Stagecoach East Midlands Trains Ltd & Ors v The Secretary of State for Transport [2020] EWHC 1568 (TCC)

“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”

“Within the framework of the provisions set out below, restrictions on freedom to provide services within the Union shall be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended. …”

“Any competent authority which has recourse to a third party other than an internal operator, shall award public service contracts on the basis of a competitive tendering procedure, except in the cases specified in paragraphs 3a, 4, 4a, 4b, 5 and 6. The procedure adopted for competitive tendering shall be open to all operators, shall be fair and shall observe the principles of transparency and non-discrimination. Following the submission of tenders and any preselection, the procedure may involve negotiations in accordance with these principles in order to determine how best to meet specific or complex requirements.”

“the award of public service contracts by rail and by road shall comply with Article 5 as from 3 December 2019. During this transitional period Member States shall take measures to gradually comply with Article 5 in order to avoid serious structural problems in particular relating to transport capacity.”

“Regulation 1370/2007 is, thus, a legislative measure whose Treaty basis permits the granting of aid in the context of rail passenger services which might otherwise have been prohibited aid under Article 107(1), albeit subject to the conditions and limitations set out in the Regulation and the wider State aid principles and guidelines that have been issued in the rail sector.”

“The purpose of this Regulation is to define how, in accordance with the rules of Community law, competent authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed. To this end, this Regulation lays down the conditions under which competent authorities, when imposing or contracting for public service obligations, compensate public service operators for costs incurred and/or grant exclusive rights in return for the discharge of public service obligations.”

“Where EU legislative or administrative institutions exercise a discretion involving political, economic or social choices, especially where a complex assessment is required, the court will usually intervene only if it considers that the measure is manifestly inappropriate.”

“22. The first is that the Secretary of State’s allocation is a discretionary decision of a kind which the courts have traditionally been particularly reluctant to disturb. There is no “right” answer prescribed by the EU Treaty or the 2013 Regulation to the question how EU Structural Funds should be distributed within a Member State. There is not even any clear principle on which this should be done. Instead, the Secretary of State was required to make a complex evaluation of a wide range of overlapping criteria, all of which involved difficult and sometimes technical judgments about matters of social and economic policy. 23. Secondly, it was a judgment of a particularly delicate kind, involving the distribution of finite resources, including domestic taxpayers’ funds as well as EU funds, between the four countries and the distinctive regions of the United Kingdom. In such cases, the Secretary of State is in reality arbitrating between different public interests affecting different parts of our community. It is an exercise in which the legitimacy of the decision-making process depends to a high degree on the fact that ministers are answerable politically to Parliament. As Lord Hoffmann observed in a lecture given in 2001, “Separation of Powers”, 7 JR 137 (2002)), at paras 1920: “… there are certain areas in which, although the decision is formally justiciable because it involves the interpretation of statute or the common law, the outcome is likely to have an important impact upon public expenditure. The allocation of public expenditure - whether we should spend more or less on defence, health, education, police and so forth, whether at a national or local level - is very much a matter for democratic decision. Furthermore, a court deciding a case which will affect one form of public expenditure - for example, impose a burden of expenditure upon education authorities - has no way of being able to decide whether such expenditure should or should not have a prior claim over other forms of expenditure. It may consider that, viewed in isolation, it is fair and reasonable that children in schools should receive certain benefits or financial compensation for not having received other benefits. But because it can only view the matter in isolation, it has no way of knowing whether this means that other people dependent upon social security, police protection and so on will have to make sacrifices because there is less money for them. The only people who can make such decisions are the democratically elected bodies who are in charge of the budget as a whole. This means that even when a case appears to involve no more than the construction of a statute or interpretation of a common law rule, the courts are very circumspect about giving an answer which would materially affect the distribution of public expenditure.”

“62. The importance of according proper respect to the primary decision-making function of the executive is particularly significant in relation to a high level financial decision such as that under consideration in the present case. That is because it is a decision which the executive is much better equipped to assess than the judiciary, as (i) it involves an allocation of money, a vital and relatively scarce resource, (ii) it could engage a number of different and competing political, economic and social factors, and (iii) it could result in a large number of possible outcomes, none of which would be safe from some telling criticisms or complaints. 63. Therefore, like Lord Carnwath, I agree with the Court of Appeal that the Secretary of State’s decision under consideration in this case is in the “classic territory” where the courts afford the decision-maker “a wide margin of discretion” – [2014] EWCA Civ 1080, [2014] PTSR 1387, para 57. …”

“This ITT invites Bids from Bidders in respect of a service concession contract (as that term is defined in the Concession Contracts Regulations 2016 although for the avoidance of doubt those Regulations do not otherwise apply to this contract award).”

“(3) A “services concession contract” means a contract— (a) for pecuniary interest concluded in writing by means of which one or more contracting authorities or utilities entrust the provision and the management of services (other than the execution of works) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment; and (b) that meets the requirements of paragraph (4). (4) The requirements are— (a) the award of the contract shall involve the transfer to the concessionaire of an operating risk in exploiting the works or services encompassing demand or supply risk or both; and (b) the part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible. (5) For the purposes of paragraph (4)(a), the concessionaire shall be deemed to assume operating risk where, under normal operating conditions, it is not guaranteed to recoup the investments made or the costs incurred in operating the works or the services which are the subject-matter of the concession contract.”

“37. ... observance of the principle of equal treatment of tenderers requires that all the tenders comply with the tender conditions so as to ensure an objective comparison of the tenders submitted by the various tenderers … . 39. With regard to the Danish Government's argument that Danish legislation governing the award of public contracts allows reservations to be accepted, it should be observed that when that legislation is applied, the principle of equal treatment of tenderers, which lies at the heart of the directive and which requires that tenders accord with the tender conditions, must be fully respected. 40. That requirement would not be satisfied if tenderers were allowed to depart from the basic terms of the tender conditions by means of reservations, except where those terms expressly allow them to do so.”

“43. In those circumstances, and since the condition in question did not give tenderers the option of incorporating reservations into their tenders, the principle of equal treatment precluded Storebælt from taking into consideration the tender submitted by ESG.”

“41. … [T]he principle of equal treatment implies an obligation of transparency in order to enable compliance with it to be verified … . 42. More specifically, this means that the award criteria must be formulated, in the contract documents or the contract notice, in such a way as to allow all reasonably well-informed and normally diligent tenderers to interpret them in the same way. 43. This obligation of transparency also means that the adjudicating authority must interpret the award criteria in the same way throughout the entire procedure … 44. Finally, when tenders are being assessed, the award criteria must be applied objectively and uniformly to all tenderers. Recourse by an adjudicating authority to the opinion of an expert for the evaluation of a factual matter that will be known precisely only in the future is in principle capable of guaranteeing compliance with that condition.”

“In that context, the purpose underlying the principle of transparency, which is a corollary of the principle of equality, is essentially to ensure that any interested operator may take the decision to tender for contracts on the basis of all the relevant information and to preclude any risk of favouritism or arbitrariness on the part of the licensing authority. It implies that all the conditions and detailed rules of the award procedure must be drawn up in a clear, precise and unequivocal manner to, first, make it possible for all reasonably informed tenderers exercising ordinary care to understand their exact significance and interpret them in the same way and, second, to circumscribe the contracting authority's discretion and enable it to ascertain effectively whether the tenders submitted satisfy the criteria applying to the relevant procedure … .” (Emphasis added)

“55. It … is for the referring court to assess whether the tenderer concerned was in fact unable to understand the award criteria at issue or whether he should have understood them by applying the standard of a reasonably informed tenderer exercising ordinary care. 56. In the context of that assessment, it is necessary to take into account the fact that the tenderer concerned and the other tenderers were capable of submitting tenders and that the tenderer concerned, before submitting its tender, did not request clarification from the contracting authority.”

“…in order to ensure respect for the principles of equal treatment and transparency, it is important that potential tenderers are aware of all the features to be taken into account by the contracting authority in identifying the economically most advantageous offer, and, if possible, their relative importance, when they prepare their tenders … .”

“The principles of equal treatment, non-discrimination and transparency require a contracting authority that has adopted a decision-making procedure for assessing bids to comply with it once it has begun to do so. A different way of expressing the same principle is to state that a contracting authority that has set rules for that procedure must follow them, applying those rules in the same way to the different bidders. Changing the decision-making procedure during the process of assessment risks arbitrariness and favouritism, a risk that it is the purpose of such requirements to avoid. In C-226/09 Commission v Ireland [2010] ECR I-11807 the weighting was altered after tenders had been submitted and after an initial review of those tenders had been performed. This was held to be conduct that was not consistent with the principle of equal treatment and the obligation of transparency.”

“…tender documents are to be construed on the basis of an objective standard, that is the standard of the reasonably well informed and normally diligent (RWIND) tenderer. It follows that the tender documents must state the process to be followed, including how marking of bids will be carried out, in terms that can be objectively assessed and understood by a RWIND tenderer; and, having done so, the contracting authority must stick to it.”

