Eurotunnel inquiry

Momentum appears to have slowed in Whitehall, with preparations for the UK leaving the EU on 31 October not happening quickly enough. The Department for Transport says that its immediate arrangements for leaving the EU were stood down after April and that it was reviewing the “sensible course to take to step those up again”. The task of planning for October will differ from the plans that were made for March. The Department says that work is being done across government to determine what the risk is to the flow of goods across the short channel crossings if the UK leaves the EU with no deal in place on 31 October 2019 and what action is required by departments. This work needs to be completed quickly, as it will shape what freight capacity the Department for Transport may need to procure and for what length of time, and the Cabinet Office tells us that a decision on ferry procurement needs to be made imminently. The Cabinet Office accepts that preparations for leaving the EU have been scaled back in Whitehall since March, and says that Departments stand ready to ramp up their work again. It is confident that the civil service will be ready by 31 October. But we remain concerned that departments’ preparations are being left too late. The window for decision-making for any departure on 31 October is short and key deadlines for decisions are passing every day. Recommendation: The Government must ensure that departments urgently step up their preparations on the assumption that the UK could be leaving the EU on 31 October and be ready to implement them.

The Department for Transport’s rushed procurement of ferry freight capacity resulted in it taking excessive risks and has cost the taxpayer an extra £33 million on top of the £51.4 million it paid to cancel the contracts. The compressed procurement timetable for getting ferry capacity in place for 29 March resulted in a flawed process and exposed the Department to a risk of being challenged. As a result, when Eurotunnel, which had not been invited to bid, challenged the procurement the Department was forced to pay £33 million as part of an out-of- court settlement. Following the extension of the date for EU Exit to 31 October the Department has now cancelled its contracts with the ferry operators, at a cost of £51.4 million, bringing the total cost of this procurement to the taxpayer, including the settlement with Eurotunnel, to around £85 million. The Department recognises that it needs to learn from this flawed procurement. However, there is a real risk that the short time left before 31 October will force the Department into further high- risk procurements, which it wants to avoid. Given the lead time needed to put ferry capacity in place, which the Department says can take a minimum of three months, any new procurement process would need to begin very soon. Our evidence sessions were held in early and mid-June, since when the Minister for the Cabinet Office has made a written statement stressing the importance of preparations to minimise any disruption in the event of a No Deal scenario and updating the House accordingly. He states that the Department of Health and Social Care is starting the process of setting up an express freight contingency arrangement to support continuity of supply of medicines and medical products, that this will be for products requiring urgent delivery if the UK leaves the EU without a deal, and that Government will only pay for capacity as and when it is needed and used. He also states that the 6 Brexit and the UK border: out-of-court settlement with Eurotunnel Department for Transport is putting in place a freight capacity framework agreement that will provide government departments with the ability to secure freight capacity for our critical supply chains as and when required, that this framework does not commit the Government to purchasing or reserving any freight capacity, but that it does provide options that can be drawn upon if needed. Recommendation: The Department for Transport should set out within weeks what it has learnt from this procurement to ensure it does not expose the taxpayer to unnecessary risk and excessive cost in the future and particularly in its preparations for 31 October.

We are not convinced that the Department has secured any additional benefit from its £33 million settlement with Eurotunnel. The Department’s settlement with Eurotunnel includes an obligation for Eurotunnel to commit at least £33 million on projects relating to infrastructure at the Channel Tunnel site, including security and border preparedness measures. The Department told us that it wanted to ensure that in return for the £33 million settlement Eurotunnel made investments that had a public value. This appears little more than window dressing, as Eurotunnel has said that it would have committed at least £33 million on these types of projects irrespective of the settlement. The Department will monitor how Eurotunnel commits the £33 million and told us that it expects to claw back expenditure that does meet the terms of the settlement. Recommendation: The Department should report back on how Eurotunnel commits the £33 million and what these projects will deliver. Brexit and the UK border: out-of-court settlement with Eurotunnel 7 Out-of-court settlement and preparations for 31 October 2019

The date for the UK to leave the EU is 31 October 2019. Departments now have only a short time to prepare. They will be preparing to respond to different scenarios, including any potential disruption to the movement of goods at the border and, in particular, the short channel crossings. The Department told us that immediate arrangements across government were stood down after April 2019. When we took evidence from it in mid- June the Department told us that the government was reviewing the “sensible course to take to step those up again”.4

