Examination of Witnesses (Questions 1-19)
MONDAY 9 APRIL 2001
SIR RICHARD MOTTRAM, KCB, MR ROBERT HOLDEN, MR STEVEN MARSHALL, and MS LOUISE HART
1. Our hearing today is on the PFI deal to build the Channel Tunnel Rail Link. Our witnesses are old friends: Sir Richard Mottram, a very experienced witness before this Committee, and Permanent Secretary of the Department of the Environment, Transport and the Regions; Mr Robert Holden, the Chief Executive of London and Continental Railways; and Mr Steven Marshall, Chief Executive of Railtrack, accompanied by Ms Hart who is also from Railtrack. Welcome all four of you. May I start as I always do by declaring that I was at one time (but no longer) sponsored by the TSSA and I am still a member of it. Now this goes back way before your time at the Departmentthankfully I suspect you feel, Sir Richard. It dates to just one month after one of the worst hearings I think we have heard in terms of financial fiascos, which is after the hearing into the sale of the ROSCOs, the rolling stock companies. That was in January of 1996 and this project was set up in February of 1996. One of the things I remember when we were inquiring into how on earth three companies could make a profit of £900 million in less than two years was that the witnesses assured us that one of the problems they had was that the Ministers had decided that it had to be dealt with quickly in the case of the ROSCOs and therefore everything was done in a hurry. Looking at this one there are symptoms of a similar problem. Was it done in a rush, Sir Richard?
(Sir Richard Mottram) Chairman, it was certainly the then Government's wish to transfer the operation of Eurostar into the private sector as quickly as possible, but I have got no evidence that it was done in a rush and that that produced an outcome.
2. That suggests that the privatisation was more the objective than the Link.
(Sir Richard Mottram) No, both were the objectives, Chairman, but, as the report I think brings out, what essentially happened was the business was transferred into the private sector on the basis of a very limited amount of experience of operating it and likely passenger forecasts, and I think that reflected the then Government's wish to move ahead with getting private sector management into that business, but the process through which both that was done and the original deal was set up, as far as I am aware, was an entirely satisfactory process from the point of view of assessing the risks and the potential benefits.
3. I suspect we will have some differences of opinion on that precise issue and, indeed, what was rather poetic about the fact that it was (again as you intimated) in a bit of hurry was that, of course, Sections 1 and 2 of this project were originally due to be completed by 2003, even including the tunnelling under Islington.
(Sir Richard Mottram) Yes.
4. Now I gather only Section 1, despite the hints at the start, is going to be completed by 2003. To the best of your knowledge, is it on target for that date?
(Sir Richard Mottram) It is Chairman, yes.
5. No sign of slippage at all?
(Sir Richard Mottram) There is possible slippage but we are looking at no more than six months and it may be recoverable.
6. Can I turn your attention to page 7 of the report and particularly to paragraph 23. I have been on this Committee since its second manifestation in 1989/early 1990 and I cannot remember quite as strongly worded, in NAO speak, criticisms as one finds in this paragraph. The NAO says: "We examined the other key assumptions made in the Department's calculations"key assumptions"In our view, some of them are questionable. Substituting more reasonable assumptions, we have estimated that there would be a net benefit from the Link of under £500 million, and that if money estimates of regeneration benefits are excluded, in line with Departmental guidance, then the net benefits from the project would be marginal." That is a pretty devastating contradiction of your suggestion that all risk assessments were properly conducted.
(Sir Richard Mottram) This is a statement about the likely cost/benefit ratio of the project when you take into account the non-financial benefits. These are the views of the National Audit Office. We do not agree with them, Chairman.
7. You do not?
(Sir Richard Mottram) No.
8. Yet is it not a fact that the methodology that was used varied during the procedure and during the development of the project with changes in practice including changes being inconsistent with your guidance, for example, in relation to regeneration costs? These have always been below-the-line costs and they have always been referred to as too vague to take into account above the line. Now suddenly in order to get, as it would look, the result that the Department wanted they have been taken into account.
(Sir Richard Mottram) What I think happened, Chairman, is that over a period of time these assessments were indeed revised. That is the essence of these assessments. They are revised every time we look at the project. They were looked at in 1996 and they were looked at again in 1998. We have looked at them again in the current year in the light of where we are now. That is what one does. In the case of the regeneration assessment we think that it is entirely defensible to include the regeneration value that we have included here. You could do it the other way and say we will quantify those benefits we can confidently quantify and then, as we would for any other project of this kind, assess what other benefits and disbenefits there are. At that stage in the calculation we would, for reasons we could discuss, bring to bear the regeneration benefits and we would argue that they are indeed substantial and they should be weighed in the balance when thinking about this project.
