grip on what was going on, given that you were new in the post, and you would probably feel that you were trying to prove yourself; you were in a new job and this was a big, high profile case. To what extent did you actually take ownership of this particular process and how familiar were you with the actual numbers that were being generated by the various models used in the Department?

Philip Rutnam: There are a number of different elements in answering that. The first is that in fact-this may surprise the Committee-under the confidentiality arrangements that were in place for dealing with major procurements, the commercially confidential information in the bids does not come to the permanent secretary or other senior officials until the end of the process. In terms of my involvement in the project, there was, first, a phase from my arrival in April until the latter part of July in which I did not receive any commercially confidential information about the process. There was then a phase when I saw letters from Virgin that were making representations about it. The other consequence of the rules that the Department has adopted in relation to procurement is that, having had sight of that material, I was thereafter debarred from taking part in the decisionmaking process.

Q612 Kwasi Kwarteng: So, even though you were heading the Department, you weren’t actually allowed to be involved in those decisions.

Philip Rutnam: I agree that it seems surprising. However, these were the rules under which the Department was running this procurement and rules on which it had in fact given undertakings or commitments to the bidders. Of course, as you say, I arrived in my new job, and I had a whole array of different things to seek to understand and a whole array of different people to meet and to understand their relationship to the Department or the agencies to understand the Department. It is a large and complicated organisation. What I did receive during those early months were assurances that the process in relation to the West Coast franchise was going well. So, if you like, with regard to the level of assurance in relation to the process, the information that I received was positive.

Q613 Kwasi Kwarteng: So what you have just said is that you were new to the job, this was arguably one of the most high profile processes that your Department has been involved in and that you were somehow kept at arm’s length from the process for four months.

Philip Rutnam: I wouldn’t use the phrase "at arm’s length". I am just describing the situation where, because of the rules in relation to the conduct of procurements, I did not receive commercially confidential information in relation to this procurement, even though I was permanent secretary. I did receive assurances that the process of conducting the procurement was going well. Again, if you read section 6 of Mr Laidlaw’s report, he is rather surprised, in retrospect, that these seem to be the processes we have adopted and is suggesting that these might be among the many matters to which he will come back in his final report.

Q614 Kwasi Kwarteng: Just as a followup, when the doubts were first raised about the actual calculations, did you personally check these figures and assumptions?

Philip Rutnam: When you say "when the doubts were first raised", in terms of my personal experience the first time that doubts were raised was when we received external representations from Virgin very late in the process, towards the back end of July. At that point both Ministers and I asked the team responsible for it a whole range of questions-quite searching and challenging questions-and got back assurances that the process was, to use the word, robust.

Q615 Kwasi Kwarteng: Forgive me. You are a man of great experience. You have worked in the private sector. You are very aware of the processes that are involved in this sort of calculation, one would have thought.

Philip Rutnam: Yes.

Q616 Kwasi Kwarteng: So I am going to repeat my question. Did you personally check the-

Philip Rutnam: No, at that time I did not personally check the process. The issue that has subsequently become the centre of all of this, which is the calculation of the subordinated loan facility, did not feature in those representations then. The issues that were being raised were much more around the deliverability of First’s bid and whether the risk assessment process was robust. In fact, in the whole process since, as we have gone through layer after layer of analysis of what actually went on in the decisionmaking process within the Department, those issues have not been the centre of attention; it has been the subordinated loan facility. Since the subordinated loan facility has become the centre of attention, which is in the period since the beginning of September, I certainly have looked at the spreadsheet. I have looked at how the spreadsheet works.

Q617 Kwasi Kwarteng: Do you see where the mistake was made?

Philip Rutnam: Yes.

Q618 Kwasi Kwarteng: What do you think of that error?

Philip Rutnam: Laidlaw puts it rather well, actually. First of all, the model was not developed for this purpose. The model, which is known as the GDP Resilience Model, was developed for another purpose, which was in order to calibrate another element of the financial mechanism, which is the way in which the Government adjust payments to and from franchisees according to variances in GDP. It was developed for that purpose. It was not developed for the purpose of working out a subordinated loan facility. So, that’s the first thing I thought. This is taking a very significant risk, using a model developed for another purpose effectively to backsolve the calculation of the subordinated loan facility.

Secondly, I thought that it was a-how can I put it?-textbook error, if you like, to make the confusion between real and nominal. That is the sort of confusion which-I have built models myself. I will confess I have built models that have included errors. The critical thing then, in my experience of models, is the quality assurance process, which takes out the errors and reduces the errors so that you end up with a tool that is robust. So my other personal observation was: what was the quality assurance process?

Q619 Kwasi Kwarteng: There was one, was there?

Philip Rutnam: I don’t want to speak about that, to be honest, because, really, we need to let Mr Laidlaw finish his inquiry and I need in particular to let the HR investigation finish its process of establishing who did what, because there will then be a report to me. On the basis of that I will need to make decisions and I will need to approach those decisions with a clean mind and in an unbiased way as to whether disciplinary action is needed.

Q620 Chair: You have referred to Virgin’s representations, and I assume you mean the Europa report. Did they refer to the issue of the size of the bond required from FirstGroup?

Philip Rutnam: In fact, there were other representations from Virgin before the Europa report. The early representations, as I recall, focused very much on the question of deliverability, whether the bid that we had was actually deliverable or whether effectively the Government were taking-they didn’t use this word-a naive view and accepting a bid that overpromised. That was the focus. As I recall the Europa report, it was getting closer to the issues around the subordinated loan facility but it still did not focus on them. Instead, it focused on whether the risk assessment process was robust. The risk assessment process, in this complicated sequence of events, is actually an earlier stage in the procurement process, which comes before you determine the SLF.

Q621 Chair: Who actually took the decision on the subordinated loan fund requirement in June-the decision at that point?

Philip Rutnam: Who took the decision?

Q622 Chair: Who took it?

Philip Rutnam: I am sorry, but, again, I have to decline to say who took the decision because the question of who did what is something that has to be looked at by the HR investigation, which is under way.

Q623 Chair: Would you have expected a decision of that sort to be signed off by a Minister or reported to a Minister?

Philip Rutnam: Going back to my earlier answer about what sort of professional standards we should work to as opposed to what happened in this case, if you want my view in relation to what sort of professional standards we should work to on a complex procurement such as this, which has a number of component parts, I would expect the professional standards we should work to to include involving Ministers in decisions like that, but that is not making any comment on what happened in this particular case. Can I be clear about that?

Q624 Chair: Would it be normal for a Minister to inquire about a decision of that sort, given the disquiet that had already been expressed?

Philip Rutnam: I have to say I think that is too broad a question really. It depends very much on the context.

Q625 Chair: The context is that concerns had been raised and, indeed, according to the Financial Times, in May 2011, two of the shortlisted bidders discovered flaws and reported them.

