To be published as HC 537-iv

House of COMMONS



Transport Committee

Rail 2020: West Coast Main Line Franchise

Monday 7 January 2013

Rt Hon Patrick McLoughlin MP and Philip Rutnam

Evidence heard in Public Questions 968 - 1040



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Oral Evidence

Taken before the Transport Committee

on Monday 7 January 2013

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Sarah Champion

Jim Dobbin

Kwasi Kwarteng

Karen Lumley

Karl McCartney

Lucy Powell

Iain Stewart

Graham Stringer


Examination of Witnesses

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

Q968 Chair: Good afternoon, gentlemen. Welcome to the Transport Select Committee. Would you give your names and positions, please?

Mr McLoughlin: I am Patrick McLoughlin, Secretary of State for Transport.

Philip Rutnam: I am Philip Rutnam, Permanent Secretary for the Department for Transport.

Q969 Chair: Secretary of State, you, of course, were not in post when this debacle occurred. Are you glad that you weren’t in the hot seat?

Mr McLoughlin: I was in another hot seat at the time. In politics, you take the challenges that face you in whatever job you are doing. The truth is that I am not going to try to escape from the fact that what happened as far as the West Coast Main Line is concerned was a very damaging and serious incident for the Government and the Government have got to learn from it. I was a member of the Government and I share the responsibility as a member of the Government.

Q970 Chair: Looking more specifically at the role of Ministers in the Department for Transport at the time, the Laidlaw report is very scathing about the role of officials and criticises processes and governance. It talks about an organisational structure that failed to set out roles and responsibilities, associated accountabilities, a culture of limited and ineffective oversight and the need for leadership. Given those very severe criticisms, backed up very strongly by evidence as detailed in the report, would you say that Ministers don’t have any of the responsibility for what happened?

Mr McLoughlin: No, but we can all quote bits of the Laidlaw report. You can quote them to me and I can quote them back to you. I can quote paragraph 7.18, where he said that, had there been the appropriate escalation, sufficient resources could or would have been found. There was not the evidence to say that they would not have been found; they would have been found. What we have to do is learn the lessons from what was a very serious mistake. It is not the first mistake Governments have made, but it is a serious mistake. We have to learn lessons from it and make sure that we put into position now the right kind of apparatus so that an incident like that cannot happen in the future.

Q971 Chair: What would you say are the main lessons for senior Ministers and, in particular, the Secretary of State?

Mr McLoughlin: It is difficult to say because there were the questions asked. The Prime Minister asked a question, which was referred to in Laidlaw, as to whether everything that was done was correct. The reference was that the checks had been made.

The truth of the matter is that this will form part of civil service training for many years to come, taking account of the mistakes that were made and the way in which escalations should be referred up and taken up the chain. It is not the only problem, but one of the problems we see from this is that that was not done as effectively as perhaps it should have been.

Q972 Chair: The report is very clear that the Rail Minister, in particular, was given inaccurate information and that questions asked were not answered fully. There are issues to do with governance, structures and the way the resources were allocated. Would you say that the Secretary of State would have some kind of responsibility for that?

Mr McLoughlin: I would say that the Secretary of State has responsibility for that if he or she is warned of the issue. As Laidlaw says in the paragraph from which I have just quoted, it does seem that these were not escalated up the system sufficiently. However, I come back to the point that people know and will see that, in future, this inquiry of Laidlaw, and subsequently Brown to perhaps a lesser degree-Laidlaw is much more about what went on with the Department and Brown is much more about the future of franchising-will become more apparent and, hopefully, these kinds of mistakes won’t happen in the future.

Q973 Chair: Why do you think officials bent the rules to keep FirstGroup in the competition?

Mr McLoughlin: I don’t want to second-guess or try and judge that. You are asking me to interpret. I can only interpret what I have done since I have been at the Department and what I have learned from the inquiries that have taken place. I don’t think I can second-guess what officials did. I am sure that most of the people who acted thought they were acting in good faith and doing what was right for the industry overall, but they weren’t, and we have seen the serious mistakes that have come as a result of it.

Q974 Chair: Mr Laidlaw says that he tried to get a full e-mail capture to come to a view on whether there had been an anti-Virgin or a pro-FirstGroup bias. He says, "In the absence of a full, independent e-mail capture and review … I can only express a qualified view on the issue." Then he says he has seen no evidence of any such bias, but it is a qualified view. Can you tell us why the Department was unable to provide the full information requested?

Mr McLoughlin: Philip may want to go into greater detail on this, but there was a problem with taking data off site and giving it over to another body to go through certain data. When Mr Laidlaw appeared before the Committee, he said that he was satisfied that he had seen as much evidence as he needed to be able to make his report and was not critical of the things that were held back. There was a desire as far as the Department was concerned, and I think as far as Parliament was concerned too, to get answers as quickly as possible to some of the mistakes that were made. Obviously, as Secretary of State, I wanted to make sure that we could continue to run the railways, to learn from the mistakes that had been made and to put in place the right kind of structure so that we can return to future long-term franchising as soon as possible.

Q975 Chair: Do you think that Ministers were deliberately misled by civil servants?

Mr McLoughlin: No, I don’t think they were deliberately misled. I hope that was not the case. I don’t think that was the case. One only has to go through the Laidlaw report to see that some of it was not the proper workmanship that one would expect from the civil service. That needs to be taken on board and lessons learned.

Q976 Chair: After seeing what happened and looking at the detail, do you feel you have confidence in your civil servants now?