9. You argued they should be substantial and then argued immediately that they would not be as substantial as you first argued they would be. You included regeneration costs. At the top of that page it says: "The estimate was that the Government would be willing to pay £1 billion through conventional regeneration funding . . . This figure was then halved to take account of double counting." But that hardly fits in with your original contention about the sound statistical processes that underlie the policy that eventually evolved.
(Sir Richard Mottram) I think what I am saying, Chairman, is that originally in the way in which the project was being assessed there were benefits to international passengers who were both resident in the United Kingdom and not resident in the United Kingdom. It was then decided to take out the benefits to international passengers who were not resident in the United Kingdom (which we can argue therefore made the appraisal more pessimistic, so to speak), but we recognised that there was a potential regeneration impact from the fact that this was an international link and that that part of the regeneration benefit could be scored if we were not at the same time also scoring the passenger benefits for international passengers who lived overseas. The reason why we halved it was because we were concerned about double counting the benefits we scored for international passengers who are resident in the United Kingdom. We believe that there is a consistent methodology here. If you say to me, "Can you prove the number is £500 million or £350 million?" or whatever, of course I cannot and I would not wish to argue with you that it is anything other than a judgment that we have sought to quantify. If you put it to one side then I would argue that you have to bring in these below-the-line considerationsand it is very substantial below-the-line considerationsand I think our position is consistent.
10. You are consistent but you are double counting. That to your mind is consistent?
(Sir Richard Mottram) No, we did not double count.
11. You just said you did.
(Sir Richard Mottram) I did not Chairman. What I said was that originally when these assessments were being done there were non-financial benefits for international passengers domiciled in the United Kingdom and domiciled overseas. We decided to take out one set of those, the overseas ones, and we looked at that point at the regeneration impact. We were reasonably confident you could argue that there is a £1 billion regeneration impact for reasons we can discuss. We were concerned we might double count that benefit in relation to the benefit we were also scoring for UK-based international passengers so we took £1 billion and halved it. As you can see Chairman, that is a fairly rough and ready calculation and I do not wish to pretend it is anything other than that, but it is not double counting or fancy footwork.
12. Can I remind you, as we constantly have to, about relatively succinct answers. I do not demand answers so short you cannot answer the question properly, but you have taken two Members' quotas of question time going round this one issue. It goes on to say in paragraph 23: "On the basis of recent Eurostar UK performance, which has been below this level, the Link represents poor value for money in terms of estimated economic benefits."
(Sir Richard Mottram) But we do not agree with that, Chairman.
13. You do not? That is alright.
(Sir Richard Mottram) It is not an agreed statement in this report; it is the NAO's view.
14. It is their view. We will explore it a little further when we examine some of the other unchanged statistics which do not happen to be the same as they were originally. If we turn to page 14, paragraph 1.11: "LCR forecast that in 1996-97 Eurostar UK's second full year of operation, 9.5 million passengers would use the train service. The actual number was 5.1 million . . . LCR realised that the Link would not be viewed as a good investment." Having got it wrong by a function of two, it is not surprising really, is it, but what is interesting is the next paragraph, paragraph 1.12: "When the Department was evaluating bids, much depended on the bidders' forecasts. As the evaluation would favour the bidder demanding the lowest level of direct grants there was an in-built incentive to take an optimistic view of future demand for the Eurostar UK services." It was built in so it was almost an invitation to a pie-in-the-sky estimate. If you overestimated the revenues then that brought down the grant and bringing down the grant enabled you to meet one of the peak criteria as far as the Department was concerned. That was an invitation to get it wrong, was it not?
(Sir Richard Mottram) Yes, if you did it. You were also potentially at risk, were you not, for the consequences of getting it wrong?
15. Not really. As we have established, they got it wrong and have not been much at risk, as we will soon demonstrate.
(Sir Richard Mottram) They got it wrong but the Government has not ended up paying substantially more for it.
16. We do not know yet.
(Sir Richard Mottram) No, we do not.
17. Are you willing to sit there and say it will not?
(Sir Richard Mottram) Within bounds I am willing to describe the risks.
18. Within bounds?
(Sir Richard Mottram) Yes.
19. What bounds?
(Sir Richard Mottram) I can describe the risks as we see themfinancially I mean.