Examination of Witnesses (Questions 120
WEDNESDAY 21 NOVEMBER 2001
120. But, a year ago, just over a year ago,
the then Chief Executive of London Underground told the Committee
that continued Government subsidy would be modest, and, subsequent
to that, that figure was estimated to be between £95 million
and £175 million a year. The equivalent assessment of that
now would bring that up to £380 million a year. Are you saying
these figures are not known to you?
(Mr Smith) There are figures that are known to us,
but until we have assessed the final bids we cannot be sure about
the actual numbers.
121. At what stage will you make a judgement
about what these numbers are?
(Mr Smith) At the point when we have completed the
negotiations of the contract with the bidders and received their
bids and that we have been able to assess their bids, to cost
them and to analyse them in detail.
122. And will you at any point consider whether
the amount of public subsidy thought to be right at that point
is likely to be the correct figure, or as something so unclear
that it is likely to rise? Would that be part of the consideration?
(Mr Smith) We will certainly assess, as I mentioned,
whether raising the money this way is value, compared with other
ways of raising the money, and we will identify what figure is
needed in terms of subsidy to deliver this, if we regard it as
being overall value for money. It is then a matter for Government
to decide as to the extent of subsidy that it is prepared to commit
to the underground on a continuing basis.
123. Would you not be considering what subsidy
would be required to produce the same level of service through
some other method of raising money; is that not relevant to you?
(Mr Smith) It is only relevant in that we are comparing,
for value purposes, the different ways of raising the money.
124. And value, to you, does not include amounts
of public subsidy and whether the amounts of subsidy relate to
quality of service for the passenger, who hardly seems to get
mentioned in all of that?
(Mr Smith) That is certainly a good definition of
125. Is it one you use?
(Mr Smith) We certainly are very cognisant of the
126. But are you using that?
(Mr Smith) That we deploy public money all the time.
127. But are you using that measure of value?
(Mr Smith) It is one measure of value, but we also
use comparative measures of value.
128. But is that measure of value the best use
of public subsidy, in terms of the passengers' interest, a measure
of public value that you are using, you are deploying, in the
assessment that you are making?
(Mr Smith) If the assessment we make is that the Public
Private Partnership is better value for money than the other forms
of financing the investment in the Underground then it will be
a better use of the public subsidy.
129. But is the question of the use of public
subsidy, in itself, part of your considerations?
(Mr Smith) Most certainly. We have to recognise that
we are in the public sector and we depend upon a good proportion
for our operations and investment for public funding.
(Mr Poulter) Could I just add a brief point. The public
sector comparator and the bids have costs associated with them;
those are compared, as are the levels of public subsidy, that
they would both imply. So, very clearly, they are both part of
the decision on value for money, and on whether the Public Private
Partnership should go ahead.
130. Can I just say, Mr Smith, earlier you talked
of £30 billion over the next 30 years, something in that
order; what proportion of that is public and what proportion of
that is private?
(Mr Smith) That is considered as the amount that would
be raised by the private sector, over that period, for the purpose
of investment in the underground network, and the assumption was
£13 billion over 15 years.
131. That excludes any public money; so what
do you guesstimate is the likely investment by the public sector
over that same period?
(Mr Smith) The public money comes in two ways; directly
from the public, because they pay their fares, and, of course,
through the taxpayer, through subsidy. That will contribute towards
the infrastructure service charge that is paid to the private
sector companies who are investing; that charge is fixed, in accordance
with the way in which they are performing, in relation to the
132. So what is the guesstimate of that amount
of money, what is the figure for the money?
(Mr Smith) Until we receive the bids, it is very difficult
133. But you know, over the last year, what
that figure would be. What was it over the last year; public money
was put into the system by virtue of fares, or by virtue of subsidy?
(Mr Smith) We had £520 million for investment
in the underground, from the public purse, for this year.
134. So if that is projected over 30 years then
we are talking £15 billion?
(Mr Smith) Yes; but I ventured that it was £13
billion over 15 years.
135. Over 15 years?
(Mr Smith) Over 15 years.
136. I have got this wee problem, I am finding
it difficult to follow. What do you expect to make as savings
by the use of the Partnership?
(Mr Smith) We do expect that, because the flow of
investment will be consistent and predictable, the private sector
infrastructure companies will be able to make efficiencies in
the delivery of projects. It is, I am afraid, the truth, under
the publicly-funded model that we have at the moment, that we
are uncertain, year on year, precisely how much money we will
receive, and so, in the past, we have started projects and we
have stopped them, which is profound inefficiency, we have designed
projects and then not gone through with them.
137. What happens if a company that has got
this project goes bust, in the middle of the project; surely,
in these circumstances, there are equally the same difficulties,
faced by you, in that circumstance, as it would be if it were
in the public sector? And, given that the two sort of run parallel,
in terms of when the economy is strong the companies are strong,
one presumes that that is just as much of a problem as what you
face at present?
(Mr Smith) In the Public Private Partnership structure,
the infrastructure companies would be working solely for London
Underground, so unless they performed spectacularly badly they
would not go bust, because the Underground will not go bust; if
they perform very badly, potentially, they might. The virtuous
circle here is, if the infrastructure company performs well
138. So it is a no-risk investment?
(Mr Smith) No, there is a risk; they have got to perform
139. But if they go down, if a company of some
size goes down, then surely that section of the responsibility
goes down, and therefore you have got a problem? And if the Government
are not in a position to be able to give you additional resources
then that is that aspect of the underground still?
(Mr Smith) Mr Callaghan, if he may, would like to
clarify this picture, but I think the risks sit where appropriate,
and he can explain.