Mr McLoughlin: Yes. As I said to you on the last occasion, the truth of the matter was that mistakes were made in one section, but I want to re-emphasise that, overall, the Department for Transport has first-class civil servants, who are doing a very tough job. It is tough at the moment working in a Department that has a lot of pressure on it. It is a Department that has a lot of things to deliver across the road and rail network, in aviation, shipping and bus services. There is a lot going on in the Department, and a lot of very good civil servants who have worked a very long time in the Department.

Q977 Karen Lumley: We heard from Mr Laidlaw that there were not enough top civil servants taking responsibility and getting involved at that level. Are you confident that won’t happen again?

Mr McLoughlin: As you will have seen, the Permanent Secretary made an announcement before Christmas about the new Director Generals for the rail industry. Clare Moriarty has taken over that particular post. Obviously, I hope that will not happen in the future. Yes, I am confident. There is also another Director General joining us to deal with HS2-David Prout, who has come from DCLG. We will have to appoint another Director General over the course of the next few months, but it is also important to make sure that we make the right appointments and do not rush to make appointments.

Q978 Lucy Powell: The Laidlaw report also says that a couple of other contextual issues were part of the problem here. One was that the franchising policy changed to longer-term franchising and was being trialled on this, the biggest and most complex of all of the franchises. The other was about the resourcing of the Department and there being a lack of sufficient resource to use external advisers and so on. Do you see those two areas as being a ministerial responsibility?

Mr McLoughlin: That part of the Laidlaw report said that, had the problems come up to the top, then there may well have been ways in which that could have been addressed and we could have got external advice. I certainly don’t rule out in future having to use external advice where it is appropriate. These are big franchises.

I should have perhaps said a few moments ago, which I meant to say in some opening remarks, that I have the Brown report, and I hope to publish that later this week. I know that this inquiry today is not to talk about that particular section. You will want to talk about that in due course, but that does, obviously, deal with the wider issue of the length of franchising.

Long-term franchising is not something that is completely new. The Chiltern Line is a long-term franchise. It is renewed on a five-yearly basis but given for a 20-year period. I don’t necessarily see that, but I don’t want to say too much at this stage about what is in the Brown report, which I am still considering, as a result of its only recently being delivered to me.

Q979 Lucy Powell: You see no ministerial responsibility for those contextual problems that gave rise to some of the issues?

Mr McLoughlin: There is obviously ministerial responsibility, in that it was a policy that was set out, but I don’t think that necessarily answers some of the more specific criticisms that Laidlaw has put in about different figures being given to different bidders and bidders being treated in a different way. Those sorts of things should not have happened.

Q980 Lucy Powell: Do you agree with the statement David Cameron gave in 2009, that Ministers must take responsibility for serious or systematic performance failures in their Department, and Ministers must not be allowed to shuffle off responsibility for flawed policy and poor design within their Department? Is that a statement you now agree with?

Mr McLoughlin: Every Secretary of State always agrees with the statements made by the Prime Minister, and I am not going to be in the position of starting a new role in Government. The Prime Minister is absolutely right in that statement, but it does rely on the Secretary of State being given the full information. As was clear in certain parts of what happened in this, the Secretary of State and the Minister of State were not given that assurance. Indeed, the Prime Minister asked for assurance. The Parliamentary Under-Secretary of State, the Member for Lewes, also asked for specific assurance. That is referred to in the Laidlaw report.

Chair: Mr Stringer?

Q981 Lucy Powell: You don’t think that is a shuffling off; sorry.

Mr McLoughlin: Sorry?

Lucy Powell: I will defer to the Chair.

Q982 Graham Stringer: Following up the point made by Lucy there, the context was not just the policy. You referred to paragraph 7.18 in the report. If you look at the conclusions in that section, which is paragraph 7.19, in the heavy black type, it talks about the dispersal of the rail team and the change in the structures of the Department being part of the cause for things going wrong, does it not? The Ministers were responsible for taking decisions on the structure and resourcing of the Department, were they not?

Mr McLoughlin: I think you will find that that was already well under way and had been planned for before the Government came into office. The truth of the matter is that over a period of two years there were four different Permanent Secretaries. That has not been the greatest backdrop in an overall management context and I am pretty sure that that is something that the head of the civil service will also want to draw lessons from.

Q983 Graham Stringer: Let us look specifically at the wording of paragraph 7.19: "Organisational restructuring at the" Department for Transport "resulted in a lack of clarity in roles and responsibilities". That is not because there were four Permanent Secretaries. That is a decision taken by Ministers finally, is it not? They have to sign off on the structure of the Department.

Mr McLoughlin: Yes, but, as I pointed out and Laidlaw points out, the problems were not referred up to the Secretaries of State through the proper channels. It is very difficult for a Secretary of State. I have asked to see both-

Q984 Graham Stringer: Can I just stay on that point, Secretary of State? I accept completely that, when Laidlaw was here, he said that the Ministers had asked the right questions, and they had been very tough in asking the officers, but they had not been given the right information. I accept that completely. Laidlaw was not a whitewash. He was very clear about what the Ministers had done when presented with that information. I am asking quite a different point. The responsibility of the Ministers was to set up the structure of the Department. Laidlaw says that the organisational restructuring resulted in a lack of clarity of the roles and responsibilities associated with accountability. I am not going to read the whole of it; it is longer than that, but that is the start of it.

Should Ministers not take responsibility for that? They decided on that structure, which was dysfunctional.

Mr McLoughlin: You are asking me to account for what my predecessors did in the questions that they asked. I was obviously not in that meeting. The point I would make at that stage is that, if they were not told that there were particular problems, and if they were not advised that they were having difficulty with certain elements of the formula-

Q985 Graham Stringer: And we agree on that.

