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Out of Court Settlement with Eurotunnel BOOK A picture of the National Audit Office logo Memorandum to the House of Commons Committee of Public Accounts Department for Transport Out-of-court settlement with Eurotunnel MAY 2019 Our vision is to help the nation spend wisely. Our public audit perspective helps Parliament hold government to account and improve public services. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund, nationally and locally, have used their resources efficiently, effectively, and with economy. The C&AG does this through a range of outputs including value-for-money reports on matters of public interest; investigations to establish the underlying facts in circumstances where concerns have been raised by others or observed through our wider work; landscape reviews to aid transparency; and good-practice guides. Our work ensures that those responsible for the use of public money are held to account and helps government to improve public services, leading to audited savings of £741 million in 2017. Department for Transport Out-of-court settlement with Eurotunnel MAY 2019 Memorandum on the Department for Transport’s out-of-court settlement with Eurotunnel © National Audit Office 2019 The material featured in this document is subject to National Audit Office (NAO) copyright. The material may be copied or reproduced for non-commercial purposes only, namely reproduction for research, private study or for limited internal circulation within an organisation for the purpose of review. Copying for non-commercial purposes is subject to the material being accompanied by a sufficient acknowledgement, reproduced accurately, and not being used in a misleading context. To reproduce NAO copyright material for any other use, you must contact [email protected]. Please tell us who you are, the organisation you represent (if any) and how and why you wish to use our material. Please include your full contact details: name, address, telephone number and email. Please note that the material featured in this document may not be reproduced for commercial gain without the NAO’s express and direct permission and that the NAO reserves its right to pursue copyright infringement proceedings against individuals or companies who reproduce material for commercial gain without our permission. Links to external websites were valid at the time of publication of this report. The National Audit Office is not responsible for the future validity of the links. 007759 04/19 NAO Contents Introduction 4 Part One The Department’s assessment of legal risk ahead of procuring the ferry freight capacity 6 Part Two The settlement reached with Eurotunnel 13 Part Three Eurotunnel’s commitment under the settlement agreement 21 Appendix One Timeline of key events 26 Appendix Two The scope and evidence base for this memorandum 28 The National Audit Office study team consisted of: Jonathan Bayliss and Jonny Mood, under the direction of Peter Gray. This report can be found on the National Audit Office website at www.nao.org.uk For further information about the National Audit Office please contact: National Audit Office Press Office 157–197 Buckingham Palace Road Victoria London SW1W 9SP Tel: 020 7798 7400 Enquiries: www.nao.org.uk/contact-us Website: www.nao.org.uk Twitter: @NAOorguk If you are reading this document with a screen reader you may wish to use the bookmarks option to navigate through the parts. 4 Introduction Out-of-court settlement with Eurotunnel Introduction 1 In December 2018, the Department for Transport (the Department) awarded three businesses with contracts to provide additional freight capacity on ferry services between the UK and mainland Europe.1 This formed part of the government’s plans to mitigate the impact on the transport system if the UK left the European Union (EU) without a deal (no deal). The additional freight capacity was intended to allow government to prioritise the flow of critical goods, particularly medicines, into the UK and to enable imports to flow as freely as possible in the event of no deal. The definition and quantities of critical goods were collectively agreed across government by an ad hoc ministerial meeting on borders and prioritisation and included ‘category one’ goods including medical supplies, veterinary medicines and essential chemicals. The government wanted the additional capacity to be in place for 29 March, the earliest expected date for the UK’s departure from the EU. 2 On 25 January 2019, The Channel Tunnel Group Limited and France-Manche SA who together operate Eurotunnel services (hereafter referred to as Eurotunnel) began legal action against the Department. Eurotunnel challenged the legal basis on which the freight contracts were procured and the underlying legality of the contracts. On 1 March 2019, the Department announced that a £33 million settlement had been reached with Eurotunnel, which ended the legal action. 