Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. Would you answer Mr Grayling's first question then; is it true that the Treasury came back, having seen the original assessments, and asked for a reassessment?
  (Mr Smith) No, the Treasury did not come back and ask for a reassessment; we have to make certain assumptions about the fact as to how much of the public purse would stand the cost of investment in the early years.

Chris Grayling

  161. But you must, surely, have had some governmental context for doing that; it is inconceivable that there was no dialogue taking place through the DTLR into the Treasury, in some shape or form?
  (Mr Smith) We certainly have regular contact with the DTLR, and we have discussions with them.

  162. So was there nothing to suggest that the Treasury wanted you to push the expensive stuff into the later years of the arrangements?
  (Mr Smith) We have discussions with officials about what we can and cannot do around this, and we have to draw conclusions, in the end, about what the public purse will or will not do. It would be very nice, from our point of view, to be able to spend billions of pounds in the first five or six years of the PPP, as long as we could also operate the railway at the same time. Realistically, though, there has to be an amount that we judge can go into investment in the underground network.

  163. Let me ask you the question in a different way then. If you take the total amount that is being spent on a PPP exercise, and if it was entirely within London Underground's discretion as to when that money was spent, would it be possible, whilst operating the current network, for you to speed up the modernisation work?
  (Mr Smith) To an extent, yes. The trail-off would be, and you have raised the point yourself, just how much of the network could reasonably be worked upon and closed down while still not impairing the service too much.

  164. But if you are saying the answer is to, a certain extent, yes, by definition, therefore, some of the expenditure must be being pushed to a later date than would otherwise be necessary?
  (Mr Smith) Than would otherwise be ideal, certainly.


  165. So the answer, in the first place, was, yes, Mr Grayling was right.
  (Mr Smith) Not exactly.

Chris Grayling

  166. Given the process you have gone through to reach the point you are at now, a number of statements have been made by Government over the years as to when we can expect improvements to take place; most recently, there was a long list of examples of when new trains would be in place, when modernisation would be in place. Is that timetable still good, or has it slipped?
  (Mr Smith) That is the timetable to which we are working.

  167. Is there any reason to believe that timetable is under threat?
  (Mr Smith) It will depend very much upon the bids as they come in. If there are bids that would suggest that the private sector want to front-load, to a degree which is intolerable, the improvement in investment in the underground, then we would have to look at that; so that would be considered as part of the assessment of the value of the bids and whether they are going to give us what we want.

  168. Lastly, can I ask you, what has happened with Railtrack clearly has a knock-on effect in terms of perceptions of financing of private sector projects. Based on what you know so far, is there any reason to believe that the returns that will be demanded for financing for the bidding companies, and given the fact that the bidding companies are clearly not raising the money off their balance sheet, they are raising it through debt finance, is there any reason to believe that the rates of return that they will have to offer to the providers of that debt have changed?
  (Mr Smith) If I may, I will ask Mr Poulter to answer that question, as he has been engaging with our bankers.
  (Mr Poulter) I do not think there is any reason to think that. Most of the money, as you say, will be provided in the debt markets, and I see no sign that for well-structured Public Private Partnerships or PFIs there will be an increase in the cost of finance.

  169. Is there a gap between, and I appreciate this is commercially sensitive, in terms of actual figures, but is there any gap, that you are aware of, still, between the demands on the table, the cash on the table, from the private sector, as part of this process, and what the Treasury ultimately says it is willing to finance?
  (Mr Smith) We will only know that when we have the final bids.

Mr Stevenson

  170. If the Infracos operate in an efficient and economic manner, what is the rate of return that they are expecting over the contract period?
  (Mr Callaghan) The answer is, the returns to the shareholders are in the mid teens, about 17 per cent would be right, possibly.

  171. It has been suggested, as you probably know, a report in the press, the returns could be as high as 35 per cent; do you dismiss that?
  (Mr Callaghan) I am aware that they are reported, but that is not a correct figure, no.

