Examination of Witnesses (Questions 140-159)
MONDAY 9 APRIL 2001
SIR RICHARD MOTTRAM, KCB, MR ROBERT HOLDEN, MR STEVEN MARSHALL, and MS LOUISE HART
140. That is really the nub of the problem, is it not, in fact these projects were pushed ahead for policy or dogma reasons without competent research being done in the first place. We have this case, we have the Armouries at Leeds, we have the Dome, they just roll off your tongue.
(Sir Richard Mottram) I am not going to talk about those cases. In this case both British Rail in the public sector and the private sector people bidding for the opportunity to operate this service and to build the Link were, as we can now see, substantially over-optimistic in relation to passenger and revenue forecasts. Of course I accept that.
141. I will move on, it is quite clear that Railtrack have a very important role to play in the eventual success of this particular scheme. I would suspect, Mr Marshall, that if the vast majority of people in the country knew that Railtrack were involved in this, bearing in mind the performance of Railtrack since privatisation, they would not be all that keen for you to be involved to be quite honest, would they?
(Mr Marshall) I would obviously wish to debate that a little.
142. There is your chance.
(Mr Marshall) It is very important to be clear on the basis of Railtrack's involvement, it may allay any concerns that we are worrying about. The first thing to say is that we are committed to the purchase of Section 1 and that is being built by the RLE Consortium with involvement and railway expertise from Railtrack, we are involved in that. It is extremely important to the success of the project that that involvement is forthcoming and it will continue to be. As far as Section 2 is concerned we are providing very limited railway services to the construction of the project. The construction will be taken on by RLE, in which Bechtel has a major stake. Railtrack at the conclusion of Section 2 will take on the operation of the entire Link, which is entirely sensible, because it will enable it be to run as part of the national network.
143. You will, in fact, purchase Section 2.
(Mr Marshall) We will not purchase Section 2, we will operate Sections 1 and 2 at the point they are completed and, therefore, operate it as part of the national network.
144. Reports indicate that the Department has bent over backwards to ensure that Railtrack are given plenty of opportunity to purchase the second scheme, I may have read the Report wrong, why has the Department bent over backwards to accommodate Railtrack? Why did the Department not demand from Railtrack an answer immediately? It seems to me it has put Mr Holden in a very difficult position, because if at the end of the day Railtrack decided not to participate with Section 2 he would have to find somebody else to do that. Why did you bend over backwards to give Railtrack so much time?
(Sir Richard Mottram) In the restructured deal in 1998 we had an understanding with Railtrack with an option to purchase Section 2 to 2003, that was part of the restructured deal. We discussed with Railtrack in an entirely open way whether they wished to exercise this option. The reason why we were not pressing ahead with this in the current year is because we have already started doing long lead construction work for Section 2, so we needed a clear understanding of how we were going to go ahead on Section 2. Railtrack, for their own commercial reasons, felt they could not proceed on the basis that we had understood they might proceed on in 1998 and, therefore, we looked at alternatives. We have not bent over backwards with anything to do with Railtrack. We had a discussion with Railtrack, we looked at the alternatives and we decided not to proceed with Railtrack in relation to the 1998 option but, of course, to proceed with Railtrack in relation to the operation of both Sections 1 and 2, because it makes absolute sense for them to operate it.
145. Of course it does, therefore, they should have given you the agreement immediately. Mr Holden, how does that affect you if Railtrack decide not to participate in phase two, because they are giving us no guarantees at the present time in the Report that they are going to?
(Mr Holden) We have the Statement of Principles, which was announced last week. I think, also the letter from the Permanent Secretary to the Chairman in the last week or so, which indicates Railtrack's participation in Section 2 of the project along the lines which Mr Marshall has outlined, and they are very important lines; the continued deployment of staff interfacing and working closely together with the project managers and designers; and ultimately in the operation of the railway so that the Channel Tunnel Rail Link is operated as a single railway rather than as two separate parts.
146. Are you saying that since we were give this Report you have now made a decision to participate in phase two?
(Mr Marshall) Very clearly so. The revised arrangements took place after the publication of this Report and were summarised and announced quite recently and make our continuing involvement and, indeed, our role as operator at the end of it absolutely clear.
(Sir Richard Mottram) I think we are at cross purposes, the question I was answering is, perhaps, not the one you asked, which is, would Railtrack exercise the option to purchase Section 2? The answer to that is they will not. Since this Report was written we have carried forward those discussions with both Railtrack and others and the position, as eventually agreed and announced by the Government, is set out in the letter that I sent to the Chairman.
147. Just as a matter of information, are you saying that Railtrack will participate in phase two but not necessarily purchase it?
(Sir Richard Mottram) That is correct. Railtrack will participate in the way in which Section 2 is built; Railtrack will operate both Section 1 and Section 2 as part of the network, because they operate the whole of the network; it will be purchased under arrangements that will be revised, compared with those that we envisaged in 1998.
148. That brings me back to my original point, has the option of public ownership ever been considered? I would say that would be universally popular.
