Examination of Witnesses (Questions 100
WEDNESDAY 21 NOVEMBER 2001
100. How much has been spent on consultants
up to now?
(Mr Smith) In the region of £80 million has been
spent on consultancy, across the board. This may seem a lot of
money, but I think we must remember that the total value of this
deal, in terms of finance, over 15 years, is conservatively estimated
at £13 billion; so the expenditure is significantly less
than 1 per cent.
101. How can there be any realistic assessment
of value for money, when the scheme is being looked at over 30
years yet the bidders are only submitting firm prices for seven
and a half years?
(Mr Smith) If I may, Chairman, I think, again, it
would be helpful if Mr Poulter answered that question.
(Mr Poulter) The bids are assessed over both the seven
and a half year and the 30-year periods.
102. So they put the prices in on a 30-year
(Mr Poulter) I think Mrs Ellman was correct; they
put their prices in over a 30-year basis, the first seven and
a half years are firm, because there is a review after seven and
a half years, the years thereafter are not firm, and we are therefore
careful to do the assessment over seven and a half years and over
103. So how then can you make a proper assessment
of value for money, if it is over a period where you do not know
what the prices are going to be? What are we paying you for, if
you do not know what you are dealing with?
(Mr Poulter) That is one of the reasons why there
is an assessment over both periods. So the financial assessment
over seven and a half years is completely firm, because the prices
are fixed; over 30 years, you can look at it taking account of
the bids that have been put in, some elements of which are fixed
and some of which are not, but you are also looking at the wider
factors which we were discussing briefly earlier.
104. And who is going to make the judgement
on what does constitute value for money for the public?
(Mr Poulter) London Underground, subject to the approval
of the Government.
105. Could you explain how that is going to
(Mr Smith) Yes. The actual decision will be taken
by the London Regional Transport Board, to which London Underground
is accountable. That decision will be taken following detailed
assessments of value for money, along the lines that Mr Poulter
106. The seven and a half years you can do because
the prices are firm; after that we are into the realm of conjecture?
(Mr Smith) We know some things about the next 30 years,
for the next 22½ years, and we do not know others; and those
factors will be taken into account by the Board. And, of course,
as we have said, that Board's conclusions will be scrutinised
107. Do you think that the complexity and uncertainty
that you have indicated is likely to inspire public confidence?
(Mr Smith) In my view, public confidence will be inspired
if we continue to operate a safe railway and that the service
108. Irrespective of the amount of money spent?
(Mr Smith) The passengers tell us that their interest
is in getting a better train service, cleaner stations, more helpful
staff, those sorts of things.
109. And does not your value for money assessment
look at the comparable costs of doing that? And if all those improvements
could be achieved in the public sector without PPP, might that
not be a better solution than engaging the massive additional
funding, the massive additional bills for consultants still unquantified,
would that not be part of the assessment?
(Mr Smith) The evidence of the last four decades suggests
to us that the flow of money in the public sector is uncertain;
which means that some of the difficulties that we have faced over
time are that we have been unable efficiently to plan work, particularly
when we have not known at the beginning of any financial year
whether we are going to receive funding or not. We have not received
sufficient funding, which is why we have this huge backlog, and
the assets on this enormous network are decaying; and so, to us,
it does seem that, while there are many attractions in a publicly-funded
rail network in Britain, we cannot have one which brings it up
to the standard of modernisation and performance which a city
such as London requires.
110. Are you aware that one of the major failings
in the Railtrack situation, in relation to the national rail system,
is that private train operators, such as Virgin, were, and indeed
are, contemplating suing the infrastructure owner for hundreds
of millions of pounds, because of that private owner's failure
to comply with the contract and bring improvements? And, surely,
that is a failure for the privatised system. So you are telling
me that you believe a privatised system is inevitably better;
surely, that evidence just flies in the face of that?
(Mr Smith) I am not telling you that a privatised
system is better. I am saying that the system we have developed
is very different from that which is there on the national railway.
What I can say is that we consider that we have a structure within
our performance-based contract which incentivises the infrastructure
companies to provide services to the public sector London Underground,
which will improve the performance of the assets, and that improving
the performance of the assets will improve the performance of
the service to London.
111. What have you built in your estimates for
compensation payments, should the track owner fail to deliver
what the private operator wants, or, indeed, the other way round?
(Mr Smith) We must be clear, the operator, in this
case, with the PPP, is a public sector operator, London Underground
Limited will remain the operator of the trains and the stations,
and it will be, ultimately, democratically accountable to the
Mayor, when the transfer to the GLA takes place.
112. So are you saying there is no possibility
of any operator or owner of any part of London Underground being
in a situation where they are seeking compensation?
(Mr Smith) The operator is in the public sector. What
happens is that the infrastructure companies, who are seeking
to improve the assets, are incentivised on the basis of the level
of performance they achieve.
113. Incentivise is a word that means what,
they are going to be offered very considerable bonuses as long
as they are not as bad as we expect?
(Mr Smith) I do not believe that is so, Chairman.
They make profit if they perform well, and they suffer loss if
they perform badly.
114. But suppose they blame someone for failure
to perform; Virgin blame Railtrack?
(Mr Smith) We are back here, really, to fault attribution.
Which is why we give such attention to it.
115. What assessment have you made for financial
penalties in relation to fault attribution?
(Mr Callaghan) Our structure is very different from
the national railway structure, it is not a privatisation. The
way in which the private sector is rewarded for what it does is
predetermined in the contract, and there is not the same opportunity
as there might be in other structures for the sorts of claims
that you described. I am completely confident that that situation
is not going to arise in our structure.
116. There is no opportunity, or a different
kind of opportunity?
(Mr Callaghan) There is no opportunity for one private
sector part of the structure to claim against another part.
117. What is the ongoing requirement for public
subsidy for this system?
(Mr Smith) That is very hard to assess, until such
time as the final bids are in; we have calculated, therefore,
the value for money and affordability of this. In my mind, there
will undoubtedly be subsidy.
118. Forgive me; how can you assess value for
money if you do not know what the ongoing public subsidy requirement
(Mr Smith) We distinguish between assessing the value
for money of doing this compared with other forms of raising finance,
and then we have to judge the affordability of doing this within
the policy requirements established by Government.
119. And is the question of the amount of public
subsidy required not a relevant issue?
(Mr Smith) It is, most certainly, a relevant issue,
but, in many ways, it is a matter for Government. There is a social
choice here between the amount of money for an underground railway
of this kind that is raised from the fare box and the amount that
is funded by subsidy; in other countries, a far higher proportion
is provided by subsidy, generally speaking, than in this country.