“37. The manner in which English law ensures that contractual effect is given to the Article 8 objectives is by treating BT’s discretion under Clause 12 as limited. As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously: … . This will normally mean that it must be exercised consistently with its contractual purpose: … . Interconnection agreements are made in a regulated environment. The regulatory scheme may change, quite possibly after interconnection terms have been agreed (as it did in this case). But the intention of the parties must be to comply with the scheme as it stands from time to time so far as the contract permits. That intention necessarily informs the scope and operation of any contractual discretions. In my opinion, it is entirely clear that the discretion conferred by clause 12 of the Standard Interconnect Agreement is limited by reference to the purposes set out in Article 8 of the Framework Directive. It follows that contractually BT was entitled to set its own charges, but only within limits which are fixed by those objectives.”

“What is also plain is that among the most important factors for compliance with the principle of transparency are the definition of the subject matter of the contract and need for certainty of terms.”

“37. Proportionality as a ground of review of national measures … has been applied most frequently to measures interfering with the fundamental freedoms guaranteed by the EU Treaties. Although private interests may be engaged, the court is there concerned first and foremost with the question whether a member state can justify an interference with a freedom guaranteed in the interests of promoting the integration of the internal market, and the related social values, which lie at the heart of the EU project. In circumstances of that kind, the principle of proportionality generally functions as a means of preventing disguised discrimination and unnecessary barriers to market integration. In that context, the court, seeing itself as the guardian of the Treaties and of the uniform application of EU law, generally applies the principle more strictly. Where, however, a national measure does not threaten the integration of the internal market, … a less strict approach is generally adopted. … “37. Proportionality as a ground of review of national measures … has been applied most frequently to measures interfering with the fundamental freedoms guaranteed by the EU Treaties. Although private interests may be engaged, the court is there concerned first and foremost with the question whether a member state can justify an interference with a freedom guaranteed in the interests of promoting the integration of the internal market, and the related social values, which lie at the heart of the EU project. In circumstances of that kind, the principle of proportionality generally functions as a means of preventing disguised discrimination and unnecessary barriers to market integration. In that context, the court, seeing itself as the guardian of the Treaties and of the uniform application of EU law, generally applies the principle more strictly. Where, however, a national measure does not threaten the integration of the internal market, … a less strict approach is generally adopted. … 38. Where member states adopt measures implementing EU legislation, they are generally contributing towards the integration of the internal market, rather than seeking to limit it in their national interests. In general, therefore, proportionality functions in that context as a conventional public law principle. On the other hand, where member states rely on reservations or derogations in EU legislation in order to introduce measures restricting fundamental freedoms, proportionality is generally applied more strictly, subject to the qualifications which we have mentioned.”

“73 Member states must also comply with the requirement of proportionality, and with other aspects of EU law, when applying EU measures such as Directives. As when assessing the proportionality of EU measures, to the extent that the Directive requires the national authority to exercise a discretion involving political, economic or social choices, especially where a complex assessment is required, the court will in general be slow to interfere with that evaluation. In applying the proportionality test in circumstances of that nature, the court has applied a “manifestly disproportionate” test:… . The court may nevertheless examine the underlying facts and reasoning: … . 74 Where, on the other hand, the member state relies on a reservation or derogation in a Directive in order to introduce a measure which is restrictive of one of the fundamental freedoms guaranteed by the Treaties, the measure is likely to be scrutinised in the same way as other national measures which are restrictive of those freedoms.”

“21. The Court has consistently held that the principle of proportionality is one of the general principles of Community law. By virtue of that principle, measures imposing financial charges on economic operators are lawful provided that the measures are appropriate and necessary for meeting the objectives legitimately pursued by the legislation in question. Of course, when there is a choice between several appropriate measures, the least onerous measure must be used and the charges imposed must not be disproportionate to the aims pursued. 22. However, with regard to judicial review of compliance with the abovementioned conditions, it must be stated that, in matters concerning the common agricultural policy, the Community legislator has a discretionary power which corresponds to the political responsibilities imposed by Articles 40 and 43. Consequently, the legality of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution intends to pursue … .”

“… it should be recalled that the Commission has broad discretion with regard to the factors to be taken into account for the purpose of deciding to award a contract following an invitation to tender, and that review by the Court must be limited to checking that the rules governing the procedure and statement of reasons are complied with, the facts are correct and there is no manifest error of assessment or misuse of powers … .”

“The reality, subject no doubt to occasional lapses, is that ministers (or authorised civil servants) are properly briefed about the decisions they have to take; that in the briefings evidence is distinguished from advice; and that ministers take some trouble to understand the evidence before deciding whether to accept the advice.”

"The reasoning followed by the authority which adopted the measure must be disclosed in a clear and unequivocal fashion so as, on the one hand, to make the persons concerned aware of the reasons for the measure and thereby enable them to defend their rights and, on the other, to enable the court to exercise its supervisory jurisdiction."

“Let us start with the rail issue. I am absolutely clear that the Department has followed and taken the best legal advice that we can. We are being taken to court over a decision to exclude around pension rights. It is worth saying that the decision was based on very clear legal advice, absolutely clear and categorical legal advice. It is not something I would have chosen to do; it is a matter of regret, but we have done what we are told that clearly we legally have to do. It is also worth saying that it is a matter of public record that across the franchise bids there were six different owning groups that put in bids. Only two of those owning groups were excluded on grounds that they had made non-compliant bids on pensions, so it is not something where the Department is somehow out there. In each of the other bids, we have compliant bids to consider, otherwise we would have taken the same step with the other owning groups.”

“The Government, as we understand it, wishes strongly to dispute the inference drawn from what was said to the Committee. It is not, therefore, in the category of Parliamentary material identified by Stanley Burnton J (OGC, para. 64) when he says, "If the evidence given to a Committee is uncontentious, i.e. the parties...agree that it is true and accurate, I see no objection to its being taken into account". We do not, of course, contend that there is a 'Harry Potter cloak of invisibility' over statements made in proceedings of either House of Parliament (a perspective considered, and rejected, by Green J in R (Justice for Health) v Secretary of State for Health and Social Care). There can be no objection to noting that the statement was made. However, this is not a case in which the Secretary of State expressly set out reasons for a decision in the course of proceedings in Parliament (as in Justice for Health). The quoted extract merely indicates that there were reasons, contained in legal advice, but does not set them out. It is impossible to draw any conclusion about what those reasons were without questioning, or drawing inferences from, the proceedings in Parliament.” (Emphasis added)

“8. For the avoidance of any doubt, while the Defendant does not dispute the truth of the Secretary of State’s comments to the Transport Select Committee (“TSC”) on 17 July 2019, it does 84. dispute their accuracy as a guide to the issues relevant to this case, as it is the Defendant’s position that those comments do not set out the entirety of the reasons for the decisions challenged by the Claimants.” (Underlining in the original) 85. The Defendant also restated its position on proof of reasons as had been previously been articulated by Leading Counsel in opening submissions: “The point I was making, …, is that frequently, and there are numerous examples in these papers and [many] The transcript says “any” but the sense suggests “many”. others, there are decisions which are taken which are attributed to the Minister, and rightly attributed to him, but where the best evidence of what was done is, particularly in this age, the electronic records of the submissions that were put up and the reasons that were put up. So we have come defending our case on the basis of those reasons, rather than trying to go into the minutiae of who said what, when, or [where] the decision was actually taken by an individual. So we would say that was the normal approach. And we don’t defend our case by reference to what Mr Grayling said in the Select Committee, although obviously if it is put to us, we will deal with it.” obviously if it is put to us, we will deal with it.”

“… . [A]s it is our understanding that the Defendants do dispute that that statement fully reflects the reasons for the decision, it is our view that Parliamentary privilege continues to be in issue in this case and that the material cannot be described as "uncontentious" as suggested in Ashurst's letter. That letter states that the Claimants rely on the Secretary of State's remarks "as an explanation of his reasoning for his decisions". Ashurst's letter cites Toussaint v Attorney General of St Vincent and the Grenadines as a precedent for use of the Parliamentary material in this case. However, it is our view that that case can be distinguished from the present one, for the good reason that the Defendants have expressly stated that they dispute the interpretation to be placed on the Parliamentary material. The Privy Council in Toussaint raised the possibility, in the passage quoted in Ashurst's letter, that "If the Prime Minister were to suggest that he expressed himself incorrectly, and did not intend to say what he said, then it would not be Mr Toussaint who was questioning or challenging what was said to the House". However, they did not go on to consider what the effect of such questioning or challenging would be on the court or the Prime Minister, presumably because the suggestion was hypothetical and was not before them in that case. In OGC that matter is expressly considered (in the context of an opinion of a Select Committee from which a party wishes to dissent, placing the tribunal in the position of having to determine whether or not the Parliamentary Committee was correct). Stanley Burnton J says (para 58): " … a party to litigation should not seek to rely on the opinion of a parliamentary committee, since it puts the other party at an unfair disadvantage, and if the other party does dispute the correctness of the opinion of the committee, would put the tribunal in the position of committing a breach of parliamentary privilege if it were to accept that the parliamentary committee's opinion was wrong". After citing from Kimathi and others v Foreign and Commonwealth Office (Speaker of the House of Commons intervening)[2017] EWHC 3379 (QB), the Speaker’s Counsel continued: “In this case, the Claimants seek to use the Parliamentary material as evidence of fact, and the Defendants dispute those facts. This appears to us to be in line with Kimathi. Other cases that support this approach are Coulson v Her Majesty's Advocate, R (Age UK) v Secretary of State for BIS and R (Butt) v Secretary of State for the Home Department, all cited in Kimathi (para 24). In particular, in Coulson the court says (para. 20): "[The principles of Parliamentary privilege] prohibit the leading of evidence questioning anything forming part of proceedings in Parliament but they also prohibit the leading of evidence for the purpose of relying on the truth etc of anything forming part of proceedings in Parliament; otherwise establishing the credibility of any person; or inviting the drawing of inferences or conclusions wholly or partly from anything forming part of these proceedings." In the light of the case law and the Defendants' statement of the position, our position remains that the use proposed to be made of the Parliamentary material in this case infringes Parliamentary privilege.”