Mr McLoughlin: That was before the-

Philip Rutnam: Shall I comment?

Mr McLoughlin: Go on.

Philip Rutnam: The reference to May 2011 is, to be frank, another aspect altogether. During 2011, the Department went through a process of consulting on the bid evaluation process, on a draft invitation to tender, and received back from the bidders a whole range of comments on that, which may well have included the comment that was cited in the Financial Times. I am afraid I wasn’t there at the time, but that was not about the subordinated loan facility. I repeat: the concerns around the subordinated loan facility and its central significance in the quality of the process that we ran, or, rather, the lack of quality of the process that we ran, really came into view after the judicial review application from Virgin, as we went through layer upon layer of the complex process.

Q626 Kwasi Kwarteng: You have had experience of financial institutions and banking and you will know the phrase "a ballpark figure", which is a horrible bit of English but it means something. Generally, if you are a managing director or in charge of an organisation and people have come up with a figure, speaking directly in connection with the SLF, did that make sense to you? The fact that Richard Branson came in, in front of this Committee, and said that the SLF should have been three times the amount that the Department required suggests that there was an order of magnitude issue here and that the £245 million or £200 million, whatever the figure was, just wasn’t plausible. Did that not ring any alarm bells to anybody in the Department?

Philip Rutnam: After the judicial review application came in there was, first of all, a great deal of press comment, but, also, we began a forensic process-an extremely detailed process-of going through every step that the Department took in its conduct of this procurement and its evaluation of those bids. We did not conclude that process until, as the Secretary of State has said, 2 October. In particular, it was indeed only in the latter part of that process, in the very last few days, that the defects in the model that we had used and the scale of the potential errors in relation to the subordinated loan facility became clear.

Can I put it this way? These are cash flows going out a very long way, with very large amounts of money going through them in terms of both revenue and cost. You then have a line that is in relation to the prospective profit margin of the bidder and it is only when you get into understanding the level of that profit margin against a whole range-about 500 different simulations of economic outturns-that you can generate a figure for the subordinated loan facility.

Q627 Kwasi Kwarteng: If it was so complicated, why was it that Virgin had the figure two months before you did?

Philip Rutnam: With great respect for Virgin, I don’t think they actually got the figure.

Q628 Kwasi Kwarteng: They got a more plausible figure.

Philip Rutnam: I am not going to go into more detail, but there is still a wide range of potential figures for what the subordinated loan facility might be, because it depends on a number of other things.

Q629 Kwasi Kwarteng: The broad point is that their figure was more accurate and your figure was wrong.

Philip Rutnam: Let me try putting the point another way. Should we have realised earlier that the model was turning out an output that was in 2010 prices in real terms and not nominal and that that makes a huge difference over a 13-year contract? Yes, we should.

Q630 Graham Stringer: Just following that ballpark question-it is the same question-it has been said that a back-of-an-envelope calculation would have shown that for FirstGroup to achieve those figures they would have had to fill every seat. Was there nobody in the Department capable of doing that simple calculation and saying this is just simply unrealistic?

Philip Rutnam: I have heard that claim. I have to say I have not seen that verified at all.

Q631 Graham Stringer: Have you tried it?

Philip Rutnam: I haven’t tried it personally, no.

Q632 Graham Stringer: That is a bit surprising, isn’t it?

Philip Rutnam: No. I cannot do all the calculations in the Department. What I can do is make sure that we are seeking to address the issues in front of us, in support of Ministers-

Q633 Kwasi Kwarteng: It’s not all the calculations; it’s one calculation.

Philip Rutnam: I have not done that one calculation. I have looked personally at the way in which the subordinated loan facility-which has been the centre of this issue for us since the beginning of September-was calculated or, rather, wrongly calculated. I have looked at that personally. I have not tried to do every one, including that one, of the other calculations that could be done. I think this issue was raised at my previous appearance at the Transport Select Committee. I said then that I would be very surprised if that claim were true.

Q634 Graham Stringer: Just going back to the question of who took the critical decisions to carry on with the process when they knew it to be flawed, I understand you are telling us that that is being dealt with by a separate review. Whilst I may not be happy with that process, I understand it, but, if that process is going on to establish the facts of this matter, why does it take four weeks and not 48 hours to find out who was responsible for something like that? If you have decided on that process to find out who is responsible there, on what basis have you managed to suspend three staff?

Philip Rutnam: Shall I comment on the suspensions first? Let me be clear. In accordance with the Department for Transport staff handbook and the civil service procedures, the suspensions-on which I personally decided-are precautionary only. They do not imply any judgment as to conclusions that the Department will reach in relation to an individual’s conduct. The staff handbook and civil service procedures provide that in exceptional circumstances-and I regarded this as an exceptional circumstance-it may be appropriate for the permanent secretary to suspend staff in order to open the way for a full investigation of the facts. That is the position on the suspensions and I am not going to say more about the suspensions.

You asked why it takes four weeks to find out who did what. The reason why it takes some time to find out who did what is that this was, in truth, a large, complicated, longlived project, which involved a wide range of people from within the Department. This was not a small isolated thing. This involved a wide range of different professional disciplines, it involved a large number of people having different roles in the project and it was a project that in fact began, in practice, at the very end of 2010 and beginning of 2011. In order to provide an authoritative report to me on who did what, I have been very clear to the people conducting that investigation; I want them to do it thoroughly, I do not want them to rush it and I want them to give me a report that is one that I can rely on. The result of that is that it will take some time, but I can assure you that they are engaged in it very actively.

Q635 Chair: Secretary of State, when did you first have any inkling that the suspension of those three staff was being thought about?

Mr McLoughlin: I think I was informed by the permanent secretary that he would suspend staff after-

Philip Rutnam: It was the evening of 2 October.

Mr McLoughlin: Either the evening of 2 October or the day after that. 2 October was quite a frenetic and a busy day when I received the report in the afternoon. Then I was making arrangements as a consequence, speaking to all the bidders-some of them were out of the country or two of them were out of the country-and then making the announcement that we made. Part of the way in which that was all formulated was based on the stock market having to close because it was a stock market sensitive announcement and being able to talk to both Tim O’Toole and Richard Branson-who were both out of the country-and then putting it into the public domain before the stock market opened the following morning. I was informed, as I say, during that afternoon or the next day. Yes, because I was told that the suspension had actually taken place between two interviews.

Q636 Chair: So there was no consultation or awareness of the suspension.

Mr McLoughlin: No, nor would I expect there to be so. I have never mentioned the names of any members of staff, although one member of staff has subsequently publicly issued a public statement. I have not mentioned the names of any members of staff, and it is right not to do so until the investigation is concluded.

Q637 Chair: Did the Prime Minister or the heads of the civil service here intimate that they thought somebody should be suspended or that heads should roll in some way, to either of you?

