Examination of Witnesses (Questions 20
WEDNESDAY 21 NOVEMBER 2001
20. We will talk to you about the detail of
them; but you are really saying it is complicated, there are a
lot of factors, but `we have already looked at these factors and
we can assess them accurately'?
(Mr Poulter) Yes.
21. Mr Smith, in case I should be misunderstood,
you will give me a little note on how much money you intend to
use to control this, will you not?
(Mr Smith) Certainly, Chairman.
Chairman: Thank you very much.
22. Mr Smith, you said financed by the private
sector over 30 years; in your opinion, will it be easier or harder
to raise money in the private sector, after Railtrack was put
into administration, for your PPP?
(Mr Smith) I think that the Railtrack position is
very different; and, while we are told that the City has become
more nervous, as a consequence of the Railtrack decision, we do
know that the banks are still engaged with our bidders, and with
us, in discussing this particular proposition. So it does seem
to us that the thing is bankable and can be done.
23. And what do you think the extra risk factor
is going to be, in the assessment by the banks and financial institutions,
to want to submit to the PPP?
(Mr Smith) I think that they will judge this on the
basis of the amount of risk that is around and whether, if anything
were to happen to this deal, they would be able to get their money
out. My colleagues may want to comment on this a little further.
24. Would they not have done that kind of estimation
anyway, or are you assuming that they would have been so content,
they were convinced that the taxpayer was always going to underwrite
the deal, that they would not even have bothered to assess that
risk? I only ask?
(Mr Smith) I do believe, Chairman, that they will
have made that risk at each stage.
25. I rather think they might, yes. Who else;
Mr Callaghan was going to comment?
(Mr Callaghan) Thank you, Chairman. My comment is,
to back up what Derek was saying, I think the Public Private Partnership
is not the same as Railtrack, and the banks are quite happy to
evaluate this on its own merits, which are quite distinct from
the proposition that they were lending to with Railtrack, and
that has been our experience.
26. And Mr Poulter?
(Mr Poulter) I would agree with that.
27. So, your potential investors, you would
not see any threat from the Secretary of State assuming powers
of direction over your PPP, in a similar way to he assumed powers
over the administration of Railtrack?
(Mr Smith) As was emphasised, this is a different
arrangement, and the banks, undoubtedly, will want to be clear
about the seven and a half year review periods that are inside
this deal, and about any matters that there are around termination,
and there are several bases on which this contract might or might
not be terminated, but they are built into the contract, and therefore
28. Just to be absolutely clear, what is the
(Mr Smith) The fundamental difference is that the
Railtrack arrangements were in a national railway system which
was privatised completely; here we have got a public sector organisation
delivering the train and station services to London, managing
the safety and being responsible for it, and then managing the
contract with the private sector. The contract that we have with
the private sector is therefore very different, and the private
sector is delivering infrastructure services to the public sector
29. Why is no other country operating a comparable
underground system, gone down this type of route?
(Mr Smith) There are very different funding systems
in different countries; there are very few, for example, that
are funded by the fare box to the extent that the London system
happens to be. In other countries, there appears to be a different
sort of commitment to funding public infrastructure; that appears
not to have been the case in this country and in relation to the
underground. Which is why, four years ago, this matter was examined
very carefully and a different way forward was sought.
30. Would it not be the case that other countries
that have got significant urban underground systems have also
looked at the public sector costs and this type of model but have
chosen to stay with public sector administration?
(Mr Smith) I think Mr Poulter may be able to help
you better with an answer to this question, since he does international
(Mr Poulter) I am not aware of any other government
or metropolitan authority which has looked at a model like this
and rejected it. There are organisations of that nature that are
looking at it now.
(Mr Poulter) I am aware of one, very recently, in
Poland, for example, but there are others.
32. (Just that, ?) in Poland? Are you sure that
no other country with an underground system has considered privatising
it into a Public Private Partnership type of operation and decided
not to do that; is that what you are saying?
(Mr Poulter) I cannot say I am sure, because
33. But you are the international expert?
(Mr Poulter) I do a lot of work in this area, I cannot
say I am familiar with every country.
34. Can I follow it up then and ask you, or
Mr Smith, whichever of you wants to answer, what it is, what specific
factors it is, that has persuaded you that the management scheme
proposed by Transport for London will be poorer value for money
than the PPP, which you are backing?
(Mr Smith) My first response would be to say that
it is impossible to assess the value for money of the proposals
of the Transport for London scheme, because it is insufficiently
detailed, it is a fairly generalised proposal. It is based upon
the idea that the money can be raised through bonds, and, of course,
money for the Public Private Partnership will be raised by the
private sector through bonds as well, but applied to the rail
network in a different way. We will, of course, have to apply
as many tests as we can at the stage of judging value for money,
to satisfy ourselves that, in fact, this offers better value than
other options. But, to answer your specific question, we are unable
to assess the TfL scheme
35. I want, therefore, to bring you to the National
Audit Office, because they have said that what it is important
to understand is that they need some supplementary analysis which
would include "factors which are either difficult or impossible
to quantify in financial terms, and which could impact directly
on the value of the different options." That is why they
are saying this is difficult; do you agree with that?
(Mr Smith) Yes, we do. The National Audit Office came
to our Board and gave a detailed presentation on their thinking,
which we thought was helpful.
36. You thought it was helpful, and you agree
with it, but you rather gave the impression that, nevertheless,
you thought you had sufficient detail to make an assessment?
(Mr Smith) We will be able to make an assessment,
and, of course, that assessment will be audited.
Helen Jackson: But you are getting near the
end of the process, are you not? If making the assessment is still
in the future, I do not know but I may be dreaming, but I thought
that the public generally thought that London Underground had
made their assessment and made their decision.
37. And how have you dealt with this business
of subjective judgement?
(Mr Smith) Chairman, first of all, we are unable to
make the final assessment of value for money until such time as
we receive the final bids.
38. But you are confident that you will be able
to come up with accurate assessments, even though the subjective
nature of the value for money assessment under this is not always
clear enough to decide conclusively on the position of the contractual
(Mr Smith) Chairman, yes, we can; and, again, I would
like to ask Mr Poulter to help the Committee with the detail of
39. You are very confident, Mr Poulter, that
in spite of what the National Audit Office says, in spite of what
Ernst & Young are worried about, you are absolutely certain
that your conclusions are going to be based on an assessment of
a range of factors which will not be subjective; is that what
you are telling us?
(Mr Poulter) What I was saying was that we are confident
we will be able to do a good assessment.