Government’s Brexit freight risk miscalculation cost £33 million

The government agreed to pay out £33 million to Eurotunnel after miscalculating the risks associated with procuring addition ferry freight services in the run up to Brexit, according to a report by the accounting watchdog NAO.

In autumn 2018, the government realised that the potential disruption to perishable goods, medicines and manufacturing components flowing across the English Channel could last six months – compared to its original estimate of six weeks. Given that almost ninety percent of all such goods arriving on lorries go via ferry into Dover or through the Channel Tunnel, it needed to take action quickly.

There was no time to go through the typical procurement process. The government invoked a special exemption clause relevant in such emergencies and the procurement of additional freight capacity took a mere 23 days to complete.

Weighing the risks

The government accounting officer decided that the legal risks were outweighed by the risks of not securing additional freight capacity. In fact, she believed it was highly likely that there would be a legal challenge from businesses that had not been invited to tender. While a legal challenge was likely, her advisors said that any trial would be unlikely to take place before 29 March 2019 – the date set for Brexit.

The Department for Transport’s contract award notices were published in the Official journal of the European Union on 28 December. Eurotunnel filed a complaint to the Department on 2 January.

“Eurotunnel expressed concern about what it considered to be the distortionary and anti-competitive effects of the contracts,” the NAO report said. “Under the terms of the contracts, for example, the additional services might operate even if an exit deal was reached, which would provide more capacity into the freight market and potentially remove business from Eurotunnel.”

Timings

The Department did not think it could successfully defend Eurotunnel’s challenge to its procurement of freight capacity – even though it had been rushed through as a matter of urgency. But it did not think that a court hearing would take place before the proposed exit date of 29 March, which would change the nature of the legal risk in one of two ways:

  • By then, an exit deal would have been agreed and ratified. There would be no need for the additional capacity that the Department had secured to move essential goods, and as a result the Department may have already cancelled some or all of the additional capacity ahead of the trial; or
  • The UK would have left the EU with no deal. There would be an urgent need for the additional capacity that had been secured to transport critical goods. In this situation the Department did not consider it likely a court would cancel contracts that were being used to transport essential medicines.

The initial court hearing took place on 11 February and a four-day trial was scheduled to begin 1 March 2019. The earlier date meant that the main risk faced were not merely financial but could also mean that the contracts would be cancelled – which would mean the Department for Transport would have to start another procurement process.

Miscalculations

Because the Department had been aware of a legal challenge, it had estimated the value of damages it might have to pay as being in the region of £20 million – mainly because the court case would have come after Brexit had taken place. Eurotunnel filed a claim for £80 million and the Department estimated it could cost an additional £97 million to secure more freight capacity (including the use of military ships) if the original contracts were cancelled.

The discrepancy between its own calculations and Eurotunnel’s arose from the fact that, “the Department’s estimate had only considered damages relating to the profit a ferry operator could have made had they won a contract,” the report said. “Eurotunnel’s estimate focused on damages relating to the distortive impact the additional services might have on the market for cross-Channel freight services. The Department had not considered in depth this type of damages in its assessment of the initial procurement.”

The Department paid out damages of £33 million in an out-of-court settlement.

Read the report Department for Transport: out-of-court settlement with Eurotunnel.

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