Mr McLoughlin: What I am saying is that, if the Secretary of State is not told and if he is reassured that the process has been robust, I think the Secretary of State is not at fault for accepting the advice that has been given to him.

Q986 Graham Stringer: We agree completely on that, but there is a proud and decent history in your party where Ministers who have not taken decisions resigned. Carrington was such a case in the Falklands, and Peter Brooke in Northern Ireland. There has been a history of ministerial resignations, not because of bad decisions but because things went wrong in their Department. That is really the point I am making, with a plus that they actually sorted out the structure. As an ex-Chief Whip, I would be interested in what your definition of ministerial responsibility is. We accept that the information that Ministers were given was inaccurate and not full. However, when tens of millions of pounds of public money are lost and the Ministers have set up a structure that was dysfunctional, where does the ministerial responsibility begin and end there?

Chair: Can we have short answers?

Mr McLoughlin: It was a fairly long question but I will try and give a short answer. If there had been ministerial culpability in the wrong decision or an attempt to ignore advice, then I think there is ministerial culpability, but I don’t think anybody is saying that the Ministers ignored advice or failed to ask the questions. There are serious lessons to be learned from this of course. This is a serious incident. In no way would I try to deflect from the very bad position in which this leaves the Government or, indeed, the fact that the rail industry rightly wants some guidance to make sure that incidents like this do not happen in the future.

Q987 Chair: Is it an issue to do with governance? That was the nub of the question. Is there a responsibility there?

Mr McLoughlin: We have the detailed report of what Laidlaw has said. Shortly, in the next few days, I hope to be able to publish the Brown report. We will then see a clearer picture as to where we go in the future, but lessons have been learned from the past, yes.

Q988 Iain Stewart: I would like to follow on from that. You have mentioned that the Department will be making significant organisational changes as a result of Laidlaw. There are possible policy changes in franchising from Brown, and, as you have mentioned, there are big strategic transport questions. In terms of governance, what assurances have you sought and received from the head of the civil service and the Prime Minister that there will a period of stability in terms of the leadership of the Department to allow you to tackle these big issues?

Mr McLoughlin: In fairness, Mr Stewart, I have not directly challenged the Prime Minister on these particular points, but they are lessons well learned. As I say, the truth of the matter is that we have had the reign of four Permanent Secretaries. In some respects I acknowledge the reasons for that, but I hope that Philip is there for a very long time learning the lessons from this. I have picked up the tail part of this and learned what mistakes have been made. We are determined to make sure that we put into operation very strict criteria within the Department.

Having said that, I would not necessarily want the Department to become over-cautious in what it needs to achieve because we need to achieve a lot in the Department. In the introduction to the report that you published just last week, which we will respond to in due course in a more proper and reasoned way, you say: "In many ways the railway has been a success in recent years." That is certainly true from the way in which the passenger numbers have dramatically increased.

Q989 Iain Stewart: I would ask Mr Rutnam to comment on this in terms of the senior civil servants in the DFT. Have you had any discussions with your superiors in the civil service about the Department being exempt in any way from the usual rotation of senior staff?

Philip Rutnam: I have not specifically had a discussion about exemptions from the usual rotation, because the underlying question is more what skills and capability we need in order to do the job that we have to do and, within that, what longevity we need both from people we already have-how long do we need some of those to stay in post-and people I may want to bring on board.

The wider point is exactly the one the Secretary of State has made. There are a number of lessons to be learned from this episode. One of those is the importance of stability at senior level in an organisation like this Department. Linked to that is having very clear accountability within that structure and who is responsible for what. Both of those points are fully taken on board in the DFT. Those are certainly points I have talked about with the head of the civil service and the Permanent Secretary and to which I have had a very positive reception.

Q990 Karl McCartney: I want to go back to a point my colleague Mr Stringer made about previous Ministers of a Conservative Government doing the honourable thing in contrast to 13 years of the previous Labour Government. However, is it normal for a senior civil servant to then come out and publicly say that the Secretary of State did ask all those questions? I believe a senior civil servant did come out and say that the Conservative Secretary of State at the time had asked all the right questions. I know it is before your time.

Mr McLoughlin: I am slightly reluctant to go down a path without knowing the actual incident and a bit more about that, Mr McCartney. Lessons have been learned from this particular event. That is what I want to talk about. I think I can remember why Peter Brooke resigned. I am not sure that it was anything the Department did wrong. It was a TV appearance which-

Chair: I think we will keep to transport.

Q991 Karl McCartney: You mention that Ms Moriarty has been appointed with regard to that, and it is something I asked both Mr Laidlaw and Mr Smith when they were in front of us. Are you confident that the senior management have experience in franchising per se? If not, do you have the level of confidence in them that they are competent in those roles as senior managers?

Mr McLoughlin: I am constantly repeating myself. The truth of the matter is that we have all learned from this particular episode. This episode should not have happened. A lot of the criteria that should have been followed were not followed. There are still the HR consequences flowing through the Department. We have brought in a person to head rail services and to be in charge of the whole section, not splitting it in any way. I think Clare Moriarty will do a superb job as far as that is concerned. I have every confidence in her ability to do that, as does the Permanent Secretary. I know from discussions I have had with Philip that he is as annoyed and upset as I am as to what went on in the Department and the way we failed in this.

