Examination of witness (Questions 1 -
19)
WEDNESDAY 15 DECEMBER 1999
MR DENIS
TUNNICLIFFE
Chairman
1. Good afternoon to you, Mr Tunnicliffe. May
I ask you whether you have any general remarks you would like
to open with? May I welcome you to the Committee? Would you like
to tell us who you are first?
(Mr Tunnicliffe) I am Denis Tunnicliffe. I am Chief
Executive of London Transport but, in the modern words of this
week, I am also Executive Chairman of London Underground.
2. Does that include a pay rise? Very well.
You do not have to answer if it is incriminating. Carry on.
(Mr Tunnicliffe) It is in the public domain and it
did, but it was last May. The reason why I would like to say a
word or two about who I am and our structure is first to apologise
for Derek Smith and then explain that I will be representing him.
The breadth of your letter required us both. At 3.00 am on the
19 September London Underground/London Transport totally changed
its form. The operating side of London Underground formed itself
into an entity which we tend to call New London Underground which
will run the stations and the trains and do the planning and do
the London—
3. Oh, a Railtrack Mark II.
(Mr Tunnicliffe) No, almost precisely the opposite.
The London Underground will be, if you want to compare it with
the national railways (and it is not a direct comparison), essentially
the sum of all the TOCS on the Underground. It is a single entity
that will remain in the public sector that is going to run the
operation, including controlling the operation, including controlling
the signalling and very clearly responsible for the safety. Separate
from that we have taken other parts of London Transport, the buses
and so on, and put them into an entity which we have called Transitional
London Transport so that they can be moved across to the Mayor
on the 3 July next year. Alongside these businesses we have created
three divisions of London Underground which will be incorporated
as limited liability companies probably on the 1 April next year
who will manage and develop and invest in the infrastructure,
and we have called those infracos. Each of those infracos has
a designated managing director and the operating company has a
managing director. The four of them report to me. Therefore it
is my responsibility to see that these companies work together
in this period we have called shadow running. They are seeking
to work together using the contract framework that is part of
the invitation to tender in the Public/Private Partnership bid.
That whole process which, as you can well imagine, in a safety
case environment where responsibilities have to change very clearly,
has taken quite a long time but has been achieved roughly when
we expected to achieve it. Alongside that process we have also,
as you know, created the invitation to tender for the PPP and
we believe that we have created a very attractive and well thought
out environment in which the sale of the infrastructure companies
on a 30-year basis will provide the future for London Underground.
We are confident that that will produce the sort of stable investment
that we have been looking for for so long. The only other thing
I would like to add by way of addition to our evidence is that
our evidence was written at a time of some gloom with respect
to the Jubilee Line extension. In fact, to our surprise, Westminster
Station has taken on something of a spurt.
Mr Olner
4. So that was why it was closed on Sunday,
was it?
(Mr Tunnicliffe) Yes, it was why it was closed on
Sunday. It was closed on Sunday for the control of the station
to move from the old operations room to the new operations room,
patch through all the systems and check them through. I think
the right term would be that it is probable that it will open
next week which will complete the extension for the new year.
Chairman
5. I am sure that will be very welcome and we
will come back to that in a minute. Let us kick off with one very
simple thing. The Government did set a target of April 2000 for
letting the Public/Private Partnership. Are they going to hit
that date?
(Mr Tunnicliffe) I am not sure which particular occasion
you are referring to.
6. Let me enlighten you. The Department itself
said in oral evidence to us that the competition to find a successful
bidder for the contract was likely to take most of 1999 with the
aim of having the contract awarded within the Government's timetable
of April 2000.
(Mr Tunnicliffe) The statement that I am familiar
with is the one made in December last year by the Deputy Prime
Minister.
7. Is that a no?
(Mr Tunnicliffe) The April 2000 figure will not be
achieved. The timescale that we set out I think about a year ago
in December in a briefing note and in the statement that the Deputy
Prime Minister then made envisaged the timescale we are now actually
achieving and that is that bids will be in in the spring of the
year 2000 and that the deals will be concluded either in the year
2000 or in the year thereafter. The Deputy Prime Minister in his
statement, which I am sorry I have not got in front of me, actually
stressed the importance of not setting a deadline for the completion
of the deals because that would create an environment where we
may not be able to secure good value for money.
8. One accepts that we want good value for money,
but what about the contracts for the deep tube and subsurface
lines? Do you have any targets? A two-year target might be interpreted
by some people as being a bit wide.
(Mr Tunnicliffe) The hard information we have is that
on the deep tube lines the invitation to tender, which is the
first big complicated thing, where we put out the contract and
so on, happened in the middle of October and the tenderers were
required to submit bids by the end of March.
9. Are you really saying that beyond that you
have no assessment of how long you would expect it to take to
look at those tenders and examine them? Do you have even a rough
guide? Are we talking about six months, are we talking about 12
months? What are we talking about?
(Mr Tunnicliffe) We are talking about 12 months as
the typical time for this sort of negotiation.
10. 2001?
(Mr Tunnicliffe) Which would take one into the first
part of 2001.
11. That is both the deep tube and the subsurface
lines?
(Mr Tunnicliffe) No. The subsurface line we expect
to issue a notice on inviting indications of interest during the
early part of next week, and that will see the publication of
an invitation to tender probably in March 2000 and then there
will be a period of around five months for bidders to put in their
bids, and therefore the process will run up to five months behind
the process for the deep tube.