“That Parliamentary privilege does prevent a challenge to the accuracy or veracity of something said in Parliamentary proceedings is, I think, confirmed by what [Lord BrowneWilkinson] said at 407F [of Hamilton]: “... The normal impact of parliamentary privilege is to prevent the court from entertaining any evidence, cross-examination or submissions which challenge the veracity or propriety of anything done in the course of parliamentary proceedings. Thus, it is not permissible to challenge by cross-examination in a later action the veracity of evidence given to a parliamentary committee.” “Veracity” is apt to include accuracy.”

“[46] These authorities demonstrate that the law of Parliamentary privilege is essentially based on two principles. The first is the need to avoid any risk of interference with free speech in Parliament. The second is the principle of the separation of powers, which in our Constitution is restricted to the judicial function of government, and requires the executive and the legislature to abstain from interference with the judicial function, and conversely requires the judiciary not to interfere with or to criticise the proceedings of the legislature. These basic principles lead to the requirement of mutual respect by the Courts for the proceedings and decisions of the legislature and by the legislature (and the executive) for the proceedings and decisions of the courts. [47] Conflicts between Parliament and the Courts are to be avoided. The above principles lead to the conclusion that the Courts cannot consider allegations of impropriety or inadequacy or lack of accuracy in the proceedings of Parliament. Such allegations are for Parliament to address, if it thinks fit, and if an allegation is well-founded any sanction is for Parliament to determine. The proceedings of Parliament include Parliamentary questions and answers to. These are not matters for the Courts to consider. [48] In my judgment, the irrelevance of an opinion expressed by a Parliamentary Select Committee to an issue that falls to be determined by the Courts arises from the nature of the judicial process, the independence of the judiciary and of its decisions, and the respect that the legislative and judicial branches of government owe to each other. [49] However, it is also important to recognise the limitations of these principles. There is no reason why the Courts should not receive evidence of the proceedings of Parliament when they are simply relevant historical facts or events: no questioning arises in such a case: see 35 above. Similarly, it is of the essence of the judicial function that the courts should determine issues of law arising from legislation and delegated legislation. Thus, there can be no suggestion of a breach of Parliamentary privilege if the Courts decide that legislation is incompatible with the European Convention on Human Rights: by enacting the Human Rights Act 1998, Parliament has expressly authorised the Court to determine questions of compatibility, even though a Minister may have made a declaration under s 19 of his view that the measure in question is compatible. The Courts may consider whether delegated legislation is in accordance with statutory authority, or whether it is otherwise unlawful, irrespective of the views to that effect expressed by Ministers or others in Parliament: R (Javed) v Secretary of State for the Home Department [2001] EWCA Civ 789, [2002] QB 129 at 33, [2001] 3 WLR 323: “... Legislation is the function of Parliament, and an Act of Parliament is immune from scrutiny by the courts, unless challenged on the ground of conflict with European law. Subordinate legislation derives its legality from the primary legislation under which it is made. Primary legislation that requires subordinate legislation to be approved by each House of Parliament does not thereby transfer from the courts to the two Houses of Parliament, the role of determining the legality of the subordinate legislation....””

“[58] In addition, in my judgment, there is substance in Mr Chamberlain's further submission, summarised at para 23(b)(i) above. If a party to proceedings before a court (or the Information tribunal) seeks to rely on an opinion expressed by a Select Committee, the other party, if it wishes to contend for a different result, must either contend that the opinion of the Committee was wrong (and give reasons why), thereby at the very least risking a breach of Parliamentary privilege, if not committing an actual breach, or, because of the risk of that breach, accept that opinion notwithstanding that it would not otherwise wish to do so. This would be unfair to that party. It indicates that a party to litigation should not seek to rely on the opinion of a Parliamentary Committee, since it puts the other party at an unfair disadvantage and, if the other party does dispute the correctness of the opinion of the Committee, would put the tribunal in the position of committing a breach of Parliamentary privilege if it were to accept that the Parliamentary Committee's opinion was wrong. As Lord Woolf MR said in Hamilton v Al Fayed at [1999] 1 WLR 1586G, the courts cannot and must not pass judgment on any Parliamentary proceedings. [59] If it is wrong for a party to rely on the opinion of a Parliamentary Committee, it must be equally wrong for the tribunal itself to seek to rely on it, since it places the party seeking to persuade the tribunal to adopt an opinion different from that of the Select Committee in the same unfair position as where it is raised by the opposing party. Furthermore, if the tribunal either rejects or approves the opinion of the Select Committee it thereby passes judgment on it. To put the same point differently, in raising the possibility of its reliance on the opinion of the Select Committee, the tribunal potentially made it the subject of submission as to its correctness and of inference, which would be a breach of Parliamentary privilege. This is, in my judgment, the kind of submission or inference, to use the words of 16(3) of the Parliamentary Privileges Act 1987, which is prohibited.” (Emphasis in [58]

“My conclusion does not lead to the exclusion from consideration by the Commissioner or the tribunal of the opportunity for scrutiny of the acts of public authorities afforded by the work of Parliamentary Select Committees. They may take into account the terms of reference of Committees and the scope and nature of their work as shown by their reports. If the evidence given to a Committee is uncontentious, ie, the parties to the appeal before the tribunal agree that it is true and accurate, I see no objection to its being taken into account. What the tribunal must not do is refer to evidence given to a Parliamentary Committee that is contentious (and it must be treated as such if the parties have not had an opportunity to address it) or to the opinion or finding of the Committee on an issue that the tribunal has to determine. Nor should the tribunal seek to assess whether an investigation by a Select Committee, which purports to have been adequate and effective, was in fact so.”

“Parliamentary proceedings are simply off-limits when it comes to litigation. They cannot be relied on either to make or to rebut a case and it does not matter whether, for the purposes of litigation, their integrity is being disputed or is being endorsed.”

“Non-compliant Bids 3.5.1 A Bid will be non-compliant if it …fails to follow the Department's instructions set out in this ITT, or if one of the elimination events in subsection 3.6 (Automatic elimination) occur, … . 3.5.2 If the Department considers that a Bid may be noncompliant, it may (but it is not obliged to) seek additional information or clarification from the relevant Bidder … . 3.5.3 Where a Bid is found to be non-compliant … and except where subsection 3.6 (Automatic elimination) applies, the Department may at its sole discretion reject the Bid and disqualify the Bidder who has submitted that Bid from the competition. 3.5.4 Where a Bid is found to be non-compliant in accordance with subsection 3.5.1 and where the Department decides not to reject the Bid and disqualify the Bidder pursuant to subsection 3.5.3 above, it may start to evaluate the Bid and: a) Take into account the effect of the non-compliance in all relevant elements of the evaluation (including, without limitation, in the allocation of evaluation scores and in the Financial Robustness Test); and b) May also, where appropriate, correct the Modelling Suite for the purposes of running the FRT … as necessary to take into account its reasonable view of the most likely financial impact of the non-compliance on the Department in accordance with subsection 7.6 (Evaluation of Financial Robustness), except that the scoring of the Bid …may not be improved as a result of the process set out in this subsection. 3.5.5 Where the Department determines that it is not appropriate to reject the Bid, or to complete the evaluation of the Bid and address the non-compliance through the process set out in subsection 3.5.4, the Department will at its sole discretion take any other action it considers necessary and appropriate in the circumstances, including but not limited to: a) Disregarding the non-compliance; b) Adjusting the requirements of this ITT, and giving all Bidders the opportunity to adjust or update their Bids to reflect the revised requirements; or c) Requiring any or all Bidders to adjust or update their Bids so that they are compliant. In so doing the Department shall have sole discretion as to whether or not any such action would have a material impact on any or all of the Bids such that any element of the evaluation requires to be reopened or Bids are to be adjusted or updated. …”

“The Department is not and shall not be liable for any costs incurred by those expressing an interest or negotiating or tendering for this contract, their Associated Entities or any other person. The Department reserves the right not to award a contract, to make whatever changes it sees fit to the structure and timing of the procurement process (including issuing updates and amendments to this ITT), to cancel the process in its entirety at any stage and, where it considers it appropriate to do so, to make a direct contract award pursuant to Articles 5(5) or 5(6) of Regulation (EC) 1370/2007.” ii) Paragraph 3.5.6 required bidders to provide a Non-compliance Statement listing all requirements of the ITT with which they were not able to confirm compliance in full at the time of Bid submission and to provide full details of the reasons for the non-compliance; iii) Section 3.6 listed events that would trigger automatic disqualification, none of which apply on the facts of this case; iv) Paragraph 4.1.2 expressly prohibited qualifications or the proposing of alterations to the terms of the Franchise Agreement – including, specifically in relation to the allocation of risk - as follows: “The Department expects to receive Bids that contain no qualifications. Bidders shall not propose amendments to the Franchise Signature Documents … , including by proposing their own Secretary of State Risk Assumptions or any other contractual amendments which seek to transfer risk from the Franchisee to the Secretary of State. For the avoidance of doubt, any failure by a Bidder to comply with the requirements of this subsection 4.1 shall mean that the Bid is deemed noncompliant, and the provisions of subsection 3.5 (Non-compliant Bids) of this ITT shall apply.”

