Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 12 APRIL 2000
MR DENIS
TUNNICLIFFE AND
MR MARTIN
CALLAGHAN
140. If you entered into a PPP you have to get
a return. If the return is dropping away, how then do you manage
to recover that?
(Mr Tunnicliffe) Other than a recession of catastrophic
proportions these would be the day-to-day variations or monthly
or yearly variations. Recessions are very rare but falling off
this growth curve tends to be three or five years and then it
comes up again as it has done from the mid-1990s upwards. At the
moment we are growing at something like five per cent but we know
that will plateau out as the employment potential in London starts
to be limited by size once again.
141. Given what you have just said in terms
of growth and new railways, what is the contribution that is going
to be made by the Jubilee Line?
(Mr Tunnicliffe) To total capacity?
142. Yes.
(Mr Tunnicliffe) If I recall, it is about 7 per cent.
143. When does that start to be a plus rather
than the negative that it is today?
(Mr Tunnicliffe) I would not agree with you it is
a negative today. I think the Jubilee Line is serving the people
in the new areas it serves, it is giving them journey opportunities
they did not have before.
Mr Donohoe: It might serve more people if you
were to clean it.
Chairman: We are here to talk about funding.
Mr Bennett?
Mr Bennett
144. I am puzzled. This 15 per cent growth in
passengers is part of the way of financing the PPP, but then you
are saying you will not be able to achieve that on its own, you
are going to have to have some new infrastructure, some new lines.
Surely you are going to have to pay for the new lines? You cannot
use the same 15 per cent growth in passengers to pay for both
the PPP and the new lines, can you, or is this some new magic?
(Mr Tunnicliffe) I cannot settle all of the problems
of all the world all the time but the task in front of me was
to design a system which would assure that the best possible capacity
was to be taken out of the present infrastructure and the present
infrastructure is capable of yielding about 15 per cent more capacity
and it will do that over the first half of the 30 year concession
so in the short to medium term we hand to the Mayor a capability
to cope certainly in the first decade and so on. Very early on
the Mayor is going to have to decide strategically whether he
or she is satisfied that that is enough and that is all I am saying.
I have never seen any projections whereby the present system was
good enough for all time assuming London continues to be the dominant
world city in the European time zone.
Chairman
145. Mr Tunnicliffe, I must say that I am absolutely
astonished at what you are saying, because I got the impression
that the whole point of the PPP is not that it was just going
to maintain the existing system, but it was going to repair a
lot of its problems and it was going to make it possible to carry
15 per cent more. Now you are saying as soon as the Mayor takes
over responsibility for the scheme that he or she has not negotiated,
they will immediately have to think of means of extending the
financing in order to carry the thing forward.
(Mr Tunnicliffe) I am saying that given the time to
produce a new scheme and to get the appropriate transport and
work order, I think it will be high on the agenda of the Mayor
to look well beyond his term of office and make a decision on
whether new construction is necessary.
Mr Stevenson
146. There are those, Mr Tunnicliffe, like Professor
Glaister, Mr Gaffney and others, who suggested that there will
be a funding gap whatever option is chosen, PPP or bonds. It does
vary over the 30 years. PPP would require at least £95 million
per annum in external financing and bonds would require £16
million. It has been stated that by the second year of the PPP
contracts there will be a difference of almost £175 million
required and it is anticipated that that may not reduce. You,
Mr Tunnicliffe, have told the Sub-Committee that whilst you have
not completed all of your calculations, there is likely to be
"a modest requirement for continual subsidy." What is
a modest requirement, Mr Tunnicliffe? How do you assess that and
what might it be?
(Mr Tunnicliffe) I do not really have anything to
add to my last reply because we are now entering the stage where
we can move away from speculation into the reality of what the
bids mean, and we will be working through the bids and looking
at real figures that real companies are willing to work to. At
that point we will be able to answer the questions, is it better
than the public sector comparison, and, what modest support will
be required from public funds?