Philip Rutnam: This was my decision. Let me clear about it. This was my decision. I informed the head of the civil service and the Cabinet Secretary that it was a decision I was planning to take and I took the decision. I came under no pressure from anybody, political or otherwise, to make this decision. I took this decision because I thought it was the right and necessary decision in the interests of the fair treatment of staff and the interests of the Department.

Q638 Chair: Mr McLoughlin, did the Prime Minister communicate with you in any way that he would like to see heads roll?

Mr McLoughlin: No, certainly not. The Prime Minister wants to know what went wrong and he certainly wants to make sure that such an incident like this doesn’t happen again. It is certainly unacceptable. That is not only the Prime Minister’s view but that is my view as Secretary of State and a member of the Government.

Q639 Steve Baker: As we were discussing the various investigations going on, Secretary of State, I was just thinking that the taxpayers are picking up the bill here for the franchising process, the investigation of how the franchising process has gone wrong and then presumably redoing the franchising process. I understand the extra cost has been estimated at £40 million. Is that right?

Mr McLoughlin: What I have said there, to be absolutely honest and to be absolutely open, is that the £40 million I have talked about is the bidders’ costs, which it is right to refund. There will be other costs as well. There will be the cost of commissioning DOR in the early stages, when I initially thought that it might be DOR that would have to take over the service if we were continuing with the judicial review. But, bearing in mind the fact that the judicial review was not going to be continued with, I thought that it was right to conduct negotiations direct with Virgin, and that was the substance of my first statement to the House of Commons. So there are some other costs. At the moment it is not possible to put figures on all those costs, and when I can put figures on those costs I will of course inform the House in the proper way. But when we come to the new bidding process-depending obviously on what Richard Brown says-it will be up to those companies if they wish to bid to run this particular franchise. But I have to say that we have not seen a lack of interest on behalf of the train operating companies in wanting to run franchises, so I don’t see that being a particular problem.

Q640 Steve Baker: In the course of wrestling with how to avoid all of this happening again, have you considered structural reforms that would move the commercial risk and the process risks out into the private sector?

Mr McLoughlin: I am not sure you could move it totally out into the private sector because at the end of the day you are dealing with a public sector asset-a very big public sector asset and an asset/liability as well, because we are actually still putting a lot of money into the railways. So I am not sure you can completely remove that risk. What I am very keen to see is that, since the privatisation of the railways, we have seen huge advances in the way in which the rail operating companies have competed with each other, yes, but also enhanced services and grown the market. If I can just say, you are slightly asking me to prejudge what the Brown inquiry would do and I am awaiting the Brown inquiry.

Q641 Steve Baker: Perhaps I’ll put my question much more directly. You mentioned that it is a matter of public sector asset. Have you considered privatising the railways?

Mr McLoughlin: Well, I think we have privatised the railways to a degree, but perhaps you would like us to be even more radical, Mr Baker, and no doubt we’ll hear your views in due course on that subject.

Q642 Chair: We will be looking at that in due time.

Mr McLoughlin: I am trying to answer the question, Chair.

Q643 Iain Stewart: I just want to ask another question about the HR issues. I appreciate the inquiry is ongoing and you can’t talk about it. While it is going on, there is a vitally important issue of securing and improving rail services after 9 December. What assurances can you give the Committee that the HR inquiry is not inhibiting that work? Are you bringing in fresh staff from other parts of the Department?

Mr McLoughlin: Look, I said in the statement to the House on Monday that we are in negotiations at the moment with Virgin. That is for a shortened contract, an initial eight or nine months, and then, depending on what happens in that time-part of that decision will be taken on the back of what the Brown inquiry comes forward with-we will go out to possibly a two-year contract just for the West Coast Main Line, not for all the franchises but possibly just for the West Coast Main Line, although I’m looking at that at the moment. As I said on Monday in the statement to the House, we have already secured some improvements on what is being offered by Virgin-better compensation for passengers and an enhanced timetable. So that is actually going on. In fairness, we have about five weeks-probably less than that-to conclude those particular negotiations, but in five weeks’ time the new term actually starts.

Q644 Iain Stewart: I appreciate all that work is going on and I very much welcome it, but it’s a staffing issue and I am asking the permanent secretary. Have you had to bring in staff from elsewhere in the Department so that they can approach this important decision with a clear, unaffected mind?

Philip Rutnam: In relation to the negotiations going on with Virgin, we have a very energised, effective team, which is focused on this, and they are fully engaged in bringing this matter to, I hope, a successful conclusion. More generally, I have of course been moving staff around the Department to the extent needed, to make sure that new priorities that have emerged, indeed, as we were going through the latter part of September and certainly following the announcement on 3 October, have been addressed. So, for example, supporting our input into the Brown review, dealing with HR process and others, yes, I have been moving staff around the Department, making sure that we are using our resources with maximum flexibility and indeed, I should say, also receiving some help from colleagues in other Departments in Whitehall.

Q645 Chair: Mr Rutnam, before we proceed, I just want to clarify something that you said earlier, and that was about this all-important point of the calculation of the subordinated loan fund-the SLF requirement-to deal with the risk factor on this franchise. You spoke about it as if the sole error was to do with the methods of calculation, yet the Laidlaw report says something rather different. It does talk about errors of calculation, yes, but more significantly it says: "the final SLF requirements were not determined in accordance with the SLF guidance"-that is either sets of guidance. "Rather, it appears that the SLF levels reflected a view taken by the" Department "as to appropriate numbers." That implies, doesn’t it, that some figure was perhaps plucked out of the air or certainly wasn’t part of a calculation? It would leave open the possibility that the Department at that stage was trying to either eliminate one bidder or keep another bidder who might have been eliminated in the running. What actually happened?

Philip Rutnam: Perhaps I could just clarify two points.

Q646 Chair: That is what the Laidlaw report found. We’ll take the point about the wrong calculations-the arithmetical errors. We understand that, but this is a rather more fundamental point, isn’t it, that the Department didn’t use a formula at all; it just found a figure?

Philip Rutnam: Perhaps I could clarify a couple of points. First, when I said the heart of the matter was the calculation of the SLF, perhaps the heart of the matter-the heart of the problem, the heart of the flaws that we have uncovered in all of this-is the determination of the SLF, which was meant to be determined on the basis of the model that I was talking about earlier but, ultimately, as Laidlaw says, was not determined on the basis of that model. Just to be clear, the heart of the failings in the Department that have caused us to cancel this competition is around the process for determining the subordinated loan facility.

As to your point about the fact-it’s Laidlaw’s finding in 3.1.3 and 3.1.4-that the Department did not ultimately use its published guidance in determining the SLF and, secondly, that when it did determine the levels of the SLF it did so inconsistently, I agree with you. Those are very serious findings. They are also findings that I recognise from my own review of the documentary trail. So you are quite right.