Philip Rutnam: I would like to add something to the Secretary of State’s answer. It is important to be clear that the appointment of a single Director General responsible for all our roles in relation to rail is only the very first step. We have a number of other actions that we will be taking-some, I hope, will be in the very early part of 2013 and others will take place during the course of the year-to strengthen our capability in relation to rail and, in particular, in relation to rail franchising and the letting of these large contracts. We have talked about that. Laidlaw talked about it in his report. We also talked about it in the Government’s response to the Laidlaw report, which was published at the same time as Laidlaw was itself published.

Q992 Karl McCartney: Will you be looking externally for consultants to come in with expertise or are you looking to have that completely in-house?

Philip Rutnam: In truth, there will be a mix. It will partly depend on where we can best access the expertise that we need on terms that ultimately represent good value for money, or at least very defensible terms. That is a work in progress. In truth, I would expect there will probably be a mix of growing in-house capability. We have some very smart people in the Department who have all the aptitude needed to work on projects like this and would like the opportunity. We will probably be importing some additional expertise from the market. We will be looking at some combination of those.

Q993 Karl McCartney: Hopefully, we are looking forward positively to the future. Going back slightly, I believe three people were disciplined and suspended. Are they all back in their full-time roles?

Philip Rutnam: I will comment on that as it is a staffing matter. At the time that the competition was cancelled on 3 October, I took the decision as Permanent Secretary to suspend three members of staff. Under the terms of civil service employment and civil service processes in our own staff handbook, suspension is not in itself a disciplinary penalty. It does not imply any judgment or conclusion in relation to an individual’s conduct; it is just a precautionary measure. Those suspensions were for the duration of the detailed investigation, which I also launched at the same time into the conduct of individuals. That was an HR investigation in order to provide me with a basis for making decisions as to disciplinary action.

When that investigation concluded, which from memory was at the very beginning of December, I lifted the suspensions because the reason for the suspensions was no longer there. It was just during the course of the investigations, so those individuals returned to work. However, shortly thereafter, I initiated disciplinary action against a number of individuals in the Department. I am afraid I cannot give any more details as to who those individuals are. You will understand that this is a confidential staff matter and those processes are still ongoing.

Q994 Chair: Can you tell us any more about the main conclusions of the HR study?

Philip Rutnam: I am sorry, Chair, but nothing more really other than that there were grounds for initiating a disciplinary process in relation to a number of individuals in the Department. The report itself and those processes are confidential. They are still in process and not concluded. You will have been able to discern from Laidlaw, which is not a report that names names but none the less is a very detailed and frank account of what went on within the Department, that there were a number of quite serious errors made and aspects of conduct that really do not accord with the standards of professionalism that we would expect. I do not think you will be surprised to hear that, having done a detailed HR investigation, or having had one undertaken for me, I have initiated disciplinary action.

Q995 Chair: How many staff have been subject to disciplinary action?

Philip Rutnam: I am afraid I am not willing to answer that question simply because I fear that, if I start giving numbers of individuals, there will be a process, probably played out in the media if previous experience is anything to go by, of seeking to identify which individuals they are. I do not think that would be fair either to individuals who might be named correctly or individuals who would be named incorrectly. I am not willing to identify the number of individuals, but I can assure the Committee that this is a process that has been taken with the utmost seriousness. A very detailed investigation has been undertaken in parallel with Laidlaw by Bill Stow, who is a very experienced former senior civil servant, into the conduct of individuals. It is on the basis of his detailed report, which is comparable to Laidlaw in terms of granularity, that I have made decisions.

Q996 Chair: Can you confirm that Peter Strachan has left the Department?

Philip Rutnam: As was mentioned earlier by the Secretary of State, shortly before Christmas, I announced a restructuring of the Department with the appointment of another individual, Clare Moriarty, as the Director General to take responsibility for all of our rail functions. Following that restructuring, Peter Strachan has decided to move on from the Department, so he has left the Department, yes.

Q997 Chair: Has Peter Strachan been held responsible for anything that went wrong?

Philip Rutnam: Peter Strachan was one of a whole number of individuals who had some responsibility for work on the West Coast, but I am not willing to get into a detailed account, blow by blow, of which individual by name was responsible for what. What I will say is that, following the restructuring which I announced shortly before Christmas, Peter has decided to move on from the Department.

Q998 Chair: Was that decision linked to the findings of the HR inquiry?

Philip Rutnam: It was a decision that Peter reached of his own accord. He reached the decision to move on from the Department in light of my decision in relation to restructuring, including that Clare Moriarty should take on the role of being Director General responsible for rail.

Q999 Chair: Could you confirm what happened to the three suspended officials? Are they all back now?

Philip Rutnam: As I said, I have lifted the suspensions on the three suspended individuals, which were put in place for the duration of the investigation into the HR aspect of this. Having lifted the suspensions, those three individuals have returned to work.

Q1000 Jim Dobbin: The public, of course, will be interested as taxpayers in the cost of this whole debacle. I would ask the Secretary of State what his current estimate is of cancelling this competition.

Mr McLoughlin: Mr Dobbin, I gave figures as to what we thought the recompense of the bid costs to the companies would be in the region of £40 million. There have also been costs as a result of First starting to commission, and figures have been given. There were also the arrangements set up in case they were needed by DOR-Directly Operated Railways. They had to do an amount of work. The latest figures we have are in the region of £45 million. Those figures were given by the Permanent Secretary to the Public Accounts Committee just before Christmas. The House and the Committee will want to come back to those figures in due course, but, before we pay out any money, we are doing the proper checks to ensure that all the costs are validated and that they are genuine costs. It has been a very expensive exercise.

Q1001 Jim Dobbin: What about the costs of postponing other competitions such as the Great Western, Essex Thameside and Thameslink franchises? Do you expect to have to refund those bidders?