147. I accept all that, but you did tell the
Sub-Committee recently that there was likely to be a modest requirement.
Presumably it is reasonable to assume that you have some idea
of what "modest" may be, or otherwise you would not
have indicated to the Committee modest or otherwise.
(Mr Tunnicliffe) It is about a year since we actually
ran the full simulation and a number of factors have changed since
then. At the time the outcome was modest. It would be quite wrong
of me to suggest that we have a more accurate view than that.
We had a policy decision at that time by the Government and announced
in the House in December 1998, that we would proceed to the bidding
stage to see whether these theoretical calculations turned out
to be a good deal. That is exactly what we are doing.
148. You applied your assumptions in terms of
your assertion that requirement would be modest, have you pushed
them through the computer model again in the ensuing year?
(Mr Tunnicliffe) No.
149. Sorry, I misunderstood. I thought you said
that it was a year ago when you did the calculations and you came
up with modest. Have you since revisited those?
(Mr Tunnicliffe) No, we have seen factors change,
but we have not run them on.
150. Factors have changed, and we have some
of the changes in the correspondence. Have you applied those changed
factors to your description a year ago of a modest requirement?
If so, what effect has that had on the modesty or otherwise of
the requirement that you suggested a year ago?
(Mr Tunnicliffe) The answer is that we have not applied
those factors. Basically what we have been doing since December
1998—and I hope it has come out in all of my answers in
the past—is that we have been pursuing the PPP objective
with vigour on the instruction of the Deputy Prime Minister that
the next test will be to look at it in the light of some real
bids, and that would be a much more valid test than computer simulations
that we might produce.
151. In the light of your responses, Mr Tunnicliffe,
I put to you that it may be best in all the circumstances, until
you have had a chance to complete your investigations and examinations,
to suggest to you that you might want to withdraw your comment
that there was likely to be a modest requirement for continued
subsidy. You do not seem able to quantify that. You do not seem
able to give analysis to the Committee that would justify that.
Would you care to withdraw that term?
(Mr Tunnicliffe) At the time it was, I think, two
questions. One was, "Do you think there will be some subsidy?"
The answer was, "Yes. I think it is probably more than zero",
and I was invited to take a general view on its size and my general
view was that it was modest.
152. Lastly on this point, would you reject,
accept or recognise when Mr Gaffney and others state that by the
second year of the PPP contract there will be a difference of
almost £175 million between the underground revenue and the
cost of the PPP and they, Gaffney and others, see no reason for
the difference in that over subsequent years? Would you accept
that or reject that?
(Mr Callaghan) The answer is, I do not accept it.
It is based on a PwC analysis which this Committee discussed the
last time Mr Tunnicliffe gave evidence, and it is based on a 15
year analysis. The year they chose as a representative is in fact
the year that has the second highest funding requirement of the
15. They make assumptions about the repayment of the borrowing,
which adds significantly to that figure and which is not supported
by PwC's analysis and will not happen in the next 15 years.
153. Can you confirm or otherwise, or would
you care to comment on the report that the Government is prepared
to offer up to £2.5 billion in sweeteners?
(Mr Tunnicliffe) The Government's position on this
I think is wholly proper. It believes that this is the way forward
in terms of giving best value for money. It is entirely content
that going ahead should be judged against that criteria and, therefore,
we have done a public sector comparator on two ways, which we
have now sealed up, we do not know the results, it is done for
us. When we have analysed the bids they will be compared against
the public sector comparator, against a bond solution and against
the bids we have really got. The Prime Minister and Deputy Prime
Minister back in 1998—and as far as I know he has never
wavered from this view—has said, "We will proceed with
the PPP provided it is best value for money."
154. Have you taken into account in your ongoing
calculations any Government input along the lines that has been
reported, ie, £2.5 billion in sweeteners, or have you discounted
that?