Q647 Chair: What about this reference? I am looking at 5.9 here. It says: "… it appears that the SLF levels reflected a view taken by the DfT as to appropriate numbers." Could that lead somebody to believe that a view was taken possibly to keep one bidder in the process who might have otherwise had to exit?

Philip Rutnam: I would not use the phrase "plucked out of the air". What I would refer you to is what Laidlaw says in paragraph 5.13. He talks about extraneous factors having been taken into account, not a phrase that I find at all comforting. If you look at 5.11, he describes what he thinks the evidence suggests those factors included. One is a view that there should be a minimum positive level of SLF-that it shouldn’t be possible to have an SLF presumably of zero-and, secondly, there is a risk that the imposition of too high a level of SLF on a bidder might knock that bidder out of the competition. So I would refer you to what Laidlaw has said, I am sure in very carefully considered language, in paragraph 5.11.

Chair: I think there are question marks there.

Q648 Kwasi Kwarteng: Can I press you on this point? What you have said is that there was an error in the calculation, which we understand. The Chair was suggesting that, actually, the figures might have been massaged-that’s the word I use-in order to eliminate particular bidders or to bolster other bidders. Those are two very different scenarios. We can understand someone getting a calculation wrong, but, if there is a suspicion that people were actually trying to manipulate the figures to pursue their own ends, if you like, in terms of the bidding process, that’s very, very serious indeed. What do you think happened? Do you I think that we are wrong to suggest that these figures may have been massaged in the way I have described?

Philip Rutnam: Just in terms of the language, I would not use the word "massaged".

Q649 Kwasi Kwarteng: I’m using it.

Philip Rutnam: But I would refer you to Laidlaw’s initial findings, which I agree are very serious. They are not mutually exclusive, by the way. The fact that there was a flaw in the model and the fact that the guidance that we had issued, which included a reference to the model, was not then followed are not mutually exclusive propositions, and he has described quite carefully what factors he thinks were taken into account that should not have been taken into account.

Q650 Kwasi Kwarteng: Sure, but what is your view on it? Are you going to say you are going to wait until-

Mr McLoughlin: We are waiting for the final inquiry. 5.12 and 5.13 are actually quite clear in what Laidlaw is saying in this. It would be wrong of us to put an interpretation on it yet until we get the final inquiry. What I am saying is-

Q651 Kwasi Kwarteng: So what you are saying is that you are not going to comment on anything that you have read.

Mr McLoughlin: No, no. I think we have commented extensively on things we have read. What we are saying is that we are not drawing a conclusion until we get the final report.

Q652 Chair: It is also the case that at our last session Vernon Barker, from FirstGroup, told us that he had been called into the Department to discuss this particular issue and that as a result of the discussion the requirement for SLF was reduced. He couldn’t remember exactly by how much-he thought about £15 million. Who would have authorised that kind of conversation/negotiation? He told us it was a clarification rather than a negotiation.

Philip Rutnam: I’m afraid that question goes back into who did what, on which I can’t comment at the moment because of the HR investigation.

Q653 Kwasi Kwarteng: So far as I understand, you are not willing to comment on the Laidlaw interim report. You can’t comment on-

Mr McLoughlin: We are not giving you the answers you want, but-

Q654 Kwasi Kwarteng: No, but you haven’t expressed a view.

Mr McLoughlin: But we are commenting quite a bit.

Q655 Kwasi Kwarteng: You haven’t expressed a view.

Mr McLoughlin: We are commenting quite a bit.

Q656 Kwasi Kwarteng: You haven’t expressed a view on who did what because you are waiting for-

Mr McLoughlin: No, because those inquiries are still going on.

Q657 Kwasi Kwarteng: Can I just get clarification on this point? Will there come a time when you can come in front of the Committee and actually give us a bit more clarification on some of the questions that we have asked you today?

Mr McLoughlin: I very much hope that when we get the final report-if you read Mr Laidlaw’s covering letter, he says in his final paragraph that you can’t read conclusions into this. "Firm judgments should not be made based upon what are provisional findings or wider conclusions drawn at this stage."

Q658 Chair: Mr Kwarteng is making an important point and there will be opportunities where we will revisit this issue.

Kwasi Kwarteng: Absolutely.

Philip Rutnam: Can I just add one comment, which is that it is not just the final report of the Laidlaw inquiry? But, to the extent that your questions are around who did what, we will also need to have concluded the HR process.

Q659 Graham Stringer: Can I ask the opposite question to Steve Baker’s question, really. What consideration did you give, after this bidding process collapsed, to using the model for the East Coast Main Line for consideration, rather than allowing Virgin to carry on on their own?

Mr McLoughlin: When I appeared before the Committee last time, what I said then was that I was giving consideration to using DOR at that particular stage.

Q660 Graham Stringer: I am asking for the details about why-

Mr McLoughlin: I am trying to-

Q661 Graham Stringer: I am asking for the details about why-

Mr McLoughlin: I am sorry, Mr Stringer, but I am trying to put the background to it, as opposed to-so that was considered. That was at a time when we were robustly defending against Virgin because we believed we had a strong case. It then became apparent that we would be unsuccessful in the courts on the judicial review. I thought therefore it was right at that stage to look at the Virgin option, partly because time had moved on and with other information that I had, which I don’t think I’m in a position to be able to disclose. But I thought therefore the best way to go forward, the safest way, ensuring the continuation of service, was to use Virgin as a result of the fact that they were already operating the trains. I went to have meetings with two commissioners in the European Union to talk about the competition rules, and that’s when I took the sort of view that that was the right way to go forward.

Q662 Graham Stringer: That is a particularly intriguing statement-"other information". Can you expand on that a little, otherwise I might-I don’t know about other members of the Committee-be tempted to interpret it as if you were doing that under duress from Virgin.

Mr McLoughlin: No, that’s not the case, Mr Stringer. The case I was looking for was the best way to keep the operation-which a lot of colleagues in the House of Commons have praised as a very good and high service-as to the way in which that was going to be extended for a short period until we probably go to a two-year franchise. There were certain concerns as to whether DOR would be ready on time. But we are still doing work with DOR in case it becomes necessary, if we can’t conclude the negotiations with Virgin, but I very much hope that we can conclude those negotiations.

Q663 Graham Stringer: Have you made estimates of the profits that Virgin will make over the period of the short contract?

Mr McLoughlin: That is what is being worked out at the moment in the extension of the contract and the arrangements we are coming to with Virgin. Of course, Virgin did make an offer to run the service on a not-for-profit basis, but we are at the moment discussing that with them.

