Examination of Witnesses (Questions 220
- 237)
WEDNESDAY 12 APRIL 2000
PROFESSOR THE
LORD CURRIE
OF MARYLEBONE
AND MR
MARTIN SINER
220. If you take out numbers of staff from railways
it might equal less safety.
(Professor The Lord Currie of Marylebone) It might,
it might not. Safety is clearly a very sensitive factor. In view
of what has happened with the Paddington rail crash it has come
back very much on the agenda and I think that is a very good thing.
One must make the point that the proposed PPP arrangement avoids
some of the co-ordination problems that arise in safety, that
arise in the rail. It is a more straightforward allocation of
responsibilities and I think that is a good thing. The other thing
I would add is one of the areas that I spend a great deal of time
working on is the electricity sector where although there are
not safety questions there are security of supply questions and
if one looks at what has happened in the electricity business,
where a very complex control process has to be managed, that is
being done with significant reductions.
221. The idea of making a comparison with the
electricity industry with very low numbers of employees at the
best of times against a railway or transport in general where
numbers of staff are extremely high is not a comparison that I
would think is possible.
(Professor The Lord Currie of Marylebone) My point
is a different one. My point is that safety is about systems.
Systems may involve people but they may involve investment and
it may well be, and I think my judgment would be that with new
investment in the London Underground one would be able to achieve
a good and better safety record without necessarily maintaining
existing levels of employment.
222. If we take it away from staffing for a
second and look at another element in terms of infrastructure
and the renewal of infrastructure, that is another possible cut-back,
is it not, in terms of this magical 20 per cent saving that again
in railways and transport in general is a very critical aspect
and department of it. Is it not possible that by using a type
of PPP that that is more the reality of the savings that are likely
to be made, savings within the industry over the 30 years of any
contract?
(Professor The Lord Currie of Marylebone) I would
think that the private infrastructure companies would be looking
to effect savings both in current and capital expenditure but
they will be under tight performance criteria and they will be
judged against those performance criteria. If they can effect
savings in the use of capital, all to the good, and again the
experience in the utilities sector is that that can be achieved
with much more efficient asset management. If one looks at some
of the new ways in which the utilities are managing their assets,
indeed separating their assets, one has a very striking parallel
with what is being proposed here. One would not want savings in
capital investment that result in a failure of service delivery,
quite clearly, but it is perfectly possible to get savings in
capital investment and more efficient capital investment that
enhances safety.
Miss McIntosh
223. Is it likely in your view, Professor, that
there might be a gap in the income rates from fare paying passengers
and the amount that under the PPP is paid to the infrastructure
companies, and if there were such a gap how in your view would
that gap be bridged?
(Professor The Lord Currie of Marylebone) That is
a question that I have not looked at in detail. Clearly it is
possible that a gap will be there. That depends on the level of
bids that one gets in. If one had a bidding round that was as
lucrative as the spectrum auctions at the moment one would presumably
be left with a surplus, but I think that is an unlikely event.
The point I would make about the PPP arrangement is that it does
ensure you have a bidding process and we do have an effective
competition for those bids that brings in a substantial amount
and may help to close that gap. Indeed, if those who say that
risk really has not been transferred to the private sector are
right, and suppose this PPP left all the risk in the public sector,
as has been suggested, I would expect the bids for those contracts
to be very high and therefore there would be an automatic extra
injection. I do not believe that is the case. I believe the risk
is being transferred to the private sector but the point about
the bidding process is it will bring in more money and therefore
help close that gap in the event that less risk is being transferred.
224. When you said at the outset how impressed
you were that the PPP arrangement was the right way forward, are
there any other arguments you would say in favour of the PPP as
being appropriate and not a bond system?
(Professor The Lord Currie of Marylebone) There are
two arguments. There is one argument which has been put forward
in favour of the bond issue which I think is wrong and that is
this point that bond finance is cheaper. That is wrong because
it does not price in the risk that remains with the taxpayer or
with the customer. The second argument for the PPP is that what
one also wants to do is to minimise the risks in the arrangement
and one thing that the different arrangements have is a different
likelihood of realisation of risk. What I mean by that is in a
system where capital is provided by one source and management
elsewhere, the incentive structures are less sharp on the management
team to get results. Where you have private capital involved,
private shareholders involved and a management team which is answerable
to those shareholders performing under very rigorous performance
criteria laid down for the public sector and for public service,
in that arrangement you get a much better alignment of incentives
and therefore it is very likely that the risks of substantial
cost over spills or substantial failures of service delivery are
minimised. That is the efficiency argument for the PPP.
Mr Stevenson
225. Professor Currie, could I press you a little
further on your assertion on risk transfer and the taxpayers and
so on, which you put in your evidence to us. My first question
is if, as you say, you have not looked in any detail at the funding
gap in response to my colleague Miss McIntosh, how can you then
assert that there may not be any substantial funding gap?
(Professor The Lord Currie of Marylebone) I did not
assert that.
226. I will ask my question and if you want
to reply by saying you did not assert it that is okay, but I will
ask the question, and, secondly, that therefore the risk transferred
to taxpayers is far outweighed by the rewards of the private sector.
If you have not done any detailed investigation into funding how
can you, if not assert that, suggest that?