3 This memorandum is a follow-up to our publication The award of contracts for additional freight capacity on ferry services which covered the original procurement with the ferry companies.2 This memorandum has been prepared at the request of the Committee of Public Accounts and examines the settlement with Eurotunnel which had yet to be concluded at the time of our previous work. It describes: • the Department’s consideration of the risk of legal challenge ahead of the original procurement (Part One); • the decision to settle with Eurotunnel (Part Two); and • Eurotunnel’s commitment under the settlement agreement (Part Three). 4 This memorandum is based on a review of the documents kept by the Department on the settlement agreement with Eurotunnel. We also conducted interviews with officials involved in the agreement and with Eurotunnel. 1 The three companies are: Bretagne Angleterre Irlande S.A. (Brittany Ferries); DFDS A/S; and Seaborne Freight (UK) Ltd. 2 National Audit Office, The award of contracts for additional freight capacity on ferry services, Memorandum to the House of Commons Committee of Public Accounts, February 2019. Out-of-court settlement with Eurotunnel Introduction 5 5 By the end of March 2019, the additional ferry capacity subject to the original procurement, excluding the contracts with Seaborne Freight (UK) Limited that had been cancelled, had become available. The date for the UK to leave the EU under Article 50 was however extended, first to 12 April 2019 and then to 31 October 2019, with the potential for the UK to leave earlier. The Department had responded to the extension to 12 April 2019 by seeking to sell capacity on the open market. On 1 May 2019 the Department announced that it had cancelled the ferry contracts. This decision was taken after the completion of our fieldwork and is outside the scope of this memorandum. 6 On 24 April 2019, the Department received a formal claim from P&O Ferries Holdings Ltd challenging the Department’s settlement with Eurotunnel on the grounds of, amongst others, state aid and breach of procurement law. Given these proceedings are ongoing, the Department’s response to this challenge is outside the scope of this memorandum. 7 A timeline of key events is set out in Appendix One. Our scope and approach are outlined in Appendix Two. 6 Part One Out-of-court settlement with Eurotunnel Part One The Department’s assessment of legal risk ahead of procuring the ferry freight capacity 1.1 This part outlines: • why the Department for Transport (the Department) procured additional freight capacity on ferry services; • the Department’s assessment of legal risk when it signed the ferry contracts; and • the contracts for ferry freight capacity. 1.2 We reported previously on the Department’s procurement of additional freight capacity in our memorandum The award of contracts for additional freight capacity on ferry services.3 In this part we review some of the details of that procurement and provide detail about the Department’s assessment, at the time of the procurement, of the legal risks it was taking. The latter are relevant to understanding the Department’s response to the subsequent challenge from Eurotunnel. Why the Department procured additional freight capacity on ferry services 1.3 Departments have been preparing for when the UK leaves the European Union (EU). As part of the preparations for the UK leaving the EU with no deal, departments have been considering how to manage potential disruption to the flow of goods across the border. Over the summer of 2018 these preparations were stepped up. 1.4 In September 2018, the Department began to develop options for mitigating disruption to the transport of freight across the short straits if the UK left the EU without a deal.4 The Department estimated that around 22% of goods travelling between the UK and the EU are transported by lorry on ‘roll-on roll-off’ (RORO) services through the Port of Dover and the Channel Tunnel. This accounts for 89% of all UK RORO traffic. The Department’s assessment indicated that the short straits were “relied on for the movement of time-critical products such as perishable goods, medicines and manufacturing components used in just-in-time supply chains”. 3 National Audit Office, The award of contracts for additional freight capacity on ferry services, Memorandum to the House of Commons Committee of Public Accounts, February 2019. 4 There are three short strait routes: Dover to Calais and Dover to Dunkirk via ferry routes, and Folkestone to Coquelles via the Channel Tunnel. Out-of-court settlement with Eurotunnel Part One 7 1.5 During autumn 2018, the government updated its planning assumptions on freight crossing the border in the event of a no deal exit.
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