The task of planning for October 2019 will be different from the plans that were made for the UK leaving the EU in March 2019. The Department told us that work was now being done to revisit the planning assumptions that formed the basis of the analysis that informed planning for March. This includes the potential impact of disruption on the flow of medicines and other critical goods.5 This work is being undertaken across government to determine what the risk is to the flow of goods across the short channel crossings if the UK leaves the EU, without agreeing a deal, on 31 October 2019.6 The Department said that they believe that preparations that have been made by the French on their side 1 C&AG’s memorandum, Out-of-court settlement with Eurotunnel, May 2019 2 Committee of Public Accounts, Brexit and the UK border: further progress review, Session 2017–19, HC 1942, 11 March 2019; Committee of Public Accounts, Exiting the European Union, Session 2017–19, HC 467, 29 January 2018; Committee of Public Accounts, Department for Transport’s implementation of Brexit, Session 2017–19, HC 1657, 28 November 2018 3 Committee of Public Accounts, Brexit and the UK border: further progress review, Session 2017–19, HC 1942, 11 March 2019 4 Q 7 5 Q 5 6 Q 41 8 Brexit and the UK border: out-of-court settlement with Eurotunnel of the border may mean that “the level of disruption may not be as great as we thought it might be last autumn”.7 The Department told us that the Border Delivery Group has been meeting and is considering the “sensible steps” for Government to take on a “host of issues” relating to the UK’s exit from the EU.8

This work needs to be completed quickly as this new analysis will determine what action is required across government.9 For example, the analysis is necessary so that the Department knows what freight capacity it may need to procure, and for what length of time. The Department told us that it has been acting as an agent for other departments to provide capacity for goods that they consider critical. As such, the Department is highly dependent on the cross-government view of what the right level of action to take is when making its preparations.10

The Department told us that the Government will “need to make a decision about what they think are prudent and necessary arrangements. Those decisions have not been taken yet”.11 We heard that this is a “political decision—the Cabinet will need to decide what it thinks the right approach is”.12 We asked what the point of no return is for a decision to be made so the Department can plan for a no-deal exit on 31 October. We were told that there is not a single date but that the window for decision making is “soon” and needs to be done in “a matter of weeks not months”.13

The Department has identified that ferry operators require at least three months’ lead-in time to introduce new services.14 Given that the UK is scheduled to leave the EU on 31 October 2019, any procurement activity for ferry capacity may need to be completed by the end of July.15

The Department told us that the key lesson it had learned from its procurement of ferry freight capacity in late 2018 was that it was left with too short a window to carry out the actual procurement.16 The Department wants to avoid taking a “higher legal risk procurement route because of the pressure of time”.17 The Department told us that its “message to the Government, to the new Prime Minister and to any minister involved in this is, if this is something the Government wishes to do, we need to do it in a way that does not require us to rely on procurement processes that may leave us open to a higher than normal degree of legal risk”.18

Further to evidence from the Department for Transport on 5 June, we also put questions to the Cabinet Office and the Ministry of Housing Communities and Local Government on 12 June about Whitehall’s preparations for 31 October.19 When asked about key deadlines by when Departments will have to make decisions, the Cabinet Office referred, in the context of decisions about ferries, to the need to create a procurement 7 Q 39 8 Q 42 9 Q 41 10 Q 41 11 Q 8 12 Q 7 13 Qq 9–11 14 C&AG’s memorandum, para 1.10 and Figure 1 15 Q 8 16 Q 27 17 Q 40 18 Q 28 19 Oral evidence: Sale of Public Land, HC 2040, Wednesday 12 June 2019 Brexit and the UK border: out-of-court settlement with Eurotunnel 9 framework that is not subject to legal challenge. It referred to this being an imminent decision—“days and weeks”.20 The Cabinet Office said it would be done in a way that is less legally exposed, and took no financial commitment at this point, with more time to set things up in a more ordered way.21 The Cabinet Office said that the effect of current political uncertainties on planning was under current discussion. It said that while there is no commitment to setting up a framework for getting additional transport capacity across the short straits, there were some things to be done that would make sense, albeit that a decision on ferry capacity was “a bit of a political decision”.22

The Cabinet Office said there is a lot that departments could get on with while waiting for the appointment of a new Prime Minister, and that the Department for Exiting the European Union was compiling a list of what could be done so that there could be clarity on when the key dates were.23 The Cabinet Office commented that the period earlier in the year had been enormously intense, with a focus on EU exit work streams almost every day, but all the machinery and mechanisms for delivering the work streams were exactly the same. The Cabinet Office said that the civil service had not been told to stand down on its EU exit preparations, but to “maintain all sensible provision”.24

The Ministry of Housing Communities and Local Government confirmed that activity had been intense, and it would need to be again. It had scaled back activity on preparations for EU exit, but maintained, for example, a degree of staffing and engagement with local authorities. The Ministry commented that “We have put all those plans very carefully to one side, ready to inflate the balloon again, if you like, when we need to. We don’t think that moment is right now, but we are obviously very aware of the 31 October deadline. What we do not want to do is to keep a lot of staff basically doing nothing for the time being, but we absolutely have not let our plans lapse.” The Ministry said it thought the time it would have to scale activity back up would be early September, stressing that this did not mean it was doing nothing between now and then, just balancing the need to deliver its ongoing agenda with the need for no-deal preparations.25 The Permanent Secretary of the Cabinet Office said that “The civil service will be ready by 31 October, of that I am quite sure, but what we have not done is to maintain everybody at the level of running hot that they were on 12 April.”26 The Department’s settlement with Eurotunnel and the cancellation of Ferry contracts