(Sir Richard Mottram) The Government in relation to the CTRL section two is satisfied that this is the right way to proceed.
149. You are saying public ownership has not been considered.
(Sir Richard Mottram) Perhaps I am, in a "Sir Humphrey" sort of way. I could have said: "No".
150. One of the things that always amazes me about these PFIs is that if anything goes wrong the government picks up the piece afterwards, in effect it is not the government that picks up the pieces up it is the taxpayer. Despite the shareholders coming into the scheme, and presumably you are aware there is a certain risk involved when you come into such a scheme, they are not going lose out at all. For example, if you take paragraph 2.13 it tells us that shareholders do not lose their original investment, they do not contribute any further, they will draw 7 per cent interestincidentally that is very much higher than I can get in a building society for a no risk investment. They have the knowledge that taxpayers may have bail them out to the tune of something like 1.2 billion. There does not seem to be any risk at all for anybody who is a shareholder who comes into one of these PFI schemes.
(Sir Richard Mottram) The answer is in two parts really. Part one is the 1996 deal did not involve a different approach to government grant, the government did not come in and do what LCR asked them to do, which was to provide a substantial increased government budget. What the government did was to find another way of proceeding with the project which, as the NAO Report brings out, was in every respect better than the 1996 answer. Secondly, why did the shareholders not lose their money? To be frank, because we had to agree a way forward, including with the shareholders. If we proposed a way forward in which the shareholders lost their money, I expect the shareholders might have said, "Thank you, but no thank you". This was a negotiation which involved the Government, LCR and its shareholders which put the project on a better basis and was defended in that way.
151. I thought the PFI was supposed to be about passing risk to the private sector.
(Sir Richard Mottram) As the Report brings out they did not lose their money, the did not lose their equity, as Mr Steinberg is pointing out. If they had lost their equity and they would have been unwilling to play in the project we would have had to go back to the beginning, some members of the Committee might not have liked that, and start again. That is the open answer.
152. Sounds like a good deal to get involved in some PFIs, you certainly do not lose any money. The only people who lose money are the taxpayers.
(Sir Richard Mottram) Can I just make a very quick point about that? In relation to construction risk, for example, Railtrack's money is exposed. In relation to revenue risk, the company that operates the trains is exposed. So, as the report brings out, we have sought to apportion risk and reward around the system, including the private sector participants, accepting risks in return for reward.
153. We will not go into the argument about Railtrack's risks at privatisation, they made it look like they had half a dozen risks. Let us slightly move on. I want to pursue what Mr Leigh was saying. I totally agree, if he was serious with what he was saying, I am sure he was, I actually agree with what he was saying. The more I read this report the more I thought to myself we do not need this, we do not need it at all. Tell me, how much quicker will the journey actually be once this is all finished? When it is all up and running, phase one is done, phase two is done, how much quicker will it be for me to get on a train in London and arrive in Paris?
(Sir Richard Mottram) About 30 minutes, I think, 40 minutes.
154. Maximum 40 minutes.
(Sir Richard Mottram) Two and a half hours to Paris compared with three.
155. How much dearer will the ticket be? Double in price?
(Sir Richard Mottram) I do not think so.
156. I do not think so: treble the price?
(Sir Richard Mottram) I do not think so either. As the report brings out, the object of this exercise is not to choke off the demand and price people off the service, it is to enable more people to use it.
Mr Steinberg: I only hope the targets are better met the second time around than they were the first time by Eurostar. I wanted to move on to that point but I am told my time is up.
Mr Williams: In answer to Mr Steinberg's first question you said we are only disagreeing on a small part of the report. Let me make it clear we are not disagreeing on a small part, we are disagreeing over whether or not the public has been sold a multi million pound tunnel and the fact that you cannot give us any figures or any evidence to substantiate your claim that it mightit mightbreakeven by 2030. That is what the anger of the Committee is about. Mr Campbell.
157. Mr Holden, if I could start with you perhaps. I am looking at page 14 and figure six which is on first view of the report a fairly small and insignificant figure but I think is possibly of huge significance because it shows the forecast made by LCR of Eurostar UK passenger numbers. First of all, can we agree how important those projections were when the deal was originally put together?
(Mr Holden) They were a very important part of the deal in that they provided a significant element of the finance to fund the construction of the Channel Tunnel Rail Link.
158. Did you take outside advice on the passenger numbers or was it an in-house exercise?
(Mr Holden) There were three major members of the shareholding group who had their expertise in transport: National Express, the Virgin Group and SNCF. They were able to look at the estimates which had been done prior to any involvement by British Rail. SNCF also had their own estimates of passenger numbers undertaken which I believe was subject to some third party scrutiny. LCR's estimates were consistent with the range which those bodies produced.
159. So third party scrutiny being outside bodies looking at it to give their view of whether or not the forecasts were realistic or not?
(Mr Holden) It is my understanding SNCF did have some third party review of their estimates, yes.
4 Note: It was the 1998 deal, not the 1996 deal. Back