Mr McLoughlin: As I say, I am about to publish the Brown report. I will want to say as much as I can about the future of those particular paused bids when I publish the Brown Report, but no contract has been made where I envisage any cost of payments on those particular franchises.

Q1002 Karen Lumley: Are you confident, with your new restructuring and new Director General, that you have the staff needed to give these contracts and, more importantly, the West Coast Main Line?

Mr McLoughlin: Of course I am confident. That is what has to be done. It is not a matter of whether I am confident; that is what has to be done. Taking that on board, we have what Richard Brown’s report will say in the not too distant future. As the Permanent Secretary has just rightly said, this is not an overnight exercise where you move 20 or 30 people all of a sudden into specific positions. Clare Moriarty has been in the Department for some time. She is a very experienced senior civil servant and will be in overall charge, but obviously we will be looking across the civil service.

One of the points made a little while ago was about transfer throughout Departments. We have been very fortunate in getting a new Director General to start in the Department. That is David Prout, who has come from DCLG. There can be certain qualities in other Departments of getting senior civil servants into the Department for Transport as well. We will draw on a proper recruitment exercise, which the Permanent Secretary is currently doing, looking across the whole sphere of the expertise that we need.

Q1003 Iain Stewart: Following on from that, and I appreciate that the detailed answer to this will happen after the Brown report is published, there are a large number of franchises due to be re-let over the next 12 to 18 months. There is obviously a capacity need in the Department to process all those. Have you had discussions with the train operating companies and potential new bidders about their capacity to submit multiple bids potentially for very different railway lines?

Mr McLoughlin: Mr Stewart, if you don’t mind, I won’t answer that too much, because if I answer that in too much of a detailed way it may pre-empt the Brown report, which I would rather not do at this stage. You can rest assured that the points you are making are occupying my attention at this particular moment in time. I hope very soon not just to be able to tell the Committee but also the train operating companies about the route that the Brown report will map out for us.

Q1004 Chair: Could you tell us a little more about where the costs of this fiasco are going to be met from? We are told it would come from headroom in the Department’s budget relating to support to passenger rail services. What does that mean and what else isn’t going to happen?

Mr McLoughlin: In running a large department like the Department for Transport, you do find areas where there will be underspends. That will be part of what we will look to use in certain areas. At the end of the day, it is going to mean that in the region of £44 million or £45 million will not be available to spend on projects that we might have been able to spend it on. That is unfortunate, but the main areas of our expenditure programme are still going ahead and there are areas in which we save money across the field.

Q1005 Chair: So it is quite possible that some projects will be stopped.

Mr McLoughlin: I do not envisage any projects that have been announced or planned being stopped, but I do imagine that we will find the savings necessary to make up these costs.

Q1006 Chair: I want to go back to the issue of the subordinated loan facility because that was a critical issue in what happened. Is it correct to say that, if the Department had judged the West Coast bids strictly in accordance with the guidance given to bidders, even though that guidance was flawed, the SLF required of First would have been unrealistically big? Mr Rutnam, can you perhaps answer that one, if the guidance had been followed?

Philip Rutnam: The SLF would certainly have been larger. It is quite a complicated question, in fact, to answer because it all depends on a number of assumptions. It depends on which of a series of errors you unpeel. If you recall, one of the errors that, sadly, we made was taking the output from the GDP resilience model that had been built as though it were nominal-a cash figure-when in fact it was a real figure in 2010 prices. That, on its own, made a difference of the order of 50% or more. It was a bit under halving the number. Correcting for that error on its own would have significantly increased the SLF.

There was then the fact that the SLF for FirstGroup was, as the Laidlaw report describes, adjusted by the Contract Award Committee when they exercised their discretion in the meeting in late June. That was another significant adjustment. Whether or not it was unrealistically big is, in a sense, a matter that one would ultimately have to have asked First. However, what we concluded was that, because all the bidders had been given information about the level of SLF that was likely to be required back in February 2012 that was itself flawed, therefore, the basis on which the competition had been conducted was unsound. I do not think I can definitely say that, if corrected, the figure would have been unrealistically big. It would have certainly been much bigger.

Q1007 Chair: If First had not been willing to provide the SLF requested, they would have been knocked out, wouldn’t they?

Philip Rutnam: Under the rules of the competition, yes, that is how it would have worked.

Q1008 Chair: And Virgin would have won.

Philip Rutnam: If Virgin had been willing to provide whatever level of SLF was being sought of them.

Q1009 Chair: If Virgin had agreed to provide the SLF sought but First had not been, then First would have been knocked out.

Philip Rutnam: If First had declined to provide the SLF requested, then you would go to the next highest ranking bidder, which in this case was Virgin. However, this is all, of course, entirely hypothetical. As the Secretary of State concluded, on the basis of the evidence that he had seen by 3 October, this was not a safe competition and it was not a fair basis on which to proceed to the award of the franchise.

Q1010 Chair: Laidlaw talks about the decision that was taken to reduce the amount that First were asked for and increase the amount that Virgin were asked for. He refers to an awareness of the possibility that a higher level of SLF than that already communicated to First could knock First out of the West Coast Main Line competition and have a knock-on effect on other franchises. Presumably, that was a significant consideration.

Philip Rutnam: He does refer to it. He has, with his advisers, done a very detailed review of all the considerations that he has been able to discern that seemed to have been in the minds of people making the decision about the level of SLF. That was indeed one consideration, but it only seems to have been one consideration. A number of considerations are listed in his report. I am looking at paragraph 4.61.