On 25 January 2019, Eurotunnel began legal proceedings against the Department. An initial court hearing took place on 11 February 2019, at which an expedited trial date was set for 1 March 2019. On 28 February 2019 the Department reached a £33 million out-of- court settlement with Eurotunnel. The settlement includes an obligation for Eurotunnel to commit at least £33 million on projects relating to infrastructure at the Channel Tunnel site, including security and border preparedness measures.27 20 12 June, Q 33 21 12 June, Q 48 22 12 June Q 34 23 12 June Qq 35, 36 24 12 June, Qq 42, 43 25 12 June, Qq 44–46 26 12 June, Q 42 27 C&AG’s memorandum, paras 2.1, 3.2 10 Brexit and the UK border: out-of-court settlement with Eurotunnel

The Department understood the level of risk attached to its procurement process when contracts were signed in December 2018. It had identified Eurotunnel as a body that might challenge the procurement and that if a procurement challenge was raised it was likely to be successful.28 The Department told us that its expectation in December 2018 was that any legal action would be pursued in a normal timeframe and any successful challenge would be focused on damages for the loss of profit. The Department had estimated £20 million as the potential consequence of a successful legal challenge.29 However contrary to the Department’s initial expectations an expedited trial date was set for 1 March 2019. In the Department’s view the expedited trial date created a risk of the contracts being cancelled ahead of 29 March 2019. This was a risk that “the Government concluded it did not want to take”.30

The expedited trial date gave Eurotunnel the upper hand in its discussion with the Department.31 Eurotunnel were able to name their damages figure and initially sought £80 million in damages. When we put it to the Department that this would have been a tactic by Eurotunnel the Department acknowledged that “these things are a negotiation.” The Department said it had “negotiated hard to get the lowest figure it could in the interests of the taxpayer. That ended up being £33 million”.32 The Department recognised that there are lessons to be learned from this procurement exercise.33

The Department’s settlement with Eurotunnel includes an obligation for Eurotunnel to commit at least £33 million on projects relating to infrastructure at the Channel Tunnel site, including security and border preparedness measures. We asked if this was merely window dressing for the payment that the Department had to make to settle the case. The Department told us that it wanted to ensure that in return for the £33 million settlement “Eurotunnel were making investments that had a public value … in terms of the resilience of our ports. That is why it is an important part of the settlement”.34 Eurotunnel has said that irrespective of its legal action, it would have committed in excess of £33 million on works that fall within the definition of permitted projects in the settlement agreement.35

The Department told us that it will be monitoring how Eurotunnel commits the £33 million. Under the terms of the settlement agreement, the Department will pay Eurotunnel in three £11 million instalments over three financial years. The first payment was made on 5 April 2019.36 Eurotunnel will provide the Department with at least four reports setting out what projects Eurotunnel has committed money to. The agreement includes a dispute mechanism if the Department does not believe that Eurotunnel has committed money to permitted projects.37 The Department will receive evidence from Eurotunnel on the projects it has committed to. The Department told us that it expects to claw back money that is not meeting the purposes of the settlement.38 28 C&AG’s memorandum, paras 1.12–1.13 29 Q 13; C&AG’s memorandum, paras 1.12, 2.18, Figure 3 30 Q 13 31 Q 13 32 Q 15 33 Q 40 34 Q 23 35 C&AG’s memorandum, para 3.4 36 C&AG’s memorandum, para 2.29 37 C&AG’s memorandum, para 3.6–3.7 38 Qq 24–26 Brexit and the UK border: out-of-court settlement with Eurotunnel 11

On 24 April 2019, the Department received a formal claim from P&O Ferries challenging the Department’s settlement with Eurotunnel. This is on the grounds of, amongst other things, state aid and breach of procurement law. The Department told us that this legal action is at an early stage and that it is some way off coming to court. We were told by the Department that it had “no plans to settle” this legal action out-of-court.39

On 1 May 2019 the Department announced that it had cancelled its ferry contracts with Britanny Ferries and DFDS. The cancellation of the contracts with these two ferry operators has cost the Department a total of £51.4 million. The Department told us that this includes around £43 million in termination fees and around £6.6 million in operating costs paid to DFDS.40 39 Qq 20–21, 35 40 Qq 1–3 12 Brexit and the UK border: out-of-court settlement with Eurotunnel