Examination of witness (Questions 60 -
79)
WEDNESDAY 15 DECEMBER 1999
MR DENIS
TUNNICLIFFE
Chairman
60. That is why we are asking you, Mr Tunnicliffe.
(Mr Tunnicliffe) The honest answer is I do not think
we really understand. There is a myriad of individual decisions
and individual reasons and so on, and we and the Department's
agent are all going to do reports on how we see it as best we
see it. There is a whole series of external factors I can point
to: the failure of the tunnelling technique, the failure of our
ability to understand the complexity of the environment in which
we were working, tunnelling in places we have never been before.
They will come out in that examination. I would very happily come
along again when we publish those reports.
Mr Donohoe
61. Have the contractors involved taken on board
any of the cost overrun?
(Mr Tunnicliffe) Yes. We have not settled all the
claims yet by any statement. They will in my view be making less
profit than they might have hoped. A lot of the cost overrun has
fallen to us because a lot of it becomes consequential on delays
and design problems and design problems often coming from finding
different conditions and so on. I think when we study it we will
find that it is not each of the single events that we struggle
with on the day. It is the whole shape.
62. Surely that is basic completions and contracts
in the first instance that allowed such an overrun.
(Mr Tunnicliffe) I wish the world were that straightforward.
The problem is that most of the United Kingdom construction industry
is an industry of little financial substance and the extent to
which the contracts are specific to delivering something and the
extent to which they are essentially time and quantity contracts
where they have said, "Given those quantities and that time,
yes, we will deliver it for that price", and if in fact the
time and/or quantities turn out to be different, then we are liable
for the overrun caused by those time and quantity differences.
That is true of virtually all civil engineering procurement in
the public sector.
63. How much extra money, if any, has been used
to make sure the line opens on the 31 December?
(Mr Tunnicliffe) Once again we will try and look at
this in more depth, but my initial reaction is none. The cost
of not completing, of having to keep teams in place and management
structures in place and so on, is so high that the benefits of
getting it complete are high. The one rule that seems to be there
is that, once you have started, the sooner you finish the less
it will cost you. When we see the analysis of the total cost we
will find a lot of that total cost will be down to the overrun
costs caused by previous decisions or mistakes.
64. Do you know the cost of employing Bechtel's
project management skills?
(Mr Tunnicliffe) I am sorry, I do not have it at my
fingertips. I would be guessing and I would be very happy to send
you a note on it.
65. Do you happen to know the cost of outstanding
contractors' claims?
(Mr Tunnicliffe) No.
66. When would you reckon that they would be
known and when will the whole issue be resolved?
(Mr Tunnicliffe) We would hope to settle the vast
majority of claims by the middle of next year. By that I mean
June. We hope to settle all the claims by discussion and analysis
and negotiation.
67. Who will do that?
(Mr Tunnicliffe) Principally Bechtel will lead on
a lot of the technical work. They will do it with other staff
that we had previously in the project team, and then it will be
supervised internally by myself and the Finance Director.
Chairman
68. You are going to give us a note on this,
are you not?
(Mr Tunnicliffe) Yes.
Mr O'Brien
69. Would it be fair to assume, Mr Tunnicliffe,
that the management of London Underground has failed?
(Mr Tunnicliffe) There is an inevitability that I
have to answer as an individual yes to that because six or seven
years ago, something like that, I actually said that in today'
money we could deliver the project for £2.1 billion and the
figure is looking now to be something like £3.5. Since in
all honesty I gave that estimate and have not delivered it, we
have failed. What one does have to recognise is that there are
very few £3 billion projects and the complexity of them is
not well understood. Whether it could really have been built for
substantially less than it has actually cost, we will only find
out when we have studied it with care. The impact of the line—dare
I say so—in terms of what it has done for the Isle of Dogs,
what it does for Stratford, what it does for the South Bank, I
think is wholly a success.
70. Would you say poor management?
(Mr Tunnicliffe) In so much as I said £2.1 and
it is £3.5, I have to accept that charge.