(Professor The Lord Currie of Marylebone) Firstly,
I did not make any observation on the funding gap question. My
point is simply this; the argument that a bond issue is preferable
because it is cheaper, that is wrong, because it is not a pricing
risk. Secondly, I believe—for the reasons I gave in answer
to the previous question—that the PPP is more likely to
deliver efficiency gains and reduce the risks of operation than
alternative arrangements. That, others being equal, is a compelling
argument for the PPP over alternative arrangements, irrespective
of the level of the funding gap. The funding gap is likely to
be less for those reasons, but I am not making a judgment as to
what a bond financed investment would mean in terms of any funding
gap.
227. Just so I do not misunderstand, when I
wrote down here your reply to my colleague, Miss McIntosh, "You
have not looked in any detail at the funding gap", is that
correct or otherwise?
(Professor The Lord Currie of Marylebone) That is
correct.
228. Can I then ask you another question, Professor?
Have you, in your examination into this complicated issue, accepted
or otherwise the academic opinion that there will be a funding
gap of the PPP of some £95 million a year, the bonding one
is £16 million a year and other academic opinion that suggests
that after two years there will be a £175 million funding
gap that is likely to continue? Thirdly, would you care to comment
on the report that the Government is prepared to offer £2.5
billion in support of this project?
(Professor The Lord Currie of Marylebone) I am certainly
not able to comment on the last point since I have no knowledge
of whether such reports are true or not. On the first, yes, we
have looked at those projections. I think they suffer from the
problems that I have just indicated.
229. Could I ask one more question, please?
I run the risk of getting into the academic field and as a lay
person I am prepared to take on that risk. You asserted that it
was a mistake to consider that the bond financing option is cheaper.
I have a direct question on that. Evidence we have received indicates
that the public sector comparator will not be costed on the basis
of the bond interest rate, it uses the Treasury test discount
rate, which is higher. The difference in the two rates is estimated
to be up to 2.5 per cent, which seems to me to be significant.
Do you accept that the bond discount rate is not being used in
the bond option, but the Treasury discount rate is and that it
is 2.5 per cent higher? If you confirm that, does that not skew
the whole public sector comparator in this vital area in favour
of the PPP?
(Professor The Lord Currie of Marylebone) I think
what you have said in terms of the way the public sector comparator
is to be done is accurate, but clearly the question, in a sense,
is independent of that. I think that is the case. I think it is
entirely sensible to do what is proposed, precisely because of
the argument that I have been trying to put to the Committee,
that is that the true cost of capital is higher than the bond
finance option if you price the riskiness in the activity. Under
a bond financed arrangement, or a revenue bond, the risk remains
entirely with the public sector. A risk premium should be put
into the cost of capital for the public sector. This is a well-trodden
area which many parliaments have worried about for 20 or 30 years.
The reason why the test discount rate is higher than the bond
rate is for precisely this reason. If one did not do that, think
what the consequences would be. In every sphere of life we would
have a compelling argument for the public sector to take over
activity. If the public sector really could raise money more cheaply
than everyone else, that would be a compelling argument for complete
nationalisation, but actually it is a nonsense argument because
it ignores the risk that stays with the taxpayer and with the
customer.
230. As a result of what you have said, Professor
Currie, would you accept that a 2.5 per cent difference is a significant
difference and is that justified in the light of what you have
just asserted? Secondly, the London Underground enmity seems to
accept that such a financial mechanism, "Could be said to
disadvantage the public sector option." I was wondering were
they right in saying that?
(Professor The Lord Currie of Marylebone) I cannot
comment on what London Underground may want to say. I think it
is a sensible approach, and if you were not to include that 2.5
per cent you would be skewing the comparison the other way.
Mr Bennett
231. Are two PPPs better than one?
(Professor The Lord Currie of Marylebone) Can you
elaborate on that question?
232. Is it logical to separate the sub and the
deep tube into two separate ones?
(Professor The Lord Currie of Marylebone) Yes, I think
it is very helpful to have more than one infrastructure company,
because it does allow comparators. This is the evidence one has
from a number of regulator sectors; if you can compare one company
against another it is possible that you will get efficient activity
by one company and not by another. You can then point to that
evidence in the case of the more sleepy one. Those comparisons
can be raised.
233. Do you think those comparisons are worth
the extra cost of having to put in the interface between the two
of them?
(Professor The Lord Currie of Marylebone) I would
think it is, but that is a question that I have to say I have
not looked at in detail. I would need to have a good look. It
does seem to me that there is an advantage, and the advantage
could be quite real if one works out the benefits of being able
to have a form of competition and efficiency between the different
infrastructure companies. There can be real benefit.
234. You have a substantial cost for putting
in the interface, is that right?
(Professor The Lord Currie of Marylebone) There is
a cost for it, but whether it is substantial in relation to the
extra efficiency you may get is a question I have not looked at.
235. Are you enthusiastic to introduce the first
of the PPPs before the Mayor takes over? Would it be nice to put
him in a straightjacket, give him a few options?
(Professor The Lord Currie of Marylebone) I think
the position one has where the Mayoral candidates do not seem
to favour the Government option is clearly not an ideal one.
Chairman
236. You sound like a Committee clerk.
(Professor The Lord Currie of Marylebone) Having said
that, I think it is the Government's responsibility to chose the
best option and I do think that the PPP option is the best one,
and I think unfortunately the Mayoral candidates are ill-informed
on this.
237. It would be better really if the Government
chose the Mayor, would it not?
(Professor The Lord Currie of Marylebone) I do not
think that idea has ever occurred to anybody.
Chairman: I think you have been very tolerant
Professor. Thank you very much indeed for your help. Thank you,
ladies and gentlemen.
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