“As part of this procurement, Bidders are not permitted to mark up the Franchise Signature Documents other than to fill gaps denoted by the drafting note 'Bidders to populate'. It is an overarching requirement that Bidders' proposals set out in each Delivery Plan and Sub-Plan are compliant with the Franchise Signature Documents. For the avoidance of doubt, any Initiative contained within a Bidder's response to this Section 5: (Detailed Bid submission requirements - Delivery Plans) which is non-compliant with the Franchise Signature Documents will not meet the Department's requirements, and will result in a Bid being treated as non-compliant.” vi) Paragraph 7.2.1.5 provided: “If: a) A Bid is found to be non-compliant in accordance with subsection 3.5 (Non-compliant Bids); b) The Department decides not to exercise its right to reject the Bid and disqualify the Bidder who has submitted that Bid from the competition; and c) The effects of the non-compliance include a likely financial impact on the Department (in the Department's reasonable view), the Department may adjust the Modelling Suite and re-run the Financial Robustness Test in accordance with subsection 7.6 (Evaluation of Financial Robustness), to take into account its reasonable view of the most likely financial impact of the noncompliance on the Department, provided that this shall only reduce the value of P used in the calculation of the Final Score for that Bid.” vii) Paragraph 7.12.1 reserved to the Defendant the right at any time prior to notification of the preferred Bidder, to require one, some or all Bidders to submit revised bids (a) where all Bidders had failed the Financial Robustness Test or (b) in the event that the Department at its sole discretion considered it would be appropriate in the circumstances to do so, for any reason; viii) Because of the uncertainties to which I refer below, pensions were treated lightly in the ITTs as originally issued and further contractual details were provided by Rebid instructions at a later date. Paragraph 3.16.1 of the original ITTs drew the attention of the Bidder to Schedule 16 of the Franchise Agreement which normally sets out the requirements for pensions (of which more later) and continued: “… For the avoidance of doubt, the Department will not provide any indemnity regarding any payments that may be required under the Railways Pension Scheme (Protection and Designation of Schemes) Order 1994 (SI1433) or otherwise.”

“(1) The main objectives of the Regulator in exercising its functions are– (a) to protect the benefits under occupational pension schemes of, or in respect of, members of such schemes, (b) to protect the benefits under personal pension schemes of, or in respect of, members of such schemes within subsection (2), (c) to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund …, (cza) … to minimise any adverse impact on the sustainable growth of an employer, …”

“Franchisees should be responsible for risks they can manage and should not be expected to take external macroeconomic, or exogenous, revenue risk; there should be a clear mechanism to adjust franchise premium/support payments for variations in Gross Domestic Product (GDP) and Central London Employment (CLE) growth rates. Not taking exogenous revenue risk will enable franchisees to bid lower profit margins, so giving better value to Government. Franchisees should, however, take clear responsibility for delivering the management initiatives that they promise and bear greater responsibility for costs, particularly infrastructure costs. ...”

“The proposition for each franchise must include appropriate risk transfer that reflects the fact that franchisees cannot manage exogenous revenue risks. Only those risks which can be managed by a franchisee should be transferred to it, allowing franchisees to focus on those areas where they can best add value. Inappropriate risk transfer reduces value for money for Government as bidders add margins into their pricing for risks they cannot manage, thereby adding cost. The risk proposition should be tailored to each franchise, as there may be occasions where revenue risk transfer is not the best value for money option, e.g. when there are significant infrastructure works and disruption.”

“… but there is a significant amount of uncertainty around these numbers given there is no plan for finalising the valuation, what covenant rating would be acceptable to TPR and when contribution rates might change.”

“The Pension Regulator's investigation into the TOC Sections of the Railways Pensions Scheme has created significant uncertainty and concern for incumbent TOCs, Owning Groups and bidders for live franchise competitions. In particular the live investigation creates significant uncertainty about the handling of future valuations - and the potential impacts that the outcome of the investigation might have on key assumptions including the pension fund investment strategy and recovery periods. The funding position could vary significantly at further valuations undertaken during the franchise term. … Without a protection, we run the risk of competitions failing and also resulting in dis-incentivising pension reform with costs ultimately being borne by Government.”

“My policy is that as far as possible the TOCs should continue to bear the pension liabilities as private sector companies. It is therefore right that the Rail Delivery Group have been facilitating a voluntary TOC led approach to this investigation. … However, as a result of the significant current uncertainty surrounding future pensions liabilities, bidders for the South East franchise competition have been unable to price pensionsrelated risk. This has created significant legal, procurement and value for money risks to this and other current live and future franchise competitions. … The provision of a risk share mechanism is consistent with the recommendations of the Brown Review into rail franchising, which recommended only allocating risks to TOCs that they could manage efficiently.”

“Your re-bid submitted 8 October 2018 assumed a mechanism different to that which was provided within the specimen drafting, with assumptions that would have required additional drafting in the Franchise Agreement. These matters of noncompliance were expressly raised with you in AQ 218 and AQ0859, and in response to the latter you provided a noncompliance statement confirming non-compliance with a proposal to allocate risks arising from future pension contribution changes. In accordance with the ITT and the rebid instructions this would be deemed to be a mark-up which seeks to transfer risk from the Franchisee to the Secretary of State, contrary to subsection 4.1.2 of the ITT.”

“Consequently, your Bid was non-compliant for the purposes of subsection 3.5.1 of the ITT as the non-compliances constituted a proposed contractual amendment to the Franchise Signature Documents (as defined in the ITT) which seeks to transfer risk from the Franchisee to the Secretary of State, contrary to subsection 4.1.2 of the ITT. 6. The Department has decided that, in all the circumstances, disqualification and rejection is the appropriate response to this non-compliance, given the following factors in particular: • Inconsistency with the Department's policy in respect of the allocation of risk on this issue, as reflected in the East Midlands specification. This was communicated clearly to bidders in the Rebid Instructions. • The financial elements of your Bid are predicated on your position with regard to pensions (which would require changes to the Franchise Signature Documents and seeks to reallocate risk to the Secretary of State), meaning that your tendered price cannot be compared on a fair basis with the prices tendered by bidders submitting compliant bids. 7. The Department also considered its obligations under EU and English law, including in particular its duties of transparency and equal treatment of bidders, as well as the requirement to act proportionately in making a decision to reject a bid and/or disqualify a bidder. 8. We have not taken this decision lightly. Ultimately, however, the Department has to treat all bidders in the competition fairly. Bidders that complied with the Department's clear instruction with respect to the allocation of the pensions risk will have submitted bids taking into account their considered view of their risk exposure. In view of the Department's duties of transparency and equal treatment, we do not see how the Department could properly have come to any decision other than to reject your Bid for non-compliance.”

“As communicated during last Monday's bidder bilateral, the need to maintain a level playing field has been a key objective when considering options to proceed with the South Eastern franchise competition. … Again, bidders are requested to note that the Department requires full compliance with the requirements of the Invitation to Tender … .”

“Since the industry realised that there is no crown guarantee for TOC pensions it has become very risk averse on the pensions issue. Specifically, it is concerned that the next RPS valuation point, 2019, will show a larger deficit requiring even higher contributions. Given other financial pressures facing TOCs at the moment, resulting from lower than forecast passenger growth, TOCs say they are unable to price or bear the risk of additional costs. … 2 bidders on the South Eastern franchise competition have made wildly different assumptions on the pensions risk, which we cannot compare for purposes of continuing the competition; the third has refused to factor in the risk, assuming that DfT will provide some financial comfort at the point of contract.”

“This is not a point for further negotiation – this has been agreed and is how we must proceed.”

“You guys all need to stop panicking and trust me. It’s all in hand and under control. Worst case scenario is that WCP and EM adopt the same approach as South Eastern. Far from ideal, but not much we can do given HMT’s position on this.”

“To limit the open-ended nature of any mechanism and the risk borne by the Government, I therefore maintain that any risk share must be tied to the 2019 valuations point only. However, I would be willing to reconsider this position if, and when, further information on the feasibility and costs of implementing a rolling mechanism that limits the risk to Government are shared with my officials. This is important to ensure Train Operating Companies are held to account for costs within their control and to protect the taxpayer from undue pensions risk.”

