Examination of Witnesses (Questions 260
- 279)
MONDAY 17 APRIL 2000
RT HON
JOHN PRESCOTT
MP, RT HON
LORD MACDONALD
OF TRADESTON,
MR MIKE
FUHR AND
MR PAUL
DAVIES
260. What should we be seduced by, Mr Fuhr?
(Mr Fuhr) The argument that most of the costs, which
are cost overruns incurred on London Underground, arise from poor
project management, or particularly from poor systems integration.
The Underground is a very large, complex system.
261. Yes, I think we have managed to work that
out.
(Mr Fuhr) There is a very great risk that in trying
to do work in one narrow area through the relatively small contract,
that work which is done may not work properly with systems which
are already there or new systems which are coming in.
262. So that is an argument for total privatisation?
(Mr Fuhr) No, it is an argument for having a contract
which is widespread and which embraces the full range of work
that needs to be done rather than have it in narrow sections.
(Mr Prescott) Plus of course on the cost overrun,
as one has mentioned, the productivity of labour and capital is
very much affected by how long you can guarantee the investment.
I think everybody has accepted that. The Underground and a number
of the nationalised industries were always affected by the two-year
Treasury rule. If you can get long-term investment into it there
is a chance of getting the productivity from capital which the
private sector gets simply because it has a long-term commitment
to it. We do not have that in government. It is tragic but that
is the way we have ordered our public finances.
Dr Ladyman
263. Just one final question. You have brought
us to the question of risk. In the answers to Mr Stevenson's questions
you were describing the reason why the Treasury test discount
rate will be used rather than the prevailing bond rate and you
said it was because you needed to reflect the price of risk in
doing the calculations.
(Mr Prescott) I think we said we would use both in
the comparison.
264. But at the end of the day if you are going
to reflect the risk one has to assume that the private sector
is going to carry that risk and that will be an assumption, I
assume, that will be made at the end of the day in the PSC analysis.
But witnesses have told us that they do not believe at the end
of the day the private sector will carry the risk because the
Underground being the Underground, if they just put their hands
up in ten years' time and say, "Sorry, we cannot manage to
pay for this," the Government of the day will have to bail
them out. To what extent can you be absolutely confident that
the risk really is going to be transferred to the private sector?
(Mr Prescott) I think they were the same people who
told us we would not get this off the ground anyway, and I would
like to say having looked at the bids that we have reached that
stage. There are bound to be people who are critical and we have
to answer those criticisms. Directly on the point you make about
these companies and whether we will be able to satisfy ourselves
that they can do the job, we will in these contracts make sure
there are penalties and incentives so that the risk will be clearly
placed upon them and, indeed, I would point as evidence the Channel
Tunnel Rail Link which I inherited and I had to renegotiate. They
wanted something like another £1.5 billion which we refused
to give them and I made it clear that they would have to carry
an agreed part of that risk, which we did do, and the Government
also will share in the profits after 2020, so they carry the risk
and we share some of the profits if they do better than we do.
That is a matter of renegotiating a deal and making sure the risk
remains with them.
Mr Olner
265. Deputy Prime Minister, could you give us
your views on whether you think the PPP provides the right framework
for ensuring that the operating company improves its day-to-day
management of the system and becomes more responsive to the passengers'
needs?
(Mr Prescott) I think in a way meeting the passengers'
needs and getting a modern railway system is partly about getting
the right level of investment over a longer period of time, which
we have been talking about. The other part is about concentrating
one's efforts on producing the service. It was interesting to
see that the Managing Director of the Underground has made it
clear that he thinks separating them in the way we have, providing
the infrastructure companies to operate it and providing the investment
and the publicly-owned transport companies to deliver the service
to the passengers, concentrates their attention on that rather
than trying to do everything. I think that will make a difference.
They will also get some comfort from the fact that their trains
will be provided for them, the investment is there, hopefully
they will be cleaner and they will have that provided for them
while they get on with making sure the service to the passenger
at the front end is provided.
266. Would you class the Northern Line PFI scheme
as a huge success?
