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West coast rail franchise - my spreadsheet is better than yours

Ken Brown, MBA Programme Director

Faculty Blog

Two companies were asked to submit bids to run a rail franchise in the UK for the next 15 years.  The customer is the UK government, which is a bit short of money these days.  Company one, the incumbent rail operator submits a bid, which is acceptable, but company two with a tweak or two to the spreadsheet; a little lower risk, maybe increasing fares at a higher rate, a few more passengers squeezed on the trains, giving higher future cash flows and hey presto a much higher bid, meaning more cash to UK government.  What does UK government do, a quick check and let’s take company two’s bid before they change their mind. 

Company one is upset: how did you work out your numbers company two?

Company two:  we’ve got a better spreadsheet than you and the UK government doesn’t ask too many questions.Spreadsheets can be complex, ugly and weapons of wealth destruction for governments.

Can any of the numbers for government contracts be believed?  There are the hundreds of PFI contracts entered into by the UK Government and public sector that have resulted in billions and billions of pounds (£267bn at the last count, but it is off-balance sheet, so doesn't appear in the National Debt) of liabilities to private contractors stretching out for decades. 

If the government doesn’t ask too many questions, how can we be sure that the discount rate, ie the risk rate for the contract was set at an appropriate level, or was just another example of the taxpayer being ripped off again? Do governments elsewhere mess up financially as much as the UK government?