“This is frustrating, given all the efforts we have put in”, to which Mr Bailey, the Department’s Director of Rail Strategy, Reform and Analysis, replied “Agreed. Infuriating. But at least we have clarity.”

“Any additional rebid would have an adverse impact on franchise competition schedules, and the implementation/delivery of planned passenger benefits. On pensions, negotiation time would be required to agree a position with HMT (potentially several months) and once this was agreed, the additional rebid required would add at least an additional eight weeks on to project timescales, along with the time required to re-evaluate bids. Any additional rebid would push East Midlands into the final periods of its existing Direct Award, risking another, and reduce the time remaining on the West Coast Partnership Direct Award.”

“The Department continued work on a potential risk sharing mechanism and obtained approval from the Secretary of State and Her Majesty's Treasury to introduce a pensions risk sharing mechanism on the South Eastern Franchise. The principles of the mechanism that the Department has obtained approval for are described in Annex A below.”

“3.1.1. Pursuant to the Form of Tender and subsection 5.1.8 of the ITT, Bidders' proposals must be compliant with the Franchise Signature Documents. Bidders are not permitted to mark up these documents - save where there are areas specifically denoted for Bidders to populate - and must accept them in their entirety. 3.1.2. It is an overarching requirement that Bidders' proposals set out in each Delivery Plan and Sub-Plan (and for the avoidance of doubt, the Record of Assumptions) are compliant with the Franchise Signature Documents. Where a Bidder has not in fact marked up a Franchise Signature Document but has made a proposal or statement in its Bid which, to be given effect, would necessarily mean a mark-up of a Franchise Signature Document would be required, the Department will deem such a proposal to be a mark-up and that will result in the Bid being treated as non-compliant in accordance with subsection 5.1.8 of the ITT.”

“The Department does not anticipate amending the risk sharing mechanism set out in Schedule 16.2. Please could you confirm by return that that: • you unequivocally accept the terms of Schedule 16.2 of the Franchise Agreement as issued to you; • no amendments are required to Schedule 16.2 to reflect the statements made in your Record of Assumptions and that these statements will be removed from your Record of Assumptions should you be taken forward as the leading Bidder; • as a consequence of the above, no other amendments will be required to your Bid including without limitation the Financial Model or the Franchise Payments in Appendix 1 and the Franchise Payment table set out in Appendix 2 to Schedule 8.1.”

“The Department requires that the Bidder re-review the queries raised in AQ 218 and responds to these specific queries and in particular please could you confirm by return that: [It then repeated the three bullet point questions from AQ218, as set out above.] If this is not confirmed in the affirmative, please could you complete a non-compliance statement … . If no response is received to this clarification question, the Department will consider your Bid as being non-compliant in relation to pensions and a deemed mark-up of the Franchise Agreement.” [It then repeated the three bullet point questions from AQ218, as set out above.] If no response is received to this clarification question, the Department will consider your Bid as being non-compliant in relation to pensions and a deemed mark-up of the Franchise Agreement.”

“we ultimately do not have to sign the Franchise Agreement consistent with the Board position with our First Rebid.”

“There are only two options that I feel are acceptable to us: - maintain the position set out in our second re-bid or; - accept the DfT's position and price in the downside. I favour the first. The risk is difficult to eliminate in the second unless we put in a huge increase in pension costs. It would, however, be worth setting out both for the DfT so it sees the figures just in case we could win on the second basis.”

“we would not propose to materially amend the risk share mechanism proposed within Schedule 16.2, although we would seek to include wording in our bid assumptions to clarify the circumstances in which [TEXT REDACTED]. Although there is a risk that such wording may ultimately not be accepted, our assessment is that, because it is explanatory in nature the risk of it being assessed as a non-compliance leading to disqualification would be very low.”

“… industry sources (RDG and others) would suggest that the DfT is unable to offer any further protection beyond what is contained in the current contractual drafting. Our assessment is that an attempt to seek more protection would be likely to end in a bidder being disqualified for non-compliance. We believe that the DfT is actively seeking compliant, but necessarily expensive bids.”

“… we would not propose to amend the risk share mechanism proposed within Schedule 16.2, since our assessment is that this would carry a high risk of disqualification.”

“As we believe the risk of disqualification is very high with option 1, we would recommend option 2 is adopted.”

“Where the Department identifies in its reasonable view a material risk of a materially different financial outcome from that projected in the Bidder's Modelling Suite, whether with respect to cost or revenue, it may risk adjust either revenue, cost, or both, as appropriate in order to reflect its reasonable view of the most credible financial outcome.”

“Were the Department to change the allocation of pension risk, a decision would need to be taken as to whether this would apply across all of the competitions and whether rebids would be required. It is considered that it would be exceptionally difficult to get HM Treasury agreement to a change in the Department's current policy, including on that of sharing risk/reward on deficit contributions only, particularly given the challenges of securing agreement to a risk sharing mechanism as detailed in paragraph 7. Any change in risk allocation approach is likely to adversely impact franchise competition schedules, and the implementation/delivery of passenger benefits.”

“If non-compliant bids (in relation to pensions) are eliminated from the competition and the franchise contracts are awarded to compliant bids, then the Department would be significantly constrained in how it could deal with pensions policy in-life and may in fact feel it is appropriate to make this clear to compliant bidders to test whether they are assuming that protection would be provided in life (see legal advice)”

“This would have significant timescale and potential procurement challenges (see legal risk section), and would be dependent on getting sign off for any new mechanism by HMT.”

“The team should continue to engage with HMT on the scope for protection, especially on the historic liabilities, as there was a shared interest in avoiding problems with franchise competitions and ensuring best value for money for Government. The team should return to BICC after further engagement with HMT but before the competition decisions, so that BICC could understand the balance of risks in order to make an informed judgement.”

“Following BICC on Monday, we were going write to HMT setting out the issues, and essentially saying we wanted to change the risk allocation approach. We’ve backed off slightly now, and intend to instead for the [Directors General] to send a factual note.”

“This is a complex issue and we would appreciate our teams working closely together on this over the coming weeks, particularly in the event that we decide Government's objectives would be better met by a change in the risk allocation approach. Any decisions that are made with respect to the live franchise competitions need to be consistent with our policy position on RDG's industry-wide proposals to address The Pension Regulator's investigation. We are working closely with your team on this also and will be advising DfT and HMT ministers in the New Year. The competition timescales are very tight - franchise competitions need to continue to proceed in order to ensure passenger benefits are delivered.”

“To be clear, our assumption (and my understanding from the conversation yesterday) is that any agreement will apply for future live comps. As there only appears to be one bidder on one competition who is non-compliant because of pensions, I’m not sure it seems sensible to pause all competitions to restart this process. My working level conversations with competition teams suggests that is not what they want either.”

“While I’ve taken on board comments to help improve clarity and shared understanding, I won’t be taking on any substantive changes that cross HMT red lines. As you’ll appreciate we’ve spent a lot of time and energy getting to this position, and Treasury’s position on private sector pensions is not going to change because of difficulties with TOC pensions.”

“23. On pensions, HMT have stated that they will not permit the Department to change its risk sharing approach on the live franchise competitions, but stated they would be content, subject to ministerial clearance, for a different risk sharing mechanism to be offered for future franchises. Given this position, it would be exceptionally difficult to get HMT agreement to a change in the Department's policy on live competitions, including the decision to only share risk/reward in respect of deficit contributions, particularly given the challenges of securing agreement to a risk sharing mechanism previously. Were HMT's position to change, DfT would need to revise the requirements in each of the live competitions and permit each bidder on each competition to rebid in order to make this a deliverable option.” and “30. Policy officials engaged with HMT in early 2019 further to the steer given at the December meeting of BICC. HMT stated that it will not permit the Department to change its risk sharing approach on these three live franchise competitions. HMT agreed to a limited protection mechanism in respect of the deficit recovery contributions required as a result of the 2019 valuation and that this is what bidders on the three competitions bid against.”

“Further actions for the team, specifically the potential undertaking of a series of legal and procurement tests with the remaining bidders to ensure bidders were confident in their bids, would be agreed following the meeting with SoS.”

“The three bids for South Eastern Franchise competition have now been fully assessed by both the Department and Network Rail (NR). Network Rail, having worked closely with the Department from ITT design to final evaluation and engaging with Bidders during the course of preparing their plans, has written to the Department to advise it that in their view all the bids received present significant problems with operational deliverability. The Department has therefore had to conclude that none of the bids provide a sound basis for awarding the franchise contract. [Sentence redacted] It is on this basis that it is recommended the competition is cancelled.”

“• Proceed with the competition. This would mean first deciding whether or not to eliminate Bidder(s) based on noncompliances and getting further independent analysis on the train service proposals and ultimately making an award decision that Network Rail might not fully support; • Conduct a further re-bid to resolve remaining problems with bids; under Equality of Treatment this would mean inviting all Bidders to re-develop their plans against prescribed criteria for re-work that we would have to develop with Network Rail. Timing, price-expiry etc; or • Cancel the competition.”