12. So could we say, without misconstruing what
you are saying, spring 2001 for the first response, autumn for
the second?
(Mr Tunnicliffe) That would be certainly a perfectly
reasonable possibility.
Mr Stevenson
13. Could I ask a question about London Underground's
view of the debate about PPP or the bond issue as alternatives?
Would you agree that since the Pricewaterhouse report was published,
on which of course the Government came to its proposals, there
have been a number of significant changes? One is a relaxation
of Treasury borrowing rules, the second is a Government announcement
that the PPP may have to be in part subsidised, and thirdly, the
whole debate about the six per cent discount mechanisms. These
seem to me to be three significant areas that could not possibly
have been taken into account in the Pricewaterhouse report.
(Mr Tunnicliffe) The knowledge we had at the time
of the Pricewaterhouse report and the knowledge we have today
are different, you are quite right in that, but as a generality
the knowledge we have has tended to reinforce the PPP approach,
particularly as we have developed our understanding and consulted
with both our own engineers and with our advisers, and the significance
of the performance of the delivery of contracts by private incentives
has become bigger in our view and leads us to believe that a PPP
approach will give very good value for money. The sorts of assumptions
that are contained in the Pricewaterhouse document that I believe
has been put in the library are compatible with the advice we
are getting. Those assumptions point to the probability that those
efficiencies in terms of private sector incentives will more than
outweigh any problems relating to discount rates or any changes
in rules. I have to say changes in rules are not self-evident
to me as a public servant. They may have made a statement but
in terms of getting at money I still have to go to my Department
that still has to go to the Treasury.
14. I will come back to the 20 per cent which
has been mentioned as this efficiency gain that seems to be taken
almost for granted. Could I be a bit more specific and press Mr
Tunnicliffe again on the discount mechanism? It is six per cent
as I understand it which is taken in the Pricewaterhouse report.
There are a number of economists and other people, for instance
the University College of London and the University of East Anglia
have written to say that it is impossible to support the six per
cent rate. It is far too high. It is well in excess of any reasonable
and defensible discount rate. Our best estimate, they say, is
2.4 per cent. These are significant differences that have been
challenged by creditable people. After all, I understand the discount
rate was chosen in 1991 when we had a completely different inflation
and interest rate scenario. Is that not important?
(Mr Tunnicliffe) It is important for me to reveal
how little I have been involved in that debate. We were involved
in the original debate which was summarised in the Government's
document on the 20 March last year, and we did some work and we
consulted people and we made some inputs to that debate, and at
the end of the day we were content with that debate and we were
content with the way forward. Therefore we have worked diligently
on behalf of Government to change our business so that it can
go into a public/private partnership and to create a contract
that is for sale. Therefore you must not expect me to have details
of all these various economist debates at my fingertips. What
I do have in common with you is the Pricewaterhouse document of
about a week ago which the Deputy Prime Minister referred to in
the House, I believe, and certainly referred to in the press release.
What that argues is that, whatever the debate about interest rates,
discount rates and whatever, if the efficiencies in the private
sector are of the magnitude that we believe them to be, and I
will associate ourselves in the work that has gone on to check
through those assumptions, it more than drowns the effect of different
interest rates that might go into the sum. The essence of what
we are trying to achieve, one must remember, is first to create
a mechanism for steady and sustained investment in the Underground,
and secondly a mechanism which gives better value for money than
carrying on as we are now. We believe the essence of that will
be proved in the bidding process when we see at what price we
can achieve that sustained investment.
15. Clearly your comments about the best method
and so on I think everyone would agree with. The Committee is
trying to probe the validity of these claims that were made in
the Pricewaterhouse report. I think that is legitimate and I simply
quoted to you information that has come into our ambit from other
creditable organisations that have challenged that. What about
transfer of risk which I have mentioned? Could you also comment
on the fact that similar organisations have said that the bond
issue could be done at a cost of about 4.5 per cent, whereas private
borrowing would demand a return of at least 12 per cent. Do you
agree with that?
(Mr Tunnicliffe) I do not have sufficient experience
to comment with any authority. All I know is that if you put the
same difference into the model you would still come out with a
thumping advantage for the Public/Private Partnership approach.
16. Because of the 20 per cent deemed efficiencies?
(Mr Tunnicliffe) Because of the assumption that private
firms, with their own money at risk, will behave in a more efficient
way than we have been able to do so far in the public sector.
Mr Gray
17. Can we explore a little the circumstances
surrounding the Railtrack deal? First, were they close to getting
the contract?
(Mr Tunnicliffe) Perhaps I can tell you what I know
and you can—
18. You certainly cannot tell us what you do
not know.
(Mr Tunnicliffe) That is exactly the point I am trying
to make. What I know is that we set about a process with Railtrack
of understanding each other on a number of areas. I do not think
it is fair to say that we were close to getting a contract but
we were starting to understand what the contract might look like
between us on the PPP and at the point at which the negotiation
terminated I think it would be reasonable to say that there was
every possibility of being able to conclude a satisfactory contractual
base, but the essence of the Deputy Prime Minister's concern was—
19. Before we leave the point about how far
you have got with the negotiations, it has been widely reported
that heads of agreement had been reached and it was a 30-year
concession, that it was a condition that Railtrack paid two and
a half billion to upgrade the track. Had heads of agreement been
reached?
(Mr Tunnicliffe) The heads of agreement were essentially
an agreement about a timetable by which we would target to agree
certain parts of the contract. We had agreed that timetable and
we were working through that timetable at the point where it was
terminated.
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