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On the right track?

aksaroya —  26 November 2012 — Leave a comment

By Peter Williams, Accounting and Business journalist and accountant

As well as highlighting the DfT’s poor record on bidding processes, the West Coast Main Line franchise debacle poses deep questions about the accounting profession’s ability to model risk. 

In May 2011, the Department for Transport (DfT) published a mercifully short document, A Guide to the Railway Franchise Procurement Process, which I read, prompted by the debacle over the West Coast franchise. When all hell broke loose over the flaws in the model, a team of consultants from PwC – previously let go to save money – found the errors in the spreadsheet within half an hour.

The DfT admitted that significant flaws had been discovered in the way the bidding process had been conducted. The risk assessment was messed up as a result of mistakes in the way inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.

The track record on these processes is not good. The Transport Select Committee heard from Virgin boss, Richard Branson, at the beginning of September, weeks before the DfT ditched the franchise process. According to Branson’s evidence, on four recent occasions companies which won bids subsequently admitted to several financial difficulties or went bust.

You may think that the Department may be scarred by those experiences by now. We all need to be sceptical of forecasts that predict high growth right at the end of the period. And to be fair to the civil servants, that May 2011 guide is clear the biggest money bid won’t win unless everything else appears in order. The Department promises it will assess the cost and revenues set out in bids. If this assessment indicates a significant risk that costs of revenues will not be delivered or identifies other reasons why the franchise is likely to be financially unstable, the Department can rule out those bids from the competition on the grounds that they are financially high risk.

Aside from all the clever technical and academic input to investment appraisal, it boils down to one technical question: would I rather receive some money from that person now or much more in five years time? If you cannot see from a common-sense perspective where those big numbers are coming from, then perhaps it is time to say thanks, but no thanks.

The West Coast example should raise some awkward questions for how good accountants are at creating and understanding these models. They are in a good position to do the number crunching, but in building models what are their drivers? What pressures do they face in stressful commercial situations? They need to take a more independent, strategic position on the risk and reward that governments should ask for and private companies should be prepared to shoulder.

Maybe competent and honest professional accountants have become too wedded to the all-pervading efficacy of spreadsheets. As well as quantifiable risk which can be modelled, the accountancy profession needs to start looking at the impact of human psychology and behaviour in difficult and complex accounting and business contexts. We need to ask ourselves questions which we have barely started to think about: if we want to achieve a certain commercial result, how does that impact on the way we behave?

This post first appeared in Accounting and Business UK November 2012.