Q664 Graham Stringer: Just on a very general point, I know there is the Brown review and we all want more information, but doesn’t it strike you, as a common-sense politician, that there is something much too complicated about this bidding process, whether there has been bias in the Department or just a cock-up? With something that costs £40 million to put on and that requires a stack of paper that high to deal with, from a Government that have boasted about reducing planning regulations from that size to that size, doesn’t it strike you that this process was an accident waiting to happen?

Mr McLoughlin: I am not sure I would say it was an accident waiting to happen, on the basis that we are dealing with very big companies. We are dealing with a huge amount of public investment that has gone into these railway lines-£9 billion as far as the West Coast Main Line is concerned. There is a lot of upgrading, a lot of refurbishment, a lot that is going to be done, and new signalling work, which will be done over this Christmas period. There is huge investment going into that. What we have seen is more people using trains as a result of the competition that is being brought in by the train operating companies.

All of that has led us to try to learn. Laidlaw talks about it in his initial report; he was saying we are trying to build on things that we have learned in the past as far as franchising is concerned-things that were learned as a result of the East Coast Main Line not wanting to continue with its franchise because it didn’t feel it could live up to it. So we are trying to build in safety valves for that and it became, perhaps, a lot more complicated.

But these are big organisations; they are used to running and projecting numbers over many years. So I don’t think that that was a problem. Obviously things went wrong as far as the initial calculations were concerned, but I think what we are going to find-until we get the full report we will not know-is that there were some mistakes. Indeed, Mr Laidlaw does talk about it in his interim inquiry, so I’m very happy to comment on it, where he actually says that different information was given to different bidders. Obviously that is completely unacceptable.

Q665 Mr Leech: How much of this problem is based on the desire to get as much money from this franchise as humanly possible, because I like to believe that there was no reason to try and deliberately exclude Virgin, and I would certainly hope that that wasn’t the case? So it would appear to me, on the face of it, that the desire to get as much money out of this franchise, and therefore the desire not to effectively exclude First from the process by making the bond that they had to pay too high, has resulted in the Department reducing that bond simply to keep First in the field and providing more money than Virgin would?

Mr McLoughlin: Mr Leech, you are making it sound as if we are just trying to get as much money as possible. What we are trying to do is get a return back to the taxpayer on what it has already paid. We would have been criticised if we hadn’t been trying to get as much money out of these franchise operators. They do make a profit out of running these lines-not a huge profit, it has to be said. The profit is usually around 3% for the train operating companies on the lines that they run, so it is not a huge profit. But were we trying to get the best deal for the taxpayer? I hope so. I would have had more questions for the permanent secretary if we weren’t.

Sitting suspended for a Division in the House.

On resuming-

Q666 Mr Leech: You were saying, before the division bell went off, that it is important to get good value for the taxpayer, which we would all accept. However, the implication from the report from Laidlaw appears to be saying that the SLF was kept artificially low, and the only reason that I can see for that is to keep the highest bidder in the competition. If the highest bidder had been frightened off by too high an SLF figure, the contract would have been awarded to Virgin. I am assuming again that there wasn’t any anti-Virgin position that officials were taking in DfT, so the only reason for getting the SLF figure wrong appears to be to ensure that the highest bidder remained in the competition. That is why I am assuming that, by trying to get as much money out of the train operating company, that has been fundamental in why we are now where we are.

Mr McLoughlin: I don’t think so because your questionnaire almost lies behind the assumption that somebody was trying to rig the outcome of the competition. I would very much hope that it was not the case of somebody actually deliberately trying to rig the outcome of the franchise competition. If I followed your logic, it would be that things were being done deliberately to help one or include another. Don’t forget that there were originally four bidders and then we went down to two bidders. So I would hope that that was not the case, but we will see what the final report says when it comes.

Q667 Mr Leech: On that basis then, if there was no deliberate attempt to keep the First bid on the table, what other reason could there be for not following the albeit flawed way of projecting the SLF? What justification would there have been for not following the procedures that should have been followed?

Mr McLoughlin: I don’t think there would have been any justification. The point is that, if you look at what Sam Laidlaw says, again, I come back to what he says at paragraph 5.13, where he says: "the level of SLF required in respect of the bids of First and Virgin was influenced by extraneous factors". There was inconsistent treatment between the two. My understanding of the way the process works is that there was anonymisation of the process up until quite late in the process, so I would be worried about-

Q668 Mr Leech: That would justify and hopefully ensure that there weren’t any anti-Virgin feelings within the Department, but it doesn’t then deal with the issue about just simply keeping the highest bidder in the process. It’s either incompetence or there has been some level of impropriety, as far as I can see.

Mr McLoughlin: Well, Mr Leech, that’s one of the things we are waiting to see. As I say, I seriously hope that that was not the case, but the truth is that things went very badly wrong as far as this process is concerned and there is no question about that.

Q669 Chair: So you can’t rule that out.

Mr McLoughlin: I don’t want to rule anything out while the inquiry is still going on. It would be wrong of me and us to do so. What I am saying is that I hope that has not been the case, but when we get the final report hopefully that will become a bit clearer. I don’t know if you want to say anything.

Philip Rutnam: Can I perhaps just add to that? From all that we have seen so far, I have not seen any evidence of bias entering into this process. The key considerations you need to look at in terms of why those figures were adjusted, as it were, or why the final levels of the SLF reflected a view taken within the Department as to appropriate numbers, are those in paragraph 5.11 of the report. If I could add an interpretation to this, which I accept is risky, the key questions revolved around the application of what you might describe as commercial judgment, which was absolutely not within the guidance that we had published. But I had not seen any evidence of bias or of impropriety. I have seen evidence that, while officials may have acted wrongly, they seem to have been seeking to do so with good intentions.

Q670 Chair: Who actually signed off the SLF that was determined in June?

Philip Rutnam: I am afraid that goes back to the "who did what" question.

Q671 Chair: But who signed it off? It must be a matter of record who signed it off.

Philip Rutnam: The decisions went through a process within the Department, from the discussions in June referred to in Laidlaw, then to final decision making in the Department at the end of July and early August.

Q672 Chair: But who signed it off?

Philip Rutnam: Ultimately, the decision to award the franchise was made by the Minister of State. I am afraid I can’t tell you whether, as part of that decisionmaking process, she specifically signed off the level of the SLF.

Q673 Chair: We want to know that.

Philip Rutnam: We will do our best and we will find out, but, just to be clear, the decisionmaking process was in relation to the award of the franchise, which involved a whole range of different considerations.

Q674 Chair: But I am asking you a specific question and I want to know who signed off the decision on the subordinated loan facility in June. You can’t tell us now but we want to know, so you will find the information for us.

Philip Rutnam: Indeed, but I just repeat that we have an inquiry that is still under way, and, to the extent that the question you have raised is a matter that needs to be addressed as part of the HR investigation, I’m afraid it will have to come under the same caveats in relation to my other responses in relation to who did what.