(Mr Tunnicliffe) What we have assumed is that our
task is to achieve the best value for money and a secure future
for the underground. We have always assumed that if it needed
public support—and I accept your point that it probably
will—the Government will provide that appropriate public
support. The key question is, for the given output, what will
be the lowest public support? It is our belief that it will be
the PPP and we believe the analysis of the bids and the comparators
will show it to be the PPP, but we cannot know that until we have
analysed the bids.
155. Would you accept, reject or care to comment
at all on the figure of £2.5 billion that has been reported
as being what the Government is prepared to put forward as a sweetener?
(Mr Tunnicliffe) In so much as I understand the word
"sweetener" I know of no sweetener. In so much as the
government is willing to properly commit to its role of giving
necessary public support to the best value for money solution,
yes, I have always assumed government will give that appropriate
support.
Mr Forsythe
156. Is there any evidence to suggest that the
consortia competing for the PPP contracts have raised the price
of their bids because of their concerns about political risks?
(Mr Callaghan) Obviously I cannot comment on the prices
that they submitted for their bids because they only arrived back
a week ago. We have been talking to the bidders extensively over
the bid period and from all the conversations we have had with
them, obviously they have asked questions about some of the comments
that have appeared for example in the press about attitudes to
PPP but they have taken great confidence from the Government's
consistent and unwavering support for doing it this way and all
the conversations I have had with them suggest they are not at
all alarmed by the kind of press comment that they have heard,
that they genuinely believe the government is committed and we
will see it through with the government's support.
(Mr Tunnicliffe) If I can develop that point slightly.
We have said to bidders, I do not know if we have said it in these
words but in conversations, you have got to look at this as a
30-year contract and sometimes your partnership with the mayor
may be difficult so you have got to think about ensuring that
your rights are properly secured in the contract and we have done
our best to frame the contract in a way that the contractors'
right are properly secured. What we have built on top of that,
however, is a whole shape of the contract that seeks to be win/win.
The best way to make a profit out of running an infrastructure
company will be to deliver the best possible service to the customer
and the way to not make a profit is to fail to do that. Provided
that mechanism is in place and is working the Mayor may not like
the philosophy any more than this government before it came to
power liked the philosophy of Railtrack being in private hands,
but once it is there the reality will be is it providing good
service to the people of London, and we believe from the beginning
it will.
157. If I can just ask you one other question.
When did you expect the deep tube and sub surface contracts to
be implemented?
(Mr Tunnicliffe) We are not offering a specific date
because, as the Deputy Prime Minister said in December, it would
be wrong to offer a deadline which the public purse the public
interest would be held across. We have said before it is late
this year/early next year. It feels about a year away but we are
not putting that up as a deadline. The subsurface competition
started about five months after the deep tube competition because
of the period of discussions we had with Railtrack. Those bids
come in on 15 September but because there is considerable overlap
in the bidders and because the form of contracts are the same
and the sorts of debates they will have to have with lawyers and
advisers will be the same, we are hopeful that the subsurface
competition will be considerably accelerated because of the learning
process both sides will have gone through.
Chairman
158. So we might be talking about April 2001?
(Mr Tunnicliffe) We may indeed.
Miss McIntosh
159. The Rail Inspectorate did indicate an agreement
with London Underground that a great deal of work needed to be
done on the safety issue. Could you update the Committee on where
we are at the moment and if the Railway Inspectorate agrees we
are far enough down the road?
(Mr Tunnicliffe) We believe we are in an optimal position.
The Railway Inspectorate has had basically three safety cases
to agree. It had to agree one for shadow running, it has to agree
one for vesting, which is the creation of departments in London
Underground into real companies and it will have to agree one
for sale. And I think the Railway Inspectorate and ourselves would
agree the one we produced for shadow running was a valuable step
forward on the safety case we had before that and I think they
would agree that the one we have now in for vesting is a valuable
step forward from the one we had before that. We have a lot of
confidence that we will make progress at the rate that we want
to make progress to create ever increasing safety from the railway
and that will wholly satisfy the Railway Inspectorate, the Health
and Safety Inspectorate and in the final analysis the Health and
Safety Commission.
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