Q1011 Chair: Another key issue in the Laidlaw report was the possibility that what was being decided would be subject to a successful legal challenge. That was raised by Eversheds’ adviser, but it was not only not acted on but that concern was not escalated to a more senior level within the Department. Why do you think that was, Mr Rutnam?

Philip Rutnam: In some ways I find this among the most difficult questions. There were people who knew that things were awry, but none of them did enough to escalate it within the organisation. Time and again I find myself saying that, if only they had, how things could have been different. Why did they not do it? The truthful answer is that I don’t know. I can speculate. Laidlaw offers some answers, but they are at the more speculative end of his findings. He talks about whether there was a concern on the part of some of the staff who did not escalate things that, if they had done, they would not have had a receptive hearing. In other words, their concerns might have been dismissed by more senior staff.

He also talks about a culture, in effect, within the team of people working on trying to get this award done of completion. There was a culture of completion almost at any cost. They knew there were risks but they felt they had to get the job done, so never mind the risks. They just had to get on with getting the job done. I don’t think he concludes definitively as to which of those it was.

What I would say on the basis of my observation of the organisation in the months I have been there is that clearly either of those is a very concerning issue. Little concerns me more, if you like, than people failing to be direct or to have the confidence to raise with others more senior than them in the Department the concerns they have. Both of those would be deeply concerning explanations. My observation of the organisation is that this has clearly been a problem here but it is not a problem I have seen elsewhere. It is not a problem that I believe is systematic to the organisation. There are many other cases that I have experienced where people have been very ready to bring their concerns to the top of the Department, whether to me, other senior officials or to Ministers.

Q1012 Chair: Secretary of State, in your position what lessons would you draw from this particular incident? Would you want civil servants to give you information that you might not want to hear? It might be something that perhaps disturbs a timetable to which you have been committed.

Mr McLoughlin: There is the position within the civil service where they can escalate up. If there is that sort of concern, then, yes, of course, they should come to Ministers. I always respect the advice I am given, though I may not always act upon that particular bit of advice. You need a proper and frank discussion within a group of people. You may take a different course of action having listened to all the arguments. Ministers have to make sure that they are acting within the law and that they are open to all the policy advice available to them. That is what the Department is there to do.

Q1013 Steve Baker: Mr Rutnam, could you confirm that this was the DFT’s biggest ever single contract?

Philip Rutnam: It was a very large contract. It all depends how you measure these things. The Committee asked me about this in the last hearing on 31 October and I wrote to you with some figures. Some of those contracts in nominal value are larger than this; others are very similar to it in value. It is certainly a very large one.

Q1014 Steve Baker: The Committee’s staff have advised us that it is the largest contract that the Department has let. Can you confirm that there was a hopelessly confused governance structure, with no one person clearly in charge of the process?

Philip Rutnam: No, I do not think that is quite right. During the period in which I have been in this Department, since April, there was one person in charge of the process. There was a senior responsible owner for both the franchising programme as a whole and for the award of particular franchises, including this one. There are two aspects to the confusion that is discussed in Laidlaw. One is that, under the organisational structure that was put in place towards the back end of 2010 and early 2011, it had been decided that there should essentially be two successive SROs, in the jargon, for projects like this. One senior responsible owner was responsible for the design of the franchise and the parameters to be put into it-what it is that the Government should be buying. Then there was another, who should be responsible for the delivery of that and the execution of that through the award process. Laidlaw, I think rightly, criticises that as creating a potential gap between the two. That is one problem.

The second problem he identified was that in the early months of 2012-specifically January to March 2012-it was not clear whether the baton had been passed from one SRO to another SRO. There was an SRO responsible for the project during 2011, and certainly from April onwards in 2012, but there was a successive SRO structure that was over-complex, and there was a period of two months in which it was not clear who was the SRO.

Q1015 Steve Baker: Is it possible for us to agree very simply that there were profound governance problems involved in this whole process?

Philip Rutnam: Given the outcome, I am not going to defend the governance of this process.

Q1016 Steve Baker: I am also conscious of your remarks earlier, where you said if only somebody had escalated the issue. What I am hearing are profound managerial difficulties. To go to the heart of the matter, it is a long time since I have been involved with civil service promotion procedures-about 13 years-but my understanding is that the civil service’s processes are there to ensure that the best possible people end up in the particular roles. Would you say that is right?

Philip Rutnam: That is obviously the objective, yes.

Q1017 Steve Baker: How many people would you say were involved in this process who are paid six-figure salaries-zero?

Philip Rutnam: My answer to that particular question is going to be off the top of my head. Involved in franchising and the franchise award in some way, it will be a small number, of single figures.

Q1018 Steve Baker: A small number, of single figures.

Philip Rutnam: Two, three or four. I don’t know exactly, I am afraid; some, yes.

Q1019 Steve Baker: From a member of the public’s point of view, they would expect a very high degree of managerial competence from somebody paid a six-figure salary, would they not?

Philip Rutnam: Indeed.

Q1020 Steve Baker: I am reflecting that we have ended up with a situation where at least one of the Department’s largest ever contracts was subject to profound managerial errors, in an environment where people were paid very large sums of money to provide managerial competency. I understand that, elsewhere, you have said you would like to see more judgment used in future processes. Given that we have the best people in place and yet all of these things happened, why should any of us have confidence that, in future, the civil service will put into these roles people capable of exercising a greater degree of judgment and therefore a greater degree of flexibility in these matters, and yet not make similar mistakes?

