Examination of Witnesses (Questions 207
- 219)
WEDNESDAY 12 APRIL 2000
PROFESSOR THE
LORD CURRIE
OF MARYLEBONE
AND MR
MARTIN SINER
Chairman
207. Good afternoon. I apologise for keeping
you waiting. I am afraid the fascination of this subject sometimes
leads us to take a little time. Would you like to identify yourselves
for the record?
(Professor The Lord Currie of Marylebone) I am Professor
David Currie from the London Business School and my colleague,
Martin Siner, is a research officer on the Regulation Initiative
at the school, which I direct.
208. Do you have any remarks that you would
like to make first?
(Professor The Lord Currie of Marylebone) I think
you will have seen my paper, which I submitted to the Committee,
which argues essentially two points. The first is that many of
the comparisons using the cost of capital between private equity
finance and a public bond have been done in an inappropriate way
which ignores the risk which falls to the public sector, the taxpayer
or to the customers. Secondly, that the PPP arrangement is a good
arrangement for getting the best efficiencies in the system. I
should say that I am not a transport expert, I am somebody who
looks much more at the regulation of utilities and privatisation
around the world and I would base that judgment on that experience.
Dr Ladyman
209. It has been suggested to us that the assumptions
that you have brought up are also flawed in that the experiences
that you have used to base your assumptions have been obtained
where there is repetitive tendering and open labour markets, and
that would not be the case in the situation of London Underground.
To what extent do you answer that criticism of your assumptions?
(Professor The Lord Currie of Marylebone) I see the
PPP arrangement as a little closer to the position of some of
the privatised utilities. Admittedly there are constraints on
the labour market side, but over time and through natural wastage
and changes there those can change in private capital involvement.
If one thinks of the competitive tendering process, you do not
have that in the privatised utilities, and privatised companies
have delivered very considerable efficiency over a number of years
since privatisation and that is of very real benefit to the customers.
I see this as being able to deliver similar levels of benefit.
210. Your assumptions are not necessarily based
on transport projects, but they are based on experience in the
privatised utilities in the United Kingdom or from where in the
world?
(Professor The Lord Currie of Marylebone) They are
from around the world. I think the experience of bringing private
capital into the management of previously publicly owned assets
and businesses is that that can yield very considerable benefits.
The reason it does so is that the lines, the risks and the incentives
are much more prominent. It is very hard in the public sector
to create management incentive structures that really incentivise
people and the teams involved to deliver the results that one
wants. I think the involvement of private capital in this way
is very much more likely to deliver those benefits. Clearly the
benefits to be realised are uncertain. My judgment is, from that
experience, that the benefits will be much greater with the involvement
of private capital in that way.
211. Have you made any assessment of whether
the risk is truly transferred to the private sector under the
PPP, or is that beyond your expertise?
(Professor The Lord Currie of Marylebone) Clearly
there is a level of detail there which is important. Clearly some
risks, as we have just heard from London Underground, remain with
the public sector and, therefore, I look forward to taxpayers,
local or national, or to customers in the end, but some risks
are transferred and that is a real benefit. The argument seems
to be from the other side that in practice no risks can be transferred,
but in fact what would happen is if one has to say to the world,
if these businesses run into difficulty, the companies in question
will just come cap-in-hand to the taxpayer or to London Underground
who will be forced to cough up. I just do not think that that
is in the real world. Many companies go thorough financial restructure
when they hit bad stakes in the world. That is a cost that has
to be borne by shareholders in these companies, and that is assuming
real risk. I can see there is a very extreme circumstance in which
a company might go bankrupt, but even then the assets remain and
can be re-tendered.
212. If you were listening to the previous evidence,
it is quite clear that this money to be raised in the PPP is to
be spent on maintenance and development of the existing infrastructure
rather than building new lines. Do the assumptions that you make
have direct applicability to the purpose for which this money
is being raised?
(Professor The Lord Currie of Marylebone) I think
so. The cases that are coming from privatisation are very much
of that kind, where assets have been transferred and managed.
Of course there has been investment and it is always very difficult
to really distinguish between new investment and existing assets
because one vary rarely replaces them in exactly the same way.
I think that evidence is applicable. I understand the constraints
on the labour market side, but I think one should not underestimate
the capacity of private management to get efficiency gains and
managing around those problems.
213. The parameters that you have seen published
so far as to how the public sector comparator is going to be worked
out, do you believe them to be fair or unfair?
(Professor The Lord Currie of Marylebone) I think
they are fair. The key point that I want to emphasise is not about
the underlying efficiencies, it is about the cost of capital.
Many of the arguments that have been made against the PPP are
saying that the bond finance is cheaper, and that is a real plus
to be argued for that option, and I think that is a felicitous
argument. The risk factor which is in the public bond or, indeed,
revenue guaranteed options, which is left with the public sector,
must be priced. The uncertainty that the consumer faces, or the
taxpayer faces, is part of the story and it does not disappear
just because one issues a bond finance. I think that is a very
unequal aspect of the comparisons that have been made on arguing
on the other side against PPP.
Mr Donohoe
214. You have indicated to us that you see some
20 per cent savings in the use of the PPP. Is part of that saving
going to affect the conditions of service of the staff?
(Professor The Lord Currie of Marylebone) If one looks
at what has happened in privatised companies, there have been
changes in the conditions and circumstances of employment, there
has been significant natural wastage, there have been re-definitions
of employment conditions, but my assessment, if one looks at the
private utilities now or even five years ago compared with the
public, staff morale and staff conditions are very much better
than they were. After all, the public sector is not known as a
wonderful employer.
Chairman
215. But we are excluding transport from those
comments.
(Professor The Lord Currie of Marylebone) In what
sense?
216. Because, frankly, that is not the case
either in Railways.
(Professor The Lord Currie of Marylebone) What I am
saying is that I think the morale can be brought up by the injection
of private capital and it can enhance the employment conditions.
Mr Donohoe
217. If I can ask the question more specifically
then, if I may. What are the savings that will come about by virtue
of the reduction in staff through natural wastage? What is the
percentage? You are talking of a 20 per cent saving. What proportion
of that is on the basis of driving down conditions of service
to the staff or reducing the numbers of staff? Is that part of
it?
(Professor The Lord Currie of Marylebone) I should
emphasise I have not arrived at that 20 number by looking at the
London Underground and making an assessment of what efficiencies
can be made there. That is not the basis of my evidence. The basis
of my evidence is to say in general when one does transfer activities
from the public to the private sector—
Mr Bennett
218. There is not a railway example.
(Professor The Lord Currie of Marylebone) No, that
is true, though I think one can argue even on the railways—it
is early days and one is talking about efficiency gains over a
number of years—when one starts to get good management put
in place there are benefits to be had.
Mr Donohoe
219. But the difficulty in that respect is it
might well miss out one of the important aspects of the equation
and that is based on safety.
(Professor The Lord Currie of Marylebone) Absolutely.
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