(Mr Prescott) No, I do not think it was a success
generally. It depends how you measure it. It is my line from Clapham
so I understand how difficult that line was. What they tried to
do was bring in new forms of financing because of the difficulty
of public financing and provide money for the trains. That they
did and they had an agreement with GEC on that particular line.
It has been felt not to have been a good deal. I have heard the
criticisms about it, but at the end of the day we have the new
trains there. Putting the two things together has not necessarily
improved the situation though it is improving and one is hopeful
that it will improve, at least its new trains. At the end of the
day if you go on that Northern Line it is as important to get
the track right as well as the trains. You can get new trains
but if they go along on that old track with the major maintenance
problems associated with that it does not seem to the passengers
to be a major improvement. I think that has been what has happened
on the Northern Line.
267. Do you think the complexity of the PPP
makes it difficult to allocate risk fairly between the public
and private sectors?
(Mr Prescott) They are complex, there is no doubt
about that. It is much easier if you can go to the Treasury and
say, "Can you give us the money?" I am afraid, after
the last 20 years or even before that—
268. They usually say no.
(Mr Prescott) If they do not say no, they do not provide
enough and that is under all governments. I do not seek to make
a political point about the last administration. They have never
had sufficient capital to meet their requirements. It is never
long term, either, so you find that London Underground tends to
keep some of the money back in case politicians decide in the
boom or bust, whatever it is, that they will have to cut back
on the investment programme. So you do not get the productivity
out of it. So whilst this is more complex than that arrangement
I do believe you can, by separating it in the way we have done,
raise the kind of capital you want to get the modernisation and
to get London Transport doing what I think it will do best, meeting
the needs of the customers, whilst getting the efficiencies and
investment by the private sector in the infrastructure companies
into the infrastructure, when it is eventually hoped there will
be a return. I did read in the evidence that one of the candidates,
I think it was the Liberal candidate, her name is Miss Kramer
I think, that she was suggesting there should be individual contracts.
I am bound to say with 15 odd lines if they were to be reduced
into individual contracts that would be much more complex than
what we are proposing. We think we have got the best balance and
hopefully we will be able to negotiate well.
269. You mentioned this previously in answer
to Dr Ladyman, but are you absolutely sure that there will be
enough fines and contractual obligations over the infrastructure
companies if they fail?
(Mr Prescott) I think so but we have laid down what
the outputs are and said if you achieve the outputs and you are
doing better than the benchmarks, you will get an incentive; if
you do worse then you will get a penalty. We can withhold payments
under those circumstances. I think that is one of the incentives
and penalties that best motivates the private sector to move.
It is much more flexible in its attitude to change if it is getting
it wrong. I am satisfied that there seem to be sufficient penalties
and incentives to secure the outputs that we are laying down for
them. If they fail to do so they face the penalty. I do not know
if Gus feels there is any more on those areas.
(Lord Macdonald of Tradeston) It is important, Chairman,
if I could come in and say, that as far as the private sector
is concerned of course we look to benchmarking and then the competition
that has been introduced by this process to give us cost efficiencies.
There will also, I believe, be innovation brought in by the private
companies. There is also the introduction of their international
expertise because these are very formidable consortia which have
been put together, and they have very strong project management
skills that we have tended not to have in the past. On the other
side I believe the Mayor of course will come in and have a responsibility
for fares, for ticketing, for service levels, for all aspects
of running trains and stations, and as a direct representative
of the passengers on them then we believe that this tension, if
you like, between private and public aspirations will be very
productive.
270. Can you give us any steer as to what sort
of innovation they will be bringing?
(Lord Macdonald of Tradeston) The example that was
quoted earlier by the Deputy Prime Minister of the Docklands Light
Railway showed that if you put a group of companies, financiers,
engineers, planners and so on together who are confronted with
a problem that might cost them money, then from my business experience
they will work very hard to find an innovative solution. It very
much depends on the problem, but I think when the bottom line
is at stake then private companies have a pretty good record in
coming up with the answers.
271. Can I finally ask, in the event we have
read all the signs wrong, and everything has gone wrong, what
measures have you got in place should one of these infrastructure
companies become insolvent or is performing so badly that you
need to rescind the contract?