Philip Rutnam: It is a reasonable question to ask. What I would say in response to it is, first, I fully recognise the profound mistakes made in this case and the fact that they are completely unacceptable. That is a recognition not just by me but one that is shared at all levels in the Department for which I am responsible. Secondly, we are acting vigorously to address the failings that have been identified in this-whether failings of governance, which in my terminology means the oversight of management and does not mean management itself, failings in terms of the clarity of managerial responsibility and accountability, or failings in our approach to planning and preparation.

My second point is that we are acting vigorously to respond to those findings. My third point would be that, while I completely understand the enormous anger that this episode has caused, I would point out that this is actually a Department that on many other occasions has shown its ability to successfully deliver projects of quite similar complexity and scale. To take just two quite recent examples, those are projects that involve large amounts of public money, such as the sale of the High Speed 1 line for £2 billion consideration or the procurement of multi-billion pound new generations of trains such as the Intercity Express programme.

There are other examples, too, of live procurements in process of a multi-billion pound scale that we are proceeding with in a very smooth and successful manner. I accept the criticisms in this case. I do not think that they are criticisms that should be applied to the Department as a whole.

Q1021 Chair: What about the Thameslink rolling stock issue? Do you think that has been dealt with very expeditiously?

Philip Rutnam: Thameslink rolling stock is a very large and complex deal. It is a private finance deal of roughly £1.5 billion in value. It has certainly taken significantly longer than we had expected and wanted to bring to close. I have been quite closely involved in this personally in the last few months. We have now made very significant progress. We brought the project to a commercial close before Christmas, reaching commercial agreement with Siemens and the other equity partners on the terms of the transaction reflected in issuing the information memorandum for raising the bank financing. We hope and expect to bring it to a financial close early in the new year. It is a large and complex transaction. It is one of huge importance but one we are confident we will bring to a satisfactory conclusion.

Q1022 Chair: We keep hearing it is about to be brought to a conclusion but it hasn’t been, has it, not completely?

Mr McLoughlin: You have just heard the latest up-to-date figures. It is true that contracts of this size do take some time. The initial invitation to tender, if my memory serves me right, was sent out by Ruth Kelly when she was Secretary of State for Transport. It was called Thameslink 2000 for a very good reason-that it was supposed to be completed then. Sometimes these projects do take a bit longer than we would like.

Q1023 Chair: I think this one is rather more than a bit longer.

Mr McLoughlin: That is true.

Q1024 Lucy Powell: Mr Rutnam, you were talking earlier about the culture within the Department and one of two options. There was either a climate of fear about escalating or a culture where people felt they could not go higher up with their concerns. Who do you think is responsible for creating a culture and a climate within an organisation, and what are you doing to address that to make sure it does not happen again?

Philip Rutnam: My answer to that is that the responsibility ultimately rests with the leaders of the organisation. Ministers have an important role, but, to be frank, I would say that, in relation to something like that, even stronger and more important than the role of Ministers is the role of senior officials, starting with me.

If you will indulge me, I sent a personal message to staff at the time that we published the Laidlaw report. The single point that I stressed as most important was that we must have a culture of open and honest exchange by staff at all levels with senior managers and Ministers. This is fundamental to the way our Department should do business.

Lucy Powell: I accept that it was a different Minister at the time.

Q1025 Graham Stringer: Is one of the lessons learned that the anonymisation process of information about bidders should be abolished?

Mr McLoughlin: There is a lot of criticism of the anonymisation process. One can see why it is there. If we abolished it, a lot of other questions would come into being, so I think we need to think a bit more carefully about that and take advice. The anonymisation process is there to try and reassure people that everyone is being treated equally. As you read from the Laidlaw report, because people became aware of who the bidders were, they had to drop out of the process. That possibly led to certain people not being at individual committees in which they had previously taken part. That is something we have to think about quite carefully. We will want to come back to give you a more detailed answer on that.

Q1026 Graham Stringer: Laidlaw says he can’t find any other Department in the whole of Government using this anonymous process. Shouldn’t you take action more quickly than this?

Mr McLoughlin: I can’t think of many other Departments-and one always has to be careful about saying this-that do procurement to the kind of level that the Department for Transport does, having to take account of European procurement rules. The Ministry of Defence does do large procurement, but that is not completely covered by the same procurement rules. Obviously, we need to give some attention to that.

Q1027 Graham Stringer: Does this imply that another lesson learned is that the Permanent Secretary should not have allowed himself or would not in the future allow himself to be excluded from the process in the way that you were excluded from the process?

Mr McLoughlin: Philip can speak for himself on that particular point, but he made his position fairly clear the last time we came to the Transport Select Committee that that was not something that he would perhaps want to see in the future.

Philip Rutnam: I think that is a lesson already well and truly learned.

Q1028 Graham Stringer: I realise we discussed it the last time. I am still on lessons learned. You are dealing with the East Coast franchise, the West Coast franchise and Thameslink. Is there sufficient capacity both within the private sector as well as the Department to deal with all of these processes in a relatively limited period of time?

Mr McLoughlin: That is one of the things that will be dealt with by the Brown report, if I may say so, Mr Stringer, and we will publish that in due course and make announcements as soon as we possibly can.

Q1029 Graham Stringer: There is a detail that concerns me on personnel issues. When you made the statement to the House explaining that you had set up Brown and Laidlaw, you did not mention to the House that you had set up a personnel inquiry. Was there a particular reason for that?