  172. Mid teens. Could I ask about the Deloitte and Touche report, because the National Audit Office report was referred to earlier, and I think you said, or Mr Poulter said, "Ah, but that was last year;" of course, this report was July this year. And although the report does say that perhaps they needed more time, and so on, to go into it, it does raise some very interesting issues. You talked about the prices for the first seven and a half year period being, I think the word you used, firm, and then we heard what you said about the subsequent 22½ years; but in the Deloitte and Touche report it says that you, that is, London Underground, have chosen not to use the first seven and a half year period for value for money comparison, because of the difficulties of validly comparing the net present value of the bids and the public sector comparator at this point. It goes on to say that, in their opinion, the draft public sector comparator, which has been provided for the seven and a half year period, shows the bids to be more expensive than the public sector comparator, with the exception of one bid. What is your response to that finding?
  (Mr Poulter) Those comments are wrong. We have made available, and it is published, a commentary on that report, which, if the Committee has not seen, I would be happy to send to you.

  173. So they are just plain wrong; you dismiss them?
  (Mr Poulter) I do not dismiss them; we considered them. I am just indicating to you—they are wrong.

  174. They are just plain wrong. Well, if they are wrong, what do you consider to be right, in this context, in the context of this issue?
  (Mr Poulter) The value for money comparison is made over seven and a half years and over 30 years, and the conclusion that London Underground reached on assessing the bids was that there were enough good bids to proceed with on those bases.

  175. Could I turn to another issue, from the Deloitte and Touche report, which I thought was very interesting, the suggestion in the report that there has been highly material adjustments to the public sector comparator that are judgmental, volatile or statistically simplistic. It gives a couple of examples, that adjustments have been made to the base costs, and these adjustments amount, in aggregate, to some £2.5 billion. Is that figure correct?
  (Mr Poulter) I cannot answer whether that figure is correct. I will happily come back to you on it.[1]

  176. Perhaps I can go on to my next question, you may have to get back to us then. It goes on to say, one of the largest adjustments, amounting to £1.17 billion, related to performance, and this represents an expected failure of London Underground Limited, under the public sector comparator assumptions, to meet the performance requirements of the projects. On what sort of basis has that assumption been made; it is actually saying that, by definition, the private sector is going to be more efficient than London Underground?
  (Mr Poulter) The factor which you are referring to, Mr Stevenson, is the assessment of the possibility, or probability, of the public sector not meeting performance requirements.

  177. Which is it, Mr Poulter, possibility or probability?
  (Mr Poulter) There is no answer to that question. It is a probability for which the percentage is has to be assessed. And, if I may, the report that I referred to, and if the Committee has not seen it we will provide it this evening, refers to all these issues, and I believe responds fully to the comments which you are quoting from.

  178. Yes, I am grateful for that. But I would still like to press, if I might, and understand a little clearer, if I might, just what is the basis for this assumption, this probable or possible assumption, you are not sure which, that the private sector will perform, to the tune of nearly £2 billion, better than the public sector; on what basis is that assumption made?
  (Mr Poulter) The assumption is what will happen in the public sector; what will happen in the private sector is shown by what they commit to in their bids.

  179. So, I think I am beginning to understand, built into this base cost and comparator is an assumption that London Underground will perform, without any question, will perform, up to £2 billion less than the private sector?
  (Mr Poulter) The assumption, for which a range of figures are considered in the comparator, is that, as has been shown on a large range of major projects, they will not always be delivered fully and to time, and that that will affect performance.

1   Note by witness: I think Mr Stevenson was referring to the figure of £2,519 million referred to in paragraph 3.3.3 of the Deloitte & Touche report. This refers correctly to an increase in the net present value of the PSC. We commented on it in paragraph 15 of our report, Commentary on Deloitte & Touche Report-A paper by PricewaterhouseCoopers (Redacted version) 24 August 2001, and related points are made in the paragraphs which follow. Back

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