“Q: [The PwC Analysis] can affect whether a contract is awarded at all to the leading bidder can’t it?”

“Our analysis indicates that in respect of the modelled scenarios in isolation (e.g. ignoring other risk scenarios that may also occur, …), the bidders would have access to sufficient Parent Company Support to tolerate crystallisation of the downside risks modelled. However, the scenarios modelled show reductions in the level of profits generated by the franchise and reduction in the level of dividends that could be paid to shareholders.”

“74. As part of the risk adjustment process, each live franchise competition has considered the most credible financial outcome for pensions and pensions related costs, and these would/will be factored in to the FRT. In view of the potential for increased pensions costs to materialise in-life, the Department has carried out further assessment to provide assurance that it would be appropriate to proceed with the competitions. The Government Actuary's Department has, separately, considered a number of downside scenarios. 75. PwC, as the Department's financial advisers, have considered the deliverability and sustainability of pensions compliant bids in-life should pensions and pensions related risks materialise, and they have concluded that, in isolation, risk should be bearable and the bidding approach/strategy does not look unreasonable. This is because any downside risks that do materialise could be absorbed by not paying dividends as planned and by drawing down on parent company support (PCS). These risks have had to be considered in isolation at this stage because the result of the FRT is not known on any competition, but the most credible financial outcome in terms of pensions will be included a part of the final FRT testing - this will consider the validity of the bid assumptions in combination with other risks. It is critical that no evaluation or award decision is made or influenced by the downside analysis conducted by the Government Actuary's Department or PwC as the ITT does not allow for this, and to do so would introduce very significant procurement challenge risk.” (Emphasis added)

“• Agree to: ◦ Award the contract to the identified lead bidder (Abellio) on the East Midlands franchise competition; o Continue with the West Coast Partnership competition; ◦ Cancel the South Eastern competition given the [redacted] operational risks identified, noting also the risks around the alternative approaches that have been considered.” and “• Agree to formally exclude [Arriva and SEMTL] from the East Midlands competition as a result of non-compliance on pensions, and agree to make one further consequential bid exclusion [i.e. WCTP] on the West Coast Partnership competition on both pensions and other issues.”

“32. Given the very significant financial risks on pensions, we have commissioned an independent review (from PwC) of the robustness of franchise bids to 'downside' in-life pension cost scenarios across all three live competitions, given the risks that we are seeking to transfer to bidders. Further detail is given below - see also Annex A for more detail on the background to the pensions issues, bidder concerns and risks associated with a number of options. 33. Across these three competitions, 9 bids have been received in total (3 in each case). In 5 of these 9 bids (representing 4 out of the 6 competing owning groups), the bidder has accepted the pension risks set out via the above mechanism and have complied with the Department's instructions. In the remaining 4 the bidder has stated that the proposed cost / risk allocation is not something that they can accept, and they have effectively 'marked up' the contractual documentation to propose an alternative allocation of risk relating to pension costs. … 34.Under the Department's standard ITT text, it is made explicit and transparent to all bidders that a mark-up of the franchise signature documents constitutes a non-compliance. All three live competitions contain this standard wording. Bidders were warned, before final bids were submitted, that a mark-up of these documents could result in the elimination of that bid from the competition. Despite this, four of the bids received have proposed actual or de facto amendments to the franchise signature documents which would alter the balance of risk in their favour, and these are therefore considered to be significantly non-compliant. [line redacted] 35. [Redacted as referring to legal advice] 36. The accompanying submission on the East Midlands franchise recommends that the contract is awarded to the leading bid (Abellio which is pensions compliant). On the above basis, it also recommends that the second and third placed bids (SEMTL and Arriva, neither of which are pensions compliant) should be formally excluded from the competition at the same time. 37. The question of excluding a bid on the grounds of pensions non-compliance has to be considered on a competition-bycompetition basis, although the precedent set in making a decision on one competition would inevitably mean similar decisions would need to be made on the other two competitions. We do not have an objective justification for taking a differential approach on this issue across the three franchises. 38. [Redacted as referring to legal advice] 39.On this basis we recommend that you formally exclude the pensions non-compliant bids across all three competitions. However, please note that the pensions non-compliant WCP bidder also has serious non-compliances that also warrant exclusion on six other areas, and that bidder would also be excluded for those areas. 40. However, in considering this issue, it should be noted that the Owning Group of one of the non-compliant bids for the East Midlands competition is also a bidder (either alone or partnering with others) for both the South Eastern and West Coast Partnership competitions. Their approach to pensions risk has been consistent across all three competitions and as such none of their bids are pensions compliant. Therefore, if [you] were to take an exclusion decision for the East Midlands competition in isolation, the Owning Group would immediately deduce that an exclusion for pensions non-compliance there will almost certainly lead to parallel exclusions of their bids from the other two live competitions as well. 41. We have also considered the in-life risks from awarding contracts to pensions compliant bidders in the current circumstances. We have commissioned an independent review of the reasonableness of the assumptions employed, and the likely sustainability of the potential franchisees, if pensions risks were to crystallise in isolation for those bidders who are compliant. This has been undertaken by PwC and is separate to the bid evaluation process. The review looked at a series of increasingly punitive scenarios for the three competitions (for example if sustained strike action occurred as a result of increased employee pensions contributions without any additional government support). This review concluded that, on all three competitions, the leading / prioritised bidder would survive if those risks crystallised, with the impact absorbed through a mixture of lower dividends and temporary calls on Parent Company Support. 42. As with any contract, there is a risk that the leading (and pension compliant) bidders seek further financial support from the Department to manage pension issues during the life of the contracts after award. However, you should note that there would be substantial procurement risk in providing this support if you were minded to, as to do so would implicitly alter the assumed balance of pension risks which underpinned the original award decision. 43. Given that: (a) the majority of bidding groups across the three competitions have accepted the pensions risk allocation; (b) the leading / prioritised bidders on each competition have accepted the pensions risk allocation; and (c) an independent review has provided reassurance that the leading bids are robust in a number of downside pensions scenarios (albeit in isolation from other downside financial factors); Our assessment is that the risks from awarding contracts to pensions-compliant bidders should be manageable. 44.We consider that the alternative of cancelling all the competitions on pensions grounds, or inviting re-bids on the basis of a different specification, would carry a high risk of being challenged by disappointed market participants. Further, we consider there to be a medium-high risk that such a challenge would succeed bearing in mind that: (a) most bidders have bid compliantly based on the current risk allocation; and (b) PWC's analysis suggests that those bidders were not behaving unreasonably in so doing. The concern is that an inference would be drawn that the Department had acted in a discriminatory manner against those bidders who have bid compliantly. If such a claim were to succeed the claimant would be very likely to recover not only its wasted bid costs but also its lost profit, a claim which in the case of current leading bidders could be very substantial indeed given the strong arguments they could make that they would otherwise have been awarded the contract.”