Q675 Chair: We will be pursuing that. The other area is where the Laidlaw report refers to new Government policy in the decision to have a minimum SLF requirement. Again, if something is a new Government policy, shouldn’t that be agreed by a Minister? Who is that?

Philip Rutnam: Is that 6.3.1?

Q676 Chair: It is paragraph 6.3. He is talking now about the decision to have a minimum subordinated loan facility requirement, and he says: "This suggests that a departure from the rules was decided by Ministers, probably including Treasury Ministers." Who was it? Which Minister decided?

Mr McLoughlin: That will become apparent when we get the full report.

Chair: Again, that is something that we will be pursuing and I am surprised there is no answer on that.

Kwasi Kwarteng: Am I to believe that we will have another such inquiry, because it seems to me that a lot of the answers that we are receiving are that we will find out once such and such a report has been published? I was just hoping that we could get a date and put it on record to say that the Secretary of State and the permanent secretary will come back to the Committee once the relevant reports have been completed.

Q677 Chair: At the end of this session I will set out how the Committee is intending to proceed and we will include that request, so there will be more-

Mr McLoughlin: I would have been surprised if there wasn’t.

Q678 Chair: We wouldn’t like to disappoint you. When was the Pricewaterhouse report commissioned by the Department and can we see the report, because it is still not very clear to me which Ministers knew about problems at what stage?

Philip Rutnam: From memory, the work by PricewaterhouseCoopers began on 24 September and the report was received-yes, they started work on the project on 24 September and we received their final report on 2 October.

Q679 Chair: Can we see a copy of that report?

Philip Rutnam: I will have to take that under advice because at the moment the report is regarded as commercially confidential, but whether there is a redacted version of it that we could release I will investigate.

Q680 Chair: That is a request. We would like to see a copy of the report. I think it is material to our considerations of what information about problems was available, to whom and at what point. It is very material to our considerations, so we request a copy of that report.

It has been reported that the previous Secretary of State was very concerned about flaws in the evaluation process as early at 3 September. Does that sound right, Mr Rutnam?

Philip Rutnam: The previous Secretary of State-let me take a step back. Once the judicial review challenge came in we began the forensic process, which I described, of starting to investigate the way in which the Department had handled the matter, layer upon layer.

On 3 September we briefed the then Secretary of State that there had been one area of concern that had emerged in the work that had by then gone on, which was probably effectively about seven to 10 working days of effort. One area of concern had emerged and we drew that to her attention. She was understandably concerned that, in a process that hitherto she thought might be essentially free of any concerns, we had identified one area of concern. We told her-this was the best advice that we had at the time-that there was no evidence that the area of concern we had unearthed would have affected the outcome of the competition. None the less she instructed us, quite rightly, to continue our investigations, continue testing that proposition, and continue our forensic process of examining how the Department handled this matter, which of course we did, all as part of preparing for handling the judicial review challenge.

Q681 Chair: We will look further when we see that report. Ed Smith is also party to the Laidlaw report. He is in fact, as Mr Laidlaw is, a nonexecutive director of the Department for Transport board. Mr Smith contributed to the Department’s Capability Review Action Plan, published on 19 March this year. Among the conclusions of that plan, which was an assessment by the Department itself of its capabilities, was a conclusion of, and I quote: "Our strong track record on delivery, generating ideas and providing value for money; our ability to deliver large infrastructure projects to time and budget; our careful management of the organisational downsizing." In view of what happened a very short time after that, don’t you feel that is a rather complacent conclusion, and will it suggest that Mr Smith is a credible person?

Mr McLoughlin: Sorry, I missed your last-

Q682 Chair: Is Mr Smith a credible person, being party to such a conclusion?

Mr McLoughlin: The fact is that Mr Laidlaw, in his report at 2.1, deals with the whole point as to the attendance of Mr Smith at the BICC meeting as an observer. We are indebted to the people who are nonexecs of the board to be an oversight and to bring into a Government Department lessons and expertise of management of large industries too. So I think the answer to that is yes.

Q683 Chair: Inevitably, questions have been raised about the ability of the Department overall because of this catastrophe that has happened. Does the failure to conclude the Thameslink project have any bearing on the Department’s capabilities?

Mr McLoughlin: No. There are a couple of points I would make about the Thameslink project, if I can find the sheet of paper just so that I am accurate in my views on this. The Thameslink project goes over-presumably here we are talking about the rolling stock project as opposed to Thameslink overall, in general.

Chair: Yes.

Mr McLoughlin: You may say that we have had a number of permanent secretaries in the Department, but the truth is that we have had a number of Secretaries of State too. The first person to deal with that, the prequalification and notice issues beginning the process, was actually Ruth Kelly in April 2008. So the rolling stock programme of that-well, it has not concluded yet-goes over six Secretaries of State: Ruth Kelly, Geoff Hoon, Andrew Adonis, Philip Hammond, Justine and myself.

It is a very large contract. The rolling stock procurement was done. It is a different kind of procurement because it’s not the same as a franchise; it’s actually for equipment. Those are areas, as we have announced, where we expect to finish the complete sign-off in the early part of next year.

But before we talk about the failings of the Department, and we have failed on this particular aspect, there have been a lot of areas where we have been very successful too. The work the Department did in preparation for the Olympics was outstanding, pulling together the transport structure for London. Crossrail is again outstanding. There are a lot of areas where the Department has delivered. There has been a breakdown in one part of the Department and it has been a very expensive breakdown as well; it has had a very expensive consequence. It has also had a consequence for confidence in the franchising system, and for that, as I have said earlier on, I hold myself responsible as the Secretary of State and we are going to find out what went wrong.

Q684 Iain Stewart: Just to follow on from that, a number of people have used the West Coast Main Line issue to question the Department’s capability in analysing High Speed 2 and other projects. Can you give the Committee an assurance that there is nothing in the reviews going on that has any bearing on the calculations and the forecasting for High Speed 2?

Mr McLoughlin: Yes, basically. A lot of read across has been done by certain people, usually people who are against HS2, who will use, understandably, any chink to attack the Department. The fact about High Speed 2 is that there is still a lot of work going on on that. I certainly hope to be able to make further announcements about the links to Manchester and Leeds in the not too distant future. That is being done by a separate company, and of course we will have a Bill before Parliament where this issue will be fully aired and discussed over that time. But it is being done by HS2 Limited, which is a separate organisation from the Department, and, as I say, there will be a lot more attention given to that once we announce the next two links.

Q685 Iain Stewart: Mr Rutnam, earlier on you said that one of the issues that has arisen from this is of quality control in the Department. From your perspective, on other issues like HS2-other big procurement decisions-will you be looking to put in additional checks to safeguard future big decisions?

