Examination of Witnesses (Questions 220-239)
MONDAY 9 APRIL 2001
SIR RICHARD MOTTRAM, KCB, MR ROBERT HOLDEN, MR STEVEN MARSHALL, and MS LOUISE HART
220. It would be interesting to know what figure you come up with. You wanted it to remain a PFI, what was the value of it remaining a PFI project?
(Sir Richard Mottram) The value was essentially that we had it incentivised in the private sector. We had a finite amount of financing, so it was not a taxpayer, bailed out public sector project on the public sector balance sheet.
221. Can I go on to follow up on something Mr Steinberg was asking about in 2.13, it makes clear that the original shareholders did not lose their investment. When asked why you thought it would have been silly to have forced them to do so you said, "Because we would have had to go back to the beginning".
(Sir Richard Mottram) Yes, we would have to re-establish the project.
222. Do you not think that given that any project of this type and size it is likely to take a few years before it proves to be non-viable and that this sends out a rather odd message to the public that any PFI project that they may get involved in is going to take time before it proves non-viable and at that point no government is going to want to go back to scratch because they are never going to lose their money.
(Sir Richard Mottram) The answer to this is that it was in the context of this deal that we were content for the equity arrangements to be as set out. If it had not been in the context of this deal, that is if, for example, there had been massive increases in the direct grants by government, and so on, with a deal of that kind you would have been in a different game. So what we were talking about was in the context of that deal, as one element of it. On balance the government was content to allow the equity to be handled as in paragraph 2.13.
223. The normal principle is, I would have thought, if you put in some equity money and the company goes broke that is the risk that you take, you expect to lose your money if a company goes broke. In this instance it would be true, therefore, of any PFI deal there are going to be times when the government never wants to go back to scratch, you are saying in practice that you took that risk because you will always come up with some other deal.
(Sir Richard Mottram) I am making a slightly different point. What I am saying is that the government felt that the deal that was introduced in 1998 was better than the deal that was introduced in 1996. The NAO imply in the Report they agree with that judgment in that context. In that context we were content to go along with the equity arrangement. In other contexts we have said, "This project has gone belly up, goodbye".
Mr Rendel: I wait to see it happen for the first time.
224. Sir Richard, according to the figures in this report, and I suspect the alternative figures that we have discussed that you produced this afternoon, should Section 2 of this Channel Tunnel Link go ahead on value-for-money grounds?
(Sir Richard Mottram) In our judgment it should, yes.
225. In your judgment.
(Sir Richard Mottram) Including taking into account the regeneration benefits, yes.
226. Let me ask you about that, according to the regeneration benefits most of them will go to Ebbsfleet, which I presume will be delivered by Section 1, are you sure that regeneration benefits are sufficient to justify Section 2?
(Sir Richard Mottram) What I am saying is that we believe that regeneration benefits should be taken into account. The regeneration benefits form a small part of the total benefits in relation to the decision to go on to Section 2. The regeneration benefits do not mainly arise in Ebbsfleet, they mainly arise in King's Cross and St Pancras and Stratford. We can all see those benefits currently unfolding in those areas. Moreover, we believe, this is certainly a significant issue for the government, that the way in which this project is being configured and the route chosen has not only regeneration benefits but also benefits for integrated transport. For all those reasons we think it is appropriate to go ahead.
227. Can I press you a little further on that, as I understand it the LCR have to raise an additional 1.1 billion for this section of construction. You already indicated earlier on there were total savings of roughly about 30 minutes by completing Section 1 and 2.
(Sir Richard Mottram) That was in relation to Paris.
228. The report indicates that 20 out of that 30 minutes are in Section 1, we are talking about an additional 10 minutes for 1.1 billion. Can that really be taken into account with all of the things that have been said this afternoon and considered to be value-for-money for 10 minutes?
(Sir Richard Mottram) The gain to St Pancras is 20 minutes.