Mr McLoughlin: I thought I had referenced it. You are quite right, looking back on it, that I did not reference it. We were fairly open that an HR inquiry had been set up. When I gave my statement to the House, it was mainly about what we were doing about the collapse of the franchise as it was and what action I was taking in setting up Laidlaw and Richard Brown. The HR was more a role for the Permanent Secretary. I make the point that I employ two members of staff in the Department for Transport and they are both my special advisers. I employ nobody else in the Department. That is the responsibility of the permanent civil service.

Q1030 Kwasi Kwarteng: Clearly, this has been a huge embarrassment. We have had ample sessions and asked lots of questions. The one thing I am unclear about is what immediate measures you can take within the next three months to prevent something like this happening again. That is what the public actually want to know. They know that there has been a mistake and that taxpayers’ money has been spent or, rather, misspent. They want to know what specific steps you are going to take in the immediate future to minimise the risk of this happening again.

Mr McLoughlin: We have outlined a number of things that we have done in the immediate future. There is a new Director General responsible for the rail industry with an overall concept of what goes on. We are still waiting for publication of the Brown report. I have received the Brown report. We will then also explain how we are going to handle franchising from here on as far as the future is concerned. I certainly know from some of my Cabinet colleagues that the lessons of the West Coast Main Line have been learned quite substantially throughout the whole of the civil service.

Q1031 Kwasi Kwarteng: Could you spell out what you think is the main lesson?

Mr McLoughlin: I think the main lesson is that there should be an overall person in charge of franchising or the procurement. There is the necessity for civil servants to be questioning and to refer things up the system, if necessary, to Permanent Secretary or Secretary of State level. The one thing that Philip referred to a little earlier on was why people were not coming forward when certain things were happening. It is unacceptable, basically, that different levels of information were given to different bidders. That was just completely unacceptable.

Philip Rutnam: I don’t know whether the Committee has seen the Government’s response to Laidlaw, which we published on the same day as the Laidlaw report itself. It sets out a whole series of actions that we are taking quickly and urgently, both specifically in relation to rail franchising but also in relation to other elements of our responsibilities for rail. It is very much a three months’ time scale. It is not a protracted time scale. We have also been taking steps-indeed, we started taking these steps right back in October when all of this came out-to make sure that the sort of failings that we have found on West Coast are not failings that we find in other projects, some of which we have already talked about.

Q1032 Kwasi Kwarteng: I would ask the question that I addressed to the Secretary of State directly to you. Clearly, you were a new person on the scene, as it were, as this decision was being made and you were kept out of it. What specifically have you learned from this fiasco?

Philip Rutnam: In truth, in part it is about never taking anything for granted. That may sound a little bit superficial, but let me try to explain. In terms of the outlook within the Department over the next few years, I see three lines of defence. How do we try to make sure that things don’t go wrong and, so far as possible, they go as right as we can make them? There are three lines of defence. There is management accountability. That is about people who I am ultimately responsible for, reporting to the Secretary of State, and making sure that they know they are responsible for getting stuff done. There is governance within the Department, which is about the scrutiny and oversight of what those managers, and the people working to them, are doing. That is why we have internal committees of the wise and the experts who are there to provide constructive challenge to the different parts of the Department and to managers. There is then internal and external assurance. Those are the sorts of things you can get from internal audit, expert external advisers or the likes of the Major Projects Authority. Those are three sorts of support or lines of defence to make sure that things are done right.

In this case none of those worked satisfactorily. That is a huge lesson. It means that you absolutely have to be on your toes, because, ultimately, while people are acting with the best of intentions, they can still get something catastrophically wrong.

Kwasi Kwarteng: Thank you very much; that was a good answer.

Q1033 Chair: Have you had an assurance from the other bidders that you won’t be challenged on giving Virgin an additional 23-month franchise?

Mr McLoughlin: I have made the announcement. The people I have spoken to in the industry have basically welcomed the fact that we did not go for the short-term eight-month contract and then an extended two-year contract. That has been welcomed. I know of no challenge so far.

Q1034 Chair: You are not concerned that there will be any legal challenge to that contract. That is quite different from people agreeing to support it.

Mr McLoughlin: I am very reluctant to give an answer because you may ask me in three or four meetings’ time why I said something as catastrophic to the Select Committee. I know of no challenge at the moment, Madam Chairman.

Q1035 Chair: Does the contract provide for any further extension beyond November 2014?

Mr McLoughlin: No. I would anticipate that, at that stage, we will be ready to move to a longer-term contract in light of what the Brown report may say.

Q1036 Chair: Will you have enough time to award a new contract after 23 months?

Mr McLoughlin: I very much hope so, yes. Within 23 months-

Q1037 Chair: You hope so. You think you will.

Mr McLoughlin: Yes. All right, then, yes, we will be ready to do that.

Q1038 Chair: Can you tell us anything about the length of the franchise that you are likely to offer?

Mr McLoughlin: Not at this stage, no. If you remember, one of the reasons why the West Coast Main Line was not a 15-year contract-I think initially we were talking about a 12-year contract-was because of the consequence of HS2 and the way in which that would change the whole future of what happens on the West Coast Main Line.

Q1039 Chair: What is happening about InterCity East Coast, currently run by Directly Operated Railways? Is that going to go out to tender?

Mr McLoughlin: It will be my intention in due course that that should go out to tender. Indeed, when the previous operator of that franchise decided it could not continue, that was the announcement made by the then Government. As I have said on the Floor of the House, that will be something I would intend to follow through.

Q1040 Chair: When is "in due course"?

Mr McLoughlin: We are publishing the Brown report shortly, and I hope to be in a much better position to be able to answer some of those questions.

Chair: On a future occasion we might pursue you on what "shortly" might mean. I thank both of you very much for coming.

Prepared 10th January 2013