71. In the interest then of the business and
the fact that it is taxpayers' money, what action is being taken
to ensure that we do not continue with poor management?
(Mr Tunnicliffe) What I am less clear of is which
bit is the poor management, whether we have been bad at containing
the overall cost, having once started to build the line or whether
in fact the mistake was at the beginning by making an unduly optimistic
estimate for what it would cost. In the wider context, the issue
of project delivery in general, we are recognising that the system
that puts that in the private sector is likely to bring better
value for money than we have been able to deliver, although one
has to say our performance at delivering more modest projects
is in general rather better.
72. Whilst understanding this was a major project,
and the quality of management could observe they were not going
to complete the extension on time and in budget, was that not
foreseen at some time before the Deputy Prime Minister had to
step in and bring in the private partnership?
(Mr Tunnicliffe) We assembled a team which was very
much from previous private sector work. They had as individuals
worked together and delivered railways in Hong Kong and in Singapore
really quite successfully, and we thought at the time we were
selecting the right group of people. In many ways the civil engineering,
which proved to be much, much more difficult than we had foreseen,
that team wrestled with that side of the project and has brought
off what I think most civil engineers would agree is a civil engineering
triumph. The point at which Bechtel were brought in, was at a
point where the emphasis was moving away from a piece of construction
towards an integrated railway. They brought a set of skills there
which in the event have proved to be more effective at delivering
an integrated railway.
73. In your opening remarks you advised the
Committee you set up a new structure for the future development
and the future operations.
(Mr Tunnicliffe) Yes.
74. How can we be assured that will not fail?
(Mr Tunnicliffe) The Deputy Prime Minister in choosing
this way forward, and I think this was really a view he had before
the election and was foreseen in the manifesto, took the view
that London Underground's general operation, when compared with
that of say the train operating companies, was good and did produce
a good operation under difficult circumstances. We believe we
continue to do that. Our actual operation of trains and stations
is good and that will stop in the public sector. On the delivery
of projects and the maintenance side, where he took the view that
there would be more improvement and that would be stimulated by
the private sector, and having examined it we would go along with
that general assumption, we are creating those companies but,
of course, when they move into the private sector they will come
under private sector discipline. The reward mechanism that is
contained in the contract will reward them if they succeed and
punish them if they fail. We believe that discipline on their
profitability will be such that they will use the present management
and bring in more management if necessary to achieve those ends.
75. Finally, could I ask you, from the preliminary
negotiations with the prospective bidders, what is the size of
the potential cost savings that the PPP may be able to bring?
(Mr Tunnicliffe) We do not have any feel from the
bidders as yet because at the moment we are in the process of
understanding. It is very much the understanding phase of the
thing. In the Price Waterhouse report that was placed in the library
I believe the presumption there is about 25 per cent and certainly
we would expect to see that sort of improvement emerging in their
bids.
76. So you would expect 25 per cent savings?
(Mr Tunnicliffe) Yes. I think I said at least that.
Dr Ladyman
77. I would like to spend a few minutes almost
trying to draw a circle I think between the evidence you began
by giving to Mr Stevenson and the evidence you have just given
Mr O'Brien. Would I be right in summarising that what you said
to Mr Stevenson was effectively that whatever model one uses,
whatever presumptions of public sector finance one puts into the
models, the efficiency savings that can be generated by public
private partnerships are such that over 15 years it will be the
cheaper option?
(Mr Tunnicliffe) I only pause slightly because all
the work I have seen has been done over the full 30 years in a
contract but yes.
78. Those efficiency savings arise, according
to your last answer to Mr O'Brien, essentially because of management
techniques and skills which are available in the private sector?
(Mr Tunnicliffe) That is the essence of it.
79. Now in the Price Waterhouse document it
talks about something which it calls "constructive tension
with regard to the management of risk" and this constructive
tension is something of a new concept to me. I spent a long time
in the private sector but I do not know what it is, and I do not
know why it is so effective at saving money. Can you tell me?
(Mr Tunnicliffe) I am afraid I cannot. I do not recall
the particular phrase or what they were thinking when they made
it.
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