Philip Rutnam: Obviously there are a number of lessons for the Department to learn from this episode, and having very strong quality assurance processes is one of them. In relation to HS2, having checked quite specifically and in some detail what the quality assurance processes are in relation to, for example, the economic models used for HS2, I have to say they are very thorough and detailed. You will have heard my answer earlier in relation to the lack of clarity around quality assurance for the economic model that went awry here.

Q686 Julie Hilling: I want to push you just a little bit more around staff levels in the Department and the staff cuts and whether they’ve had any effect, because the DfT shed 20% of its staff in 2011. It had High Speed Rail, half of the rail franchises to be relet, a new aviations policy, and private finance for roads-a huge agenda for the Department, much of which we have looked at here so I do know how big it is. Are you saying categorically that had no effect? Were there people involved in this franchise who have gone through downsizing as opposed to being moved?

Mr McLoughlin: There were plans to reduce the size of the Department before the last general election. Whichever Government had formed the Government after 2010 would have seen a reduction in budgets and the head counts. That work had already been progressed, so I’m told, actually before 2010. It is still a big Department; we still have a lot of staff.

Yes, we are asking them to do a great deal of work, and, as I have said earlier on, in a lot of areas they have done that more than adequately; in fact, they’ve come through with flying colours. Yes, there are pressures, and there are pressures on the public sector as there are pressures on the private sector, but that doesn’t allow, from what we have seen, some fairly basic mistakes early in the stage, which led to some catastrophic failures as far as the whole process was concerned.

Q687 Julie Hilling: Was there a change of personnel of those people directly working on this project?

Philip Rutnam: In fact, Mr Laidlaw refers to the fact that there were three successive senior responsible owners for the project over its life, so, yes, there were changes in personnel. That is one example of them. He makes a number of other comments about the importance of continuity, leadership and clarity of responsibility for big projects like this.

Q688 Julie Hilling: Is that something that you are currently looking at in terms of projects going forward within the Department?

Mr McLoughlin: You don’t have something happen like this and then not hopefully learn the lessons. They won’t only be learned by the Department for Transport; they will be learned across the civil service. This experience may well become a textbook chapter for future civil servant colleges of how things can go wrong if mistakes are made.

Q689 Julie Hilling: Just taking you back to another point, you said that the previous Secretary of State expressed concern sometime before clearly this all blew up, but I don’t believe you said what her area of concern was.

Philip Rutnam: We brought to her attention that during the forensic process we had been going through we had identified one area of concern, one thing that surprised us, and we brought that to her attention.

Q690 Julie Hilling: What was that area of concern?

Philip Rutnam: I would rather not go into that detail at the moment, to be honest, because that is a matter really for that-

Q691 Chair: Can you tell us something about it? We should know the nature of the concern.

Philip Rutnam: Let me put it this way. It was essentially to do with the fact that we had thought that at all stages the team responsible for the procurement would have followed the rules set out for the procurement that had been set out in the public domain. We saw that they, at least on one occasion, had not. That raised a significant flag in our minds, but, as I said earlier, at that stage there was no evidence for us that that would have led to a change in the outcome of the competition. But, of course, it led to even more vigour in the forensic process of reviewing what had happened.

Q692 Julie Hilling: But you came to this Committee previously, before all of this absolutely blew up, and you said there were no problems whatsoever with the process; it was totally robust. "We can stand by it." But, clearly, you are now saying there was already an issue that had been brought to your attention that indicated that wasn’t the case. Am I correct in that analysis?

Philip Rutnam: To be clear, it is not unusual, in a very large and very complicated process that Government have been running to find, when you go through the hundreds or thousands of documents that have accumulated during the process, that all is not exactly as you would like it. We were clear with the Secretary of State at that stage that we had no evidence that what we had found would have changed the outcome of the competition. None the less, was this a desirable feature? It was not, no, so we were going to do further investigations. She rightly asked us to do further investigations.

Q693 Chair: "Not exactly as you would like it" is somewhat of an understatement about what happened.

Philip Rutnam: You are right; it is somewhat of an understatement. As you will understand, this has been a testing process.

Mr McLoughlin: Indeed I wrote to you, Chair, on 21 September, even at that stage, as I wrote to Maria Eagle and to Margaret Hodge too, saying that we would be robustly defending the legal position. That was up until 21 September. I did not have any thoughts of conceding the point or changing my view until I got the advice I got on 2 October.

Julie Hilling: Secretary of State, what you are saying there is fine, but it would appear that within the Department there were already some questions raised, and that really does raise some real questions that clearly will be answered through this process.

Chair: We will be pursuing that, which I will set out later.

Q694 Kwasi Kwarteng: I want to raise an issue about the consultants. There is a view that I have read in the papers-and you can comment on any part of this story, if you like; it’s a short story-that people somewhere in the Department, probably at the political level, took a position that the Department wouldn’t need to refer the calculations to external financial consultants, saving some money in that process, as a consequence of which we have landed in the mess that we are in. It was sort of penny wise, pound foolish, if you like, given the liability to the taxpayer after this debacle. What would you say to that? Is there any truth in any of that?

Mr McLoughlin: What I would say to that is that we did use some outside consultants for works and I have answered-

Q695 Kwasi Kwarteng: Were they legal?

Mr McLoughlin: Yes, both Eversheds for some legal work and Atkins for some other work during the course of the competition. I have answered some parliamentary questions on that and given some figures as far as how much was spent.

Q696 Kwasi Kwarteng: The issue was the financial consultants. With respect, those consultants you mentioned weren’t looking at the financial data and financial calculations. There is a difference.

Mr McLoughlin: No. What I am saying is that there isn’t a bar, but we don’t always have to go out for consultants when we don’t think there is a necessity to do so.

Q697 Kwasi Kwarteng: Forgive me, the charge that one reads in the press is that, in order to save money on consultants, specifically financial consultants-I am talking about Ernst & Young and KPMG; I am not talking about lawyers-were not used in order to save money, and because they were not used some pretty grievous mistakes in calculation or arithmetic were made, which have cost the taxpayer far more money than would have been the case if these consultants had been used. That’s the charge.

Mr McLoughlin: It’s a charge and it’s a charge that can be made. I am not sure there is much evidence for it, but you can always make that accusation.

Q698 Kwasi Kwarteng: You don’t think that’s true.

Mr McLoughlin: I don’t know because I am not sure if people had been used. It depends what stage they came in; it depends what stage the changes to the SLF were made as to whether they would have gone back and checked that particular change. It is one of these things that could be written and it is actually very hard to disprove. What I can tell you is this. Is there a desire in Government to try and cut back on outside use of consultants and to use the civil service, which I believe to be good in providing service to Government? Yes, there is that desire, because in the past there have been complaints that we have used consultants too much.

Q699 Chair: Have you used financial consultants in other franchises?

