The National Audit Office (NAO) has dubbed the Department for Transport's (DoT) recent handling of the Intercity West Coast franchise sale fiasco as "confused" and "lacking in management oversight".
The spending watchdog concluded that the full cost to the taxpayer is unknown but likely to be significant, with at least £1.9m in staff and adviser costs, £2.7m in legal costs and £4.3m on external advisers for the reviews that it has commissioned.
Having awarded the franchise to First Group in August 2012, the DoT then cancelled the award on 3 October 2012. The incumbent operator, Virgin Trains is now running the franchise. The agreement will run for 23 months until November 9 2014.
Amyas Morse, NAO head, said: 'Cancelling a major rail franchise competition at such a late stage is a clear sign of serious problems. The result is likely to be a significant cost to the taxpayer. The failure of essential safeguards raises questions about the department's broader management approach, as well as this specific matter.
'It is commendable that, once it uncovered the problems on the franchise, the department sought to be open about what happened and to investigate further. Among the lessons to be learnt is that staff with line-management responsibilities should be clear that assurance processes are not a substitute for proper supervision and management controls.'
The report identified five key safeguards against poor decision making in major projects - none of which were followed in the Intercity West Coast case.
The NAO found that while the refranchising process was a major endeavour, with considerable complexity and uncertainty, the DoT was insufficiently clear during the franchise competition. It delayed the issuing of the invitation to tender by eight months because it had not finalised how it would implement recent policy changes, such as operators being responsible for stations. There was also confusion among DoT staff about some aspects of the process.
The subordinated loan facility - capital provided by the parent company to guarantee franchise payments will be made to the DoT should the franchisee get less passenger revenue than expected - was a particular area of confusion, the NAO discovered.
There were "significant errors" in the tool the DoT used to calculate how big a loan it would require bidders to have. The model had been designed to inform internal discussions and received no extra quality assurance once the department decided to use it to calculate the loan, a key commercial decision.
The competition also "lacked strong project management and there was no clear route for the project team to get approval for major issues in the project".
No one person oversaw the whole process or could see patterns of emerging problems, the NAO found.
In addition, there was considerable turnover in senior positions at the DoT which had four permanent secretaries in two years and changes of director general.