Bombardier Bombs This One

The British government has recently announced that a consortium led by Siemens, a German firm, was its preferred bidder for the Thameslink route. This route is a £6bn North-South cross-London venture demanding Siemens to provide 1,200 new carriages. This is bad news for Derby firm Bombardier, who lost out to the competition. In the BBC report here, we economists can’t help but comment on this quote by Mark Young, regional co-ordinating officer for Unite:

"The government's decision to award this contract to a consortium which does not have British manufacturing and British job creation as its prime focus is absolutely disgraceful".

Most important transport proposals in the UK are promoted by local authorities and the Highways Agency, and are usually financed by central government. These are then decided on a case by case basis by the Secretary of State for Transport as to whether or not to approve funding. Part of the decision-making process involves a detailed appraisal of the proposed scheme using an approach specified by the Department for Transport (DfT). The commonly applied appraisal method in transport is cost-benefit analysis (CBA). CBA effectively compares the projected future stream of benefits from a project with its initial and future costs. This allows numerous competing projects to be ranked. The project is deemed worthwhile if and only if it is predicted that the monetary values of the revenues will exceed the monetary values of the cost. In order to determine VfM, policy makers turn to cost benefit analysis. For those who are not familiar with Value for Money, the HM Treasury defines value for money in the following manner:

"VfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement."

What we should explain, is that VfM is not the choice of goods and services based on the lowest cost bid. At the core of any procurement policy is a guarantee that an infrastructure project will allow taxpayers to get value for money. Bombardier was not able to demonstrate that the NPV cost to society of the carriages they would provide, were less than what it would cost for the same service provided by Siemens

Siemens represented the best Value for Money (VfM) for tax payers. This measure used in transport and investment appraisals allows policy makers to analyse and sift through efficient firms and not so efficient ones. Clearly Siemens falls in the latter category.

References
HM Treasury (2006) Value for Money Guidance