13 The Department selects the bidder judged to offer the best value for money for operating the base service specification. Only once it has selected its preferred bidder does the Department then consider the priced options and other options put forward by that bidder. To enable comparison between bids, the appraisal is conducted using the following method:
■ The bidder's price is adjusted to take account of Departmental passenger growth forecasts, not bidder passenger growth forecasts
■ The price is discounted using the standard Department rate to give a Net Present Value (NPV) for the bid over the period of the franchise
■ Consideration of other discriminating factors including, but not limited to, comparative performance offers, focus on cost-efficiency, achievement of Passenger Focus aspirations and quality of Bidder-generated options.
14 In response to the ITT, a bidder must produce three principal delivery plans setting out how it will improve the reliability, reduce the cost and increase the revenue of the service. The bidders must use each of the operational criteria specified for the franchise to demonstrate how they meet the requirements of the delivery plans18. There are 22 criteria in the case of South Western, reduced to 14 for the Midlands franchises in 2007 (see Figure 20).
20 | Showing operating criteria by delivery plan | |||||
| Operating criteria - south Western | Principal delivery plans |
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| Midlands franchises (14 criteria) |
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| Performance | Revenue | cost |
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| Rolling Stock |
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| Train Presentation |
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| Depot and Maintenance |
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| Security |
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| Performance Improvement |
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| Marketing |
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| Ticket Sales |
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| Fares and Revenue Protection |
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| Demand Management |
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| Other Revenues |
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| Human Resources |
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| Franchise Management1 |
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| Train crews |
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| Station Management and Staff |
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| Station cleaning and Maintenance |
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| Station Enhancement |
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| Business Organisation/Quality Plan |
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| Timetable Plan & Resources1 |
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| Service Recovery |
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| Service control |
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| Stakeholder Management |
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| customer Information |
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| customer Services/charter |
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| Mobilisation |
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Source: National Audit Office summary | ||||||
NOTE 1 These are additional criteria. | ||||||
15 The Department will select a winning bidder by risk assessment of delivery plans. This is based on three key questions against each criterion.
■ What is the risk of failure?
■ Are the potential adverse impacts of failure limited to the financial position of the bidder, or could they impact on the taxpayer and the travelling public?
■ Would the failure be one that would emerge progressively, giving the bidder and the Department time to take corrective action, or could it emerge very abruptly?
16 The Department has not weighted the operating criteria so far although it is re-examining that approach and intends to give bidders guidance in the future. For the South Western franchise the Department invited bidders to express their own views on the importance to be attached to individual operating criteria. Our examination of how bidders allocated revenue in their bids on the South Western franchise showed that neither the Department nor the bidders used consistent and clearly defined categories for attributing revenue growth across the operating criteria. This could give rise to double counting although the potential problem may well have been reduced on the subsequent franchise awards as, with a reduced number of operating criteria (down to 14 - see Figure 20), we would expect a better consistency amongst bidders in allocating revenue growth to the same operating criteria category.
17 Bids must pass a compliance check and are then subject to both a technical and a financial evaluation. The technical evaluation is an assessment of the risks inherent in the three deliverability plans with a score allocated to each operating criteria for each delivery plan (i.e. 66 scores for the South Western procurement). This creates an onus on bidders to document and evidence clearly the deliverability of their bids. Only bid scores assessed overall as having a medium or low level of risk pass this evaluation.
18 In the financial evaluation, price becomes the determining factor once the Department is confident that the bid is deliverable. The decision is then primarily based on the lowest risk adjusted net present value of the subsidy required or the highest premia bid. In 2007, on a competition for a Midlands franchise, the bidder submitting the highest revenue proposal was not selected. In this case the Department's advisers and Network Rail assessed deliverability of the bid as involving too great a timetable risk because other services would have been badly disrupted if the bidder had been unable to join and split trains in the time intervals proposed.
19 The Department has put in place an approach to evaluating bids that encourages bidders to focus their bidding attention on planning for ways of maximising revenue receipts on the franchise and keeping operating costs down to those necessary to meet passenger service requirements. As seen from Figure 21, Selection of Winning Bid on the South Western franchise below, bids must demonstrate that they are deliverable but thereafter the key differentiator is the lowest subsidy or highest premium.
20 The former evaluation approach has been duplicated on subsequent procurements although the two and one half per cent band at step 3 above has been amended to reflect the relevant realities of the procurements. 19 In each case the choice of the band, and the extent of permitted price difference, has been set in advance and adjusts the balance between overall technical quality and the bid price. The Department has expanded the process for selecting the winner based on other discriminating factors including, but not limited to, comparative performance offers, achievement of Passenger Focus aspirations and quality of Bidder-generated options.
21 | Selection of Winning Bid on the South Western franchise |
step 1: Select bids that are affordable based on available resources. step 2: Discard any bids that fail the technical assessment of deliverability. step 3: Select the bid that offers the best risk adjusted premium on net present value (and retain any other bid within two and one half per cent of the best bid). step 4: If more than one bid passes step 3, consider which bid has the best result in the technical assessment. Retain the leading bidder from step 3 as the winner provided that bid either (i) has a greater than two and one half per cent advantage in the technical assessment, or (ii) is not weaker than the next bid by more than two and one half per cent. Tie breaker: If no single bid passes step 4, consider the financial risk of bidders in contention, preferring lower risk - if still close consider monetising the passenger benefits of each bidder's performance improvements. | |
Source: Department for Transport | |
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18 The Department's terminology will be changing in future franchises to "delivery criteria" and "operational plans".
19 In the case of franchises that predict a relatively small subsidy or premium payment, prices that are within one percent of the net present value of sales turnover are taken to the technical scores (step 4 in Figure 19).