Mr McLoughlin: We have not pursued any other franchises yet, so I’m not sure-

Philip Rutnam: This was the first-

Mr McLoughlin: This was the first of the new model.

Q700 Kwasi Kwarteng: What would you say to the charge?

Philip Rutnam: I have seen the comment and the charge, but I have to say I just cannot speak to the reasons why the Department didn’t use financial advisers or the reasoning underlying that because, I’m afraid, it was before my period in the Department.

Q701 Kwasi Kwarteng: As a former banker do you think it not odd that they didn’t?

Philip Rutnam: I think it certainly raises some questions, yes. Mr Laidlaw identifies some questions about that in his interim report and he may say more about that-we will see-in his final report. But these are very large contracts, with very large cash flows going through them, significant NPVs running into billions of pounds, and some quite complex financial structures that have been put in place.

Q702 Kwasi Kwarteng: So you are saying that to pay KPMG £1 million represented value for money because they wouldn’t have made the miscalculations.

Philip Rutnam: It depends on the capability within the Department. That there is a need for financial analysis is clear, but where that financial analysis comes from is another matter. That this raises questions I would have thought is something that obviously we will consider.

Q703 Chair: Would you like to give any assessment to us of the cost to the public purse of what has happened, putting together reimbursing costs, loss of premiums, possible claims against the Department? Do you have any figure in mind?

Mr McLoughlin: I have given figures for what we are paying the bidders.

Q704 Chair: That is stage 1, isn’t it?

Mr McLoughlin: There is DOR; there is the money that we are spending on DOR, there is a possible reimbursement for the amount of money that First spent in preparing once they were told that they were the successful bidder. I will update the House and the Committee and write to you directly on that when other figures become available. At the moment I am saying £40 million and there is a lot more than that.

Q705 Chair: That is just the beginning.

Mr McLoughlin: That is the bidders.

Q706 Chair: Can you tell us when the human resources inquiry that you are undertaking will be completed?

Mr McLoughlin: I did ask a question on that. Human resources inquiries can take a bit of time. We want to get it concluded as quickly as possible, but it has to be done through the right process and I am sure you understand that. We need the Laidlaw final inquiry as that could have bearings on certain bits of investigations that have to take place.

Q707 Chair: But it seems to have implications for the way the Laidlaw inquiry is proceeding with access to individuals.

Philip Rutnam: It does have implications, essentially because it is important that Laidlaw and indeed things that we say here today are not seen to pre-empt the HR investigation in the question of culpability. Who did what? What did individuals do that was wrong? So it does have implications. Can I just add one other caveat, which is that we have the HR investigation under way at the moment? I would expect it to be concluded in a matter of, I hope, a relatively small number of weeks. However, what that will then provide is a report to me, on the basis of which I will then need to make decisions about disciplinary action. If there are disciplinary proceedings, those themselves will take a further period. I am afraid I can’t tell you how long that period will be, but I just want to say that there is a caveat there about our ability to talk about individuals while all of those processes are going on.

Q708 Chair: But you accept that it has implications for the Laidlaw inquiry.

Philip Rutnam: It has implications essentially in that it is important not to say things that pre-empt the conduct of the HR investigation. It just means that there is a certain constraint on what can be said, either by inference or expressly, which implies guilt or feelings by particular individuals.

Q709 Chair: This Committee will be pursuing what happened and who indeed was responsible. This is a major catastrophe; there is a large amount of public money involved; confidence is shaken and it may have an impact on the whole of the rail system. We are going to keep pursuing this, so I would hope that your inquiry would not impede the Laidlaw findings in any way because we will continue to pursue this.

Philip Rutnam: May I say I completely understand that, and of course we would like to conclude these processes as quickly as possible, but I do just need to be frank with you about the constraint that exists as attached to explaining the conduct of individuals when we have an HR investigation under way?

Chair: I understand that, but it is because of that that it is important that inquiry is concluded so that we can see a full picture, as we will pursue it until we do.

Q710 Mr Leech: I have one very quick question. Has there been any discussion about the potential for legal action by First for having been awarded the contract and then it being snatched away from them without them having done anything wrong and as a direct result of problems created by the Department for Transport?

Q711 Chair: This is one of the issues-

Mr McLoughlin: At the moment that has not happened. We didn’t sign the contract with First, so we will have to wait and see what happens as far as that is concerned.

Q712 Chair: But is that part of your thinking?

Mr McLoughlin: One of the things I have learned to do is not to prejudge legal inquiries since I have taken this job.

Q713 Chair: I thought you might say that, but it is a very important issue.

Mr McLoughlin: It is a very important point.

Q714 Kwasi Kwarteng: Their share price went down 20% as a consequence of this, so their investors, their stakeholders, have been materially affected through no fault of their own. Is that something that you are cognisant of?

Mr McLoughlin: I am cognisant of the fact their share price went down. It has gone slightly back up over the past few days.

Q715 Julie Hilling: Are there any liabilities to other train operating companies or bidders for other franchises who will have already commenced to do an amount of work on some of those franchises, who may well then want to make a claim if they have to go back to square one?

Mr McLoughlin: I am hoping that they don’t have to go back to square one. The only bid that we are going back to square one on is the West Coast Main Line, but we need to wait and see what the Brown inquiry comes forward with as to whether they would have to go back to square one. I am very much hoping that that will not be the case.

Q716 Julie Hilling: Surely there has to be a fundamental review on the franchise bidding process within this.

Mr McLoughlin: You are asking me to prejudge two inquiries, but one particular one that relates to the franchises, which I’d rather not do at this stage. We are quite some way off on a number of the franchises. There are some that are more relevant. There are three that would come to termination during the course of next year, those being First Great Western, c2c-the National Express Group, and First Capital Connect. But that does take us to September 2013, so there is some time.

Q717 Chair: Before we conclude this session I would like to make an announcement about the remainder of our rail inquiry. We will hear oral evidence from the Rail Minister and the Office of Rail Regulation on 12 November. We have also called Sam Laidlaw and Ed Smith, nonexecutive directors at the DfT, to appear in front of us on 4 December. We will be asking them further questions. Other oral evidence may be arranged as the Committee considers appropriate. That could include calling the Secretary of State back and the permanent secretary. The Committee will decide in the light of what it hears from those sessions.

Our aim is to report to the House on general rail issues around Christmas, but we also intend to return to look at rail franchising specifically after the Brown review has reported in the new year. That is our current plan. This could be changed by events, but this is how we intend to proceed at the moment. I just wanted to make that clear.

Mr McLoughlin: Thank you.

Chair: I thank both of you for coming here this afternoon. This is a serious matter and we have heard some things of concern and importance this afternoon. We will be pursuing things in the context of the further inquiries and our own investigations. Thank you very much.

Prepared 6th November 2012