“5. The live TPR investigation, the lack of an agreed TOC-wide solution, the 2016 valuation not yet being finalised, and the wide range of possible outcomes from future actuarial valuations (which occur every 3 years) has created significant uncertainty across the industry, and particularly for bidders on live franchise competitions (South Eastern, East Midlands and West Coast Partnership). Bidders on all three competitions flagged that the lack of any protection on pensions was a material issue in whether they could bid compliantly (or at all). 6. In order to mitigate the threat to competitions and to minimise uncertainty as far as possible, you agreed, in April 2018, that the Department should develop a pension risk share mechanism to enable live franchise competitions to proceed whilst ensuring value for money and retaining incentives for pension reform (noting that the RPS is a shared cost scheme). In May 2018, you wrote to the Chief Secretary to the Treasury seeking agreement for the inclusion of a risk sharing mechanism which applied to changes to deficit recovery contributions resulting from the 2019 actuarial valuation and each subsequent actuarial valuation during the relevant franchise term. In order to incentivise TOCs to take a long-term view on pension provision, TOCs were to remain on full risk for changes to future service contributions. After a lengthy delay, and extensive engagement at senior official level, the Chancellor eventually agreed to the use of a mechanism, but stated that it must be limited to the 2019 valuation point only. 7. Bidders on the three live franchise competitions were invited to bid on the basis of the mechanism as approved by the Chancellor. Bidders were provided with illustrations, developed by the RPS Scheme Actuary, showing the potential impact of applying TPR's parameters in full to the draft results of the 2016 valuation. The Department advised bidders that it would make reference to these illustrations when risk adjusting bids, but did not state that bidders must use the illustrations when developing their bids. Content of bids in respect of pensions and non-compliances 8. At a high level, the bids indicate that transport owning groups have different appetites in respect of managing pensions and pensions related risks. 9. A number of bidders (the majority of the 6 larger bidding groups) have accepted the risks and have complied with the Department's instructions, whilst others have stated that the proposed cost/risk allocation is not something that they can accept, and have effectively marked up the contractual documentation to propose an alternative allocation of risk relating to pension costs. … 12. Where an alternative pensions cost risk allocation has been proposed, there is evidence that this has been done after the bidder has engaged with actuaries on the Detail of the risks and issues. However, while no leading bid has explicitly considered future valuation risks and considered how to address them, at least one pensions compliant bid has done. The Department has [issued/will issue] a letter to all confirmed leading bidders through the clarification question process outlining its understanding of the bidders' acceptance of the terms of the Franchise Agreement, the pricing of the bid on those terms, and the submission not being conditional or dependent on the Department providing any financial support (other than through the risk sharing mechanism) or varying the terms of the Franchise Agreement. … Evaluation of bids 15. During the evaluation of bids, risk adjustment and the Financial Robustness Test (FRT) are undertaken. Risk adjustment involves making any necessary adjustments to a bid (or bids) to reflect the Department's 'reasonable view of the most credible financial outcome' for all revenues and costs. The Department assesses the financial robustness of the prospective operator in this scenario and a ‘downside' scenario (which includes a reduction in passenger revenue). The ITT does not state that the Department will run a downside scenario on costs, including pensions costs, as part of the FRT. 16. As part of the risk adjustment process, each live franchise competition has considered the most credible financial outcome for pensions and pensions related costs, and these would/will be factored in to the FRT. In view of the potential for increased pensions costs to materialise in-life, the Department has carried out further assessment to provide assurance that it would be appropriate to proceed with the competitions. The Government Actuary's Department has, separately, considered a number of downside scenarios. 17. PwC, as the Department's financial advisers, have considered the deliverability and sustainability of pensions compliant bids in-life should pensions and pensions related risks materialise, and they have concluded that, in isolation, risks should be bearable and the bidding approach/strategy does not look unreasonable. This is because any downside risks that do materialise could be absorbed by not paying dividends as planned and by drawing down on parent company support (PCS). These risks have had to be considered in isolation at this stage because the result of the FRT is not known on any competition This was in fact an error as the EM FRT had been done. But I do not consider it to be material to the overall picture or result. , but the most credible financial outcome in terms of pensions will be included [as] part of the final FRT testing — this will consider the validity of the bid assumptions in combination with other risks. It is critical that no evaluation or award decision is made or influenced by the downside analysis conducted by the Government Actuary's Department or PwC as the ITT does not allow for this, and to do so would introduce very significant procurement challenge risk. … 19. HM Treasury officials have been briefed on the pensions content of the bids received, and the non-compliances. They have also been briefed on the potential risks associated with contracting compliant bids, including the Department likely being significantly constrained in how it could deal with pensions policy and risks during the contract term (if it was to eliminate non-compliant bidders), … . HM Treasury officials have recognised that, without the provision of a risk sharing mechanism going forwards, there is a risk that the market's response to pensions could become a disproportionate driver of the relative value for money and compliance of bids for franchises, and therefore of the outcome of competitions as a whole (as opposed to the delivery of passenger benefits). … 20. You should note that the Department is likely to be significantly constrained in how it could deal with pensions policy and the allocation of pensions cost risks during the contract term. 21… 22. There may be in-life contract management risks associated with contracting pensions compliant bids, including a franchisee being unable to meet the cost of increased pensions contributions and industrial relations issues associated with any attempts to reform the funding of the pensions sections. The Department may be asked to intervene to mitigate the impact of increased pensions contributions and/or any industrial action. [Balance of paragraph redacted] Change in risk allocation approach 23. There are a number of potential risk and issues with changing the risk allocation approach. Additionally, and based on the Department's assessment of the risks associated with this option, HMT officials have indicated that they would recommend to their Ministers that the Department should not change its risk sharing approach on the live franchise competitions, but stated they would be content, subject to the Chancellor's clearance, for a different risk sharing mechanism to be offered for future franchises. It is considered that it would be exceptionally difficult to get HMT agreement to a change in the Department's policy on live competitions, including the decision to only share risk/reward in respect of deficit contributions, particularly given the challenges of securing agreement to a risk sharing mechanism previously, there are a number of compliant bids and the independent advice from PwC indicates that the risks (albeit in isolation) should be bearable. 24. If it was decided that the risk allocation approach should change, the Department would need to revise the requirements in each of the live competitions and permit each bidder on each competition to rebid in order to make this a deliverable option, taking several months to resolve. Any additional rebid would push East Midlands into the final periods of its existing Direct Award, risking another, and reduce the time remaining on the West Coast Partnership Direct Award. 25. Legal advice is [rest of paragraph redacted] 26. It is also considered to be unlikely that a change in risk sharing approach, to a mechanism that HMT would be prepared to permit, would result in non-compliant bids becoming compliant or offer better overall value for money to the Department.”

“It is recommended that you: • Agree to award the East Midlands franchise to [Abellio], and that the Managing Director of Passenger Services should have delegated authority to approve final contractualisation elements …; • Agree to write to HM Treasury to seek approval to enter into the East Midland Franchise Agreement and associated legal documents (draft letter at Annex G); • Agree that bidders [Arriva and SEMTL] should be informed that they have been disqualified from the competition on the grounds of their non-compliance with pension requirements (see paras 45-46). The Department would make clear to these bidders that they would have not been successful irrespective of pensions non-compliance; and • Confirm that you: o have considered the legal requirements set out in the Equalities Act 2010, … .” o have considered the legal requirements set out in the Equalities Act 2010, … .”

“[Abellio’s] Bid contains no material non-compliances. [SEMTL and Arriva] both have material non-compliances in respect of pensions. They have proposed changes which amend the franchise signature documents and alter the balance of risk in their favour on pensions, declining to accept the risk sharing mechanism provided by the Department in the Franchise Agreement. A similar non-compliance (a Bidder amendment to the Franchise Agreement to alter the balance of risk in its favour) resulted in the elimination of a bidder on a previous competition.”

“As officials discussed with the Secretary of State and Andrew Jones this afternoon, both Ministers are content to: • Agree to award the East Midlands franchise to [Abellio] • Agree that the MD of Passenger Services have delegated authority to approve final contractualisation elements • Agree to write to HM Treasury to seek approval to enter into the East Midland Franchise Agreement (final, signed and sent letter attached for info) • Agree that bidders [Arriva and SEMTL] be informed that they have been disqualified from the competition on the grounds of their non-compliance with pension requirements • And confirm they have considered the legal requirements set out in the Equalities Act 2010”

“• The Secretary of State and Andrew Jones are also content to agree to make one further consequential bid exclusion on the West Coast Partnership competition on both pensions and other issues, and a bid exclusion on Southeastern on pensions.”

“Pension shortfall: The department retains certain risks in relation to pension costs, notably those arising from the 2019 valuation of the Railway Pension Scheme. Our approach to apportioning pension cost risk on this franchise has previously been agreed with HM Treasury. It should be noted that, whilst the bid submitted by [Abellio] is a pension compliant bid, there may be in-life contract management risks, including the franchisee being unable to meet the cost of increased pensions contributions and industrial relations issues associated with any attempts to reform the funding of the pensions sections. If these arise, we will work closely with HM Treasury in managing them.”

“No significant non-compliances have been identified in [Abellio’s] bid. Serious non-compliances were identified in both [Arriva’s and SEMTL’s] responses to the Department's rebid specification. After further analysis these noncompliances were considered as being sufficiently serious to merit disqualification of these two bidders from the competition, due to the level of risk on pensions which these bidders sought to transfer back to the Department. I have therefore authorised the disqualification of these two bidders. However, it is important to note that [Abellio] was the leading bidder even before these significant non-compliances were identified.” (Emphasis added)

“7. In summary, SIAP agreed that the bid was non-compliant with the stated pensions position in the ITT and the Franchise Agreement. The non-compliance was of a material nature: a. It was a deliberate, de facto mark up of the Franchise Signature Documents, which is prohibited in the ITT and was explicitly prohibited in both the original re-bid and the pensions re-bid instructions; and b. changed the allocation of risk in such a way that the Department would not be able to evaluate their price or fairly compare their tender with that of other bidders. 8. It was noted to SIAP that a decision not to eliminate [SSETL], which would in effect be equal to allowing them to remain in the competition, would be incompatible with the equal treatment of all bidders. Decision: The Chair agreed that acting consistent with the advice provided to BICC in the minutes of the 13th March 2019, and confirming the reasons above, that [SSETL] should be eliminated from the South Eastern Franchise Competition.”

“The fact remains: having reviewed once again at SIAP their bid on South Eastern it is our view that [SSETL] remains noncompliant in a way where we believe disqualification is the most appropriate way to deal with such non-compliance. Given the above, [SSETL] will be informed of their disqualification from the South Eastern competition next week.”

“We recommend that the Department clarify, in detail, exactly what its current and future approach to macroeconomic risksharing is, in doing so, it should make clear how it has implemented the relevant Brown Review recommendations.”

“10. It appears that, until prompted by TPR's investigation, Owning Groups may not have fully understood the significant pension risks they are carrying (through the TOCs) under the current industry pension arrangements. They briefly raised concern about this risk at the RDG round table with you on the 14th March and we have agreed to hold further senior official level round tables. Whilst the Owning Groups are not able to change their obligations under existing contracts, they are free to decide whether or not to enter into new contracts, and have indicated serious concern about entering into further contracts with the same level of pensions risk exposure, under current conditions.”