229. Can these gains taken in the round justify this expenditure?
(Sir Richard Mottram) If we apply the normal costs benefit approach that we apply to other projects we believe that these gains do justify the government's contribution to this project and the advice that we put to ministers sets all this out very clearly. As I say, ministers, as they made clear, attached considerable priority as part of this package to regeneration benefits and the fact that we are modernising our transport infrastructure.
230. You discussed and gave figures to Mr Rendel about the forecast increase in passenger numbers and how you had reached those figures.
(Sir Richard Mottram) Yes.
231. Can I press you on the question I raised about time, why are you so optimistic that these numbers will materialise?
(Sir Richard Mottram) Because I do not think we are optimistic, we believe we are being realistic. You could say to me, you are probably about to, you consistently revised these figures downwards, and we have revised them downwards and we now believe we have revised them downwards into a ballpark where they are realistic.
232. We have already talked about the low cost airlines, there is every possibility there will be further deregulation of the air market, we know that marine operators have consolidated and there is likely to be severe price competition from those that wish to travel about by boat and there some road improvements and rail improvements to assist in the time that people can take travelling by road and getting to and from airports. Adding all of that together, and recognising that the market does not seem to have expanded to the extent that was presumed can we be confident of these figures?
(Sir Richard Mottram) All I can say is that we have reviewed these figures carefully with our advisers. We believe they are realistic. LCR shares the view they are realistic. We have taken account of the impact of things, like the cheap airline competition, and so on, and all I can say to you is these are our best realistic forecasts.
233. Have you had the opportunity or can you tell us whether you have had the opportunity to increase prices during this period between now and 2020, are you predicting a price increase?
(Mr Holden) We are not envisaging any significant increase in prices, no.
234. Are you predicting a decrease.
(Mr Holden) No, there will be a modest increase certainly. We envisage it will be modest, not least to remain competitive with the low cost airlines on the destinations that we serve.
235. Can I then say that everything in terms of the financial returns from this projects will be based on those passenger numbers? It has to be an increase in passengers otherwise the whole thing will not stack up.
(Mr Holden) It will be a combination of increased passengers and some modest increase in yield to generate revenues but it will not be predominately one or the other.
236. We have already heard it was uneconomic to extend Eurostar to other parts of the country. Yet, of course, they would have provided a benefit to the London to Paris and Brussels service.
(Sir Richard Mottram) Yes.
237. Has the failure to get those passengers been taken into account? Has any analysis been done on the loss of passenger numbers from places like Glasgow, Manchester, Bristol, wherever, by using low cost airlines instead of using Eurostar?
(Mr Holden) There has been extensive work undertaken by ourselves and various third party bodies, Arthur D Little was mentioned earlier. The volumes of people travelling to the destinations served by Eurostar are not sufficient to justify the running of the trains within the UK. I do not think the volumes of passengers which the airlines carry, which are in much smaller numbers, justify the further use of the trains beyond London at the moment.
(Sir Richard Mottram) Of course, if I can just add a small point, we are not arguing that some people might not choose to use railways to link up with the Channel Tunnel Rail Link and when it is at St Pancras obviously there is an assistance there for people coming from the north. We just think beyond a certain point air is probably going to be more attractive and we are talking about running special services, dedicated services. We are not talking about some people choosing to come from Scotland on a GNER train, let us say, and then transferring over; obviously there is the possibility of that.
(Mr Holden) I think we should also remember that around 12 per cent of our existing UK customers come from regions outside the South East of England. We can expect that to grow as St Pancras is commissioned.
238. To some extent you will cut off the growth by not providing a service for people to go straight through.
(Mr Holden) I do not think so. I think with the Section 2 in St Pancras and its close proximity to King's Cross and Euston we will make it easier for people to connect to Eurostar services and that 12 per cent which we currently have will increase.
239. You mentioned earlier you had 63 per cent of the market in terms of the London to Paris route. How much do you expect to build that to, in percentage terms?
(Mr Holden) I think it is a number I would have to get my experts to confirm. I would expect it to increase significantly with the commissioning of Section 1 and Section 2.