(Lord Macdonald of Tradeston) Again let me point you
to the strength of the companies involved in these consortia and
also the strong equity base which we are creating here. In the
last resort, in the highly unlikely event of their not being able
to continue, then of course we would in discussion with the Mayor
look at the next best value-for-money option that could be devised.
272. A big company like BMW finds financing
a bit difficult, does it not?
(Lord Macdonald of Tradeston) We believe what has
been constructed here will both incentivise and reward companies
in a way that will keep them viable and we have got a spread of
responsibility in the consortium structure. Perhaps Paul Davies
could comment.
Chairman
273. Railtrack, my Lord, have got a system of
incentives and have not done particularly well, have they?
(Lord Macdonald of Tradeston) As indeed has been brought
to public attention very recently, Madam Chairman, and that was
in fact a defective mechanism we inherited from a very flawed
privatisation process.
274. I am not seeking to enquire who put the
mechanism in place, that is well-known to this Committee. What
I am saying to you is Railtrack is subject both to penalties and
incentives and it still receives bonuses, as you know, whether
it does the job effectively or not. That is not a very good indicator,
is it?
(Lord Macdonald of Tradeston) Indeed, and that was
exactly the feeling that the Deputy Prime Minister had when he
appointed the new Rail Regulator who has highlighted the incoherence
of the system we inherited and has taken very brusque action to
make sure a better system is put in place.
275. Nevertheless, you have read the comments
in the National Audit Office Report?
(Lord Macdonald of Tradeston) Yes, indeed, and I have
seen, too, their approval of the course of action that the Office
of the Rail Regulator was taking.
276. So we are convinced that the size of the
companies concerned and the sort of penalties that you expect
to put into place will be enough to produce these dramatic efficiencies?
(Lord Macdonald of Tradeston) That is certainly my
belief, Madam Chairman.
(Mr Prescott) And their desire to be successful in
the contract. They presumably want to make money. What we are
saying is if you do it effectively and well in a way that is agreed
between us, which we agree is the best value then you can benefit
from that. If you can do better, fine. I must say though that
the previous Regulator—and I changed the Regulator as you
know -made it clear to me within the first months of coming into
office that whilst Railtrack had failed to live up to its promises
on at least two occasions there was nothing he could do about
that because when the rules were drawn up there were no penalties
at all. There were incentives, and you have mentioned some, and
they were still getting paid for them by a crazy system. We hopefully
have learnt from that. Changing the regulator was one step in
that direction but having an effective incentive and penalty way
of dealing with it is something we will embody in this contract.
277. Mr Davies, did you wish to comment?
(Mr Davies) Clearly what we have done throughout is
try to learn from experience. On the penalties, those directly
relate to the inconvenience they are causing customers so if it
is hurting customers it is hurting the private sector just as
badly, so the incentives are there to do what is good for the
customers. Those penalties are escalating, so if performance is
slightly below target there will be a small amount of penalty,
but as it starts giving a quite poor performance it will be escalating.
I think you asked what steps could be taken eventually. In dire
situations, yes, there are rights to step in by government to
ultimately require sale of the contract and to remove those contractors.
I think we should also focus on bonuses because, yes, there are
bonuses paid but those are for performance which is directly beneficial
to customers, such as imposed ambience, better stations, increased
capacity of trains, getting more people through, and in particular
increased availability of trains, day-to-day how many trains,
what percentage is turning up on time. So it is very much directly
related to the benefit or disbenefit of the customers.
278. That sounds excellent, Mr Davies, except
in the case of some companies in the heavy rail sector what has
happened is that they have paid the fines and still managed to
finish up with considerable profit. Can you assure us that will
not be the case?
(Mr Davies) The issue there goes back to this question
of escalating penalties. Consistently poorer performance gets
escalating penalties eventually with the right to step in and
remove the contractor.
279. How eventual is "eventual"?
(Mr Davies) You would have to go to the detail of
the contract but material under-performance would eventually lead
to it, although to define "material" would take armies
of lawyers.
|