“2.5.2 The objective of the West Coast Partnership Franchise is to combine the operation and improvement of the ICWC Services with preparation for the introduction of HS2 (Shadow Operator Services), followed by the integrated operation of both services from the High Speed Start Date until 2031 (Integrated Services). The Franchisee, from the Start Date up to the High Speed Start Date, will be required to operate and improve the ICWC Services. At the same time, the Franchisee will be working closely with the Department and HS2 Ltd as a Shadow Operator of the High Speed Services to shape the future High Speed and ICWC Services, as well as preparing for the HS2 operations. Following the High Speed Start Date, the Franchisee will be required to run High Speed Services and reconfigure and operate the revised ICWC Services on the existing route.”

“6.15.1 As a contingency, the Secretary of State may choose not to exercise the switch to the IOC at 1 April 2026 but to continue with the operation of ICWC Services under the same contractual terms as the Initial Franchise Period for a period determined by the Secretary of State. This decision will be at the discretion of the Secretary of State and is intended as a contingency dependent on the circumstances prevailing at the time. The duration of this period could be up to a maximum of 5 years in length, through to 31 March 2031. The full, potential extension period is referred to as the Reset Period. Prior to entering this period a limited resetting process will be undertaken in accordance with Schedule 8.7A of the Franchise Agreement. 6.15.2 During any Reset Period, the Shadow Operator Services are anticipated to continue subject to the terms of Schedule 18 of the Franchise Agreement. 6.15.3 The resetting process will only be undertaken once in order to arrive at reset Franchise Payments through to 31 March 2031 and these payments will apply until that date or the Integrated Operator Start Date, if earlier. 6.15.4 As part of the bid submission, Bidders' ICWC Modelling Suites should extend (and be populated) for the full Core Franchise Term from 15 September 2019 to 31 March 2031 including the Reset Period from 1 April 2026 to 31 March 2031.”

“Reset shall occur effective at 02:00 on 1 April 2026, provided that the Secretary of State has not notified the Franchisee, …, that the Integrated Operator Start Date shall occur at that time.”

“224. … [T]o ensure value for money the Defendant proposed to revise the deficit recovery contribution payments to what take account of what they were on and then after 1 April 2026. If the level of those payments had increased (beyond, in the case of post 1 April 2026 changes, a small nil band i.e. the Threshold Amount), the franchisee’s premium payment to the Government would reduce and there was therefore no need for the Franchisee to include a contingency for that risk which might never arise (but would, if a contingency was included, lead to reduced premium payments and therefore worse value for money for the Government and the taxpayer). In the event of decrease, the same process applies in reverse. … 226. If Reset occurs on 1 April 2026, the franchisee obtains further protection (replacing and updating that offered by the PRSM). Upon Reset, the Financial Model will be updated based on the then current Recovery Plan. Reset operates by a run of the Financial Model and certain, specified cost and revenue items will be Reset Revised Inputs for the run of the Financial Model as set out in Schedule 8.7A. One of the Reset Revised Inputs is calculated by reference to the … “the Deficit Contributions described in the 2026 Recovery Plan”

“If there is a switch to IOC terms, all cost risk including pensions cost risks (both DRCs and FSCs) passes to the Secretary of State so that the franchisee bears no risk at all from March 2026 onwards; The Reset and post Reset (Pensions Deficit Contribution Change) mechanisms apply in the event that the franchise does not switch from ICWC Terms to IOC Terms on 1 April 2026. If the DfT does not serve notice to switch to the IOC Terms on 1 April 2026, those mechanisms apply during the "Reset Period" (1 April 2026 to 31 March 2031). [TEXT REDACTED] If there is, for example, subsequent to the finalisation of the 2025 valuation, an increase in the DRCs (beyond a small nil band …) payable from July 2027, the DfT will provide protection in accordance with Schedule 8.7A Appendix 3 to the Franchise Agreement.”

“The price that the other bidders offered took account of the risk that they were taking on. The Stagecoach bid, their price didn’t take account of that risk that would have potentially caused the Department to incur costs, and so the two prices were not comparable. An adjustment to the price to take account of the potential cost to the Department wouldn’t have made the bids comparable.”

“There are a number of potential risk and issues with changing the risk allocation approach. Additionally, and based on the Department's assessment of the risks associated with this option, HMT officials have indicated that they would recommend to their Ministers that the Department should not change its risk sharing approach on the live franchise competitions, but stated they would be content, subject to the Chancellor's clearance, for a different risk sharing mechanism to be offered for future franchises. It is considered that it would be exceptionally difficult to get HMT agreement to a change in the Department's policy on live competitions, including the decision to only share risk/reward in respect of deficit contributions, particularly given the challenges of securing agreement to a risk sharing mechanism previously, there are a number of compliant bids and the independent advice from PwC indicates that the risks (albeit in isolation) should be bearable.”

“Q. Would you accept that if it had been understood that a change in the Treasury's position was a possibility, then a further rebid on pensions would also have been a possibility? A. I think, yes, I think if we had indicated that we might be able to share more risk and reward, then in theory we could have potentially done a rebid.”

“The following objectives were published in the franchise prospectus issued to the Bidding market in March 2017, prior to the Expression of Interest deadline: • Making more space for passengers • Improving performance • Making passengers feel like valued customers • Improving connectivity • Improving the timetable • Simplifying fares and ticketing • Improving stations • Working with others • Capability • Sustainability”

“1. Drive growth in passenger numbers using the ICWC Services and develop the market for intercity travel between the cities served by the franchise ahead of the introduction of HS2. In doing so, maximise passenger benefits and create the best foundation for the future of the ICWC Services and High Speed Services. 2. Deliver a step change in customer experience for passengers on the West Coast, minimising the impact of HS2 construction whilst delivering a new benchmark in passenger satisfaction through the introduction of new technology in advance of HS2. 3. Take full advantage of a once in a lifetime opportunity to deliver a transformation in customer experience on HS2 and the existing network. 4. Act as a partner for Department for Transport, HS2 Ltd, Network Rail and other relevant bodies to support the development and delivery of the High Speed Services to maximise the long term benefits to passengers and deliver the wider socio-economic benefits associated with HS2. 5. Deliver the benefits of existing investment in the ICWC business whilst developing and delivering the maximum long term sustainable benefits for passengers associated with HS2, integrating services with the rest of the rail network by optimising the use of available capacity across the whole geography while taking account of taxpayer interests. 6. Achieve whole industry benefits through continued investment in workforce and innovation and partnership working to deliver the services in a cost effective manner. 7. Successfully deliver the service transition in 2026, including the ability to respond quickly, in real time, to changes required once high speed and recast conventional services commence.” 501.The EM table of franchise objectives was different again: “Support the Government agenda to make the Midlands region an engine for growth, working particularly to develop connectivity within and outside the region; to focus on supporting the region's industry and leisure economy. To improve the quality, frequency and timings of journeys on the east of the franchise network and to seek to develop new services and connections. Provide the franchise capacity to address predicted growth in demand, in particular into St Pancras International but also for local crowded services like Derby-Crewe, working with Network Rail to minimise the impact on passengers and the effective running of train services during any redevelopment works. Invest in the East Midlands train fleet to bring this up to world class standard of on-train passenger facilities and improve fleet capacity, operating performance and reliability, whilst complying with Persons of Reduced Mobility Technical Specification for Interoperability (PRM - TSI) and reducing operating costs and the carbon footprint. Develop a maintenance and stabling strategy for a new proposition for rolling stock which will be introduced during the next franchise. Improve passenger satisfaction and public perception of the railway - including the ticket purchasing experience. The range of ticketing media and fulfilment options should see active innovation, including barcode, print at home, smartcard and solutions that support the Government's manifesto commitments to improve compensation arrangements. In addition, in line with passenger expectations and the Department's policy, to deliver high speed Wi-Fi and wireless connectivity to passengers. Develop fully aligned incentives between management in the Train Operating Company and Network Rail to secure the investment and improvement in the route's infrastructure, including the services to Corby & Kettering, and infrastructure improvement where most needed, to reduce journey times on long distances and achieve a high level of service resilience and reliability. Invest in the Franchise workforce, their training, skills and career development to create an environment that makes this franchise a place its staff is proud to work in. To develop opportunities to give employees a share in decision-making in the franchise and the potential to share in the franchise's successes. Develop coastal, leisure and high value tourist services, including working collaboratively with heritage railways.”

“Last night we were informed by the Department for Transport (DfT) that we have been disqualified from the current three UK rail franchise competitions: … . We have been told that our bids were determined as non-compliant principally in respect of pensions risk. Bidders for these franchises were asked to bear full funding risk on the relevant sections of Rail Pension Scheme at a time when The Pensions Regulator has expressed concerns about the level of contributions required to ensure they are fully funded.”

“All risk adjustments will be made on the basis of the Department's reasonable view of the most credible financial outcome taking into account all relevant information available to it, including new information released after the issue of the ITT, existing industry/Department guidance and research, new research and other evidence put forward by Bidders in associated Delivery Plans or Sub-Plans, the Record of Assumptions, or any other relevant information submitted with Bids….”