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

Examination of Witnesses (Questions 180 - 199)



  180. Has the same performance calculation been done with some private sector companies I could point out to you, or has it been just London Underground?
  (Mr Poulter) I think that the point for this comparison is that the private sector's bids are based on them taking the risk of performance.

  181. I am coming to risk in a minute. I do not think I can press that point any further. I am not quite sure that we are there. One more question about the seven and a half year review, if I might. Is it correct that, the arbiter which has been referred to, their responsibility is confined to price-setting and has no consumer protection role?
  (Mr Callaghan) Yes, I will happily answer that. The answer is that the consumer protection role that is often taken by regulators in privatised utilities does not have a function here, because the consumer is represented by London Underground, accountable through TfL and the GLA.

  182. But the arbiter, who, presumably, would be crucial in any disputes on the seven and a half year review, has got no consumer protection role, it is simply a matter of price-setting?
  (Mr Callaghan) London Underground does the consumer protection role, and the arbiter does not.

  183. I checked that, but the arbiter does not, that is the answer to the question, yes. My last question is about risk, because, according to the information we have got, there is a £30 million cap on budget overruns for the Infracos; is that correct? The Infracos need a £30 million cap on budget overruns, in addition to all the other elements of risk which the public sector will continue; is that correct?
  (Mr Callaghan) It is not correct, no.

  184. Is there a figure; is there a cap, and, if so, what—
  (Mr Callaghan) Is there a cap on the extent to which the Infracos are protected from budget overruns; no, there is not.

  185. There is not; so, it could be—
  (Mr Callaghan) Unlimited.

  186. That is very helpful. Could I just ask about the risks; is it the case that—well, the National Audit Office identified a number of areas of risk which, according to them, remain unquantified and difficult to quantify, the risk of legal disputes, division of responsibility of the tube network, the risks of loss of flexibility, and, in particular, what caught my eye, risks associated with revenues, safety, legislative and environmental change will not be transferred to the private sector. Could you confirm that; is that correct?
  (Mr Callaghan) The answer is, if I remember those four things correctly, it is true that the risks of those—

  187. Shall I repeat them?
  (Mr Callaghan) Please, do.

  188. The latter ones are risks associated with revenues, safety, legislative and environmental changes will not be transferred to the private sector?
  (Mr Callaghan) May I deal with those one by one. On the question of revenues, it is fairly common, in deals like this, for the private sector to be paid partly on the basis of what the public sector client organisation takes in, in revenues, in our case, it would be revenues from passengers; in this case, we are not asking the Infracos to take risk, we are taking that risk. So, in terms of our customer revenue, they are not taking the risk; clearly, they are taking risk on revenue caused by shortfalls in their own performance. In terms of safety, the Infracos have to comply with ordinary safety legislation, just like any other business does, and they have to accommodate the cost of that within their own figures. If there are specific things that need to be done for railway safety purposes, which are in addition to that which we already do, then it is correct that those new measures are paid for by the public sector.

  189. That is helpful, and I wonder whether, through you, Mrs Dunwoody, we could have a more detailed paper on this, because on the basis of the headings, and I recognise they are headings, and the responses we have had, which, in the time available, I recognise is likely to be curtailed, through no fault of yours, but I certainly would like to have these issues fleshed out a bit? The issue of revenues and fares that you referred to, would the fact that, over the last two years, the fare box revenue has fallen away to £73 million be something that the public sector would carry, under this arrangement?
  (Mr Callaghan) The £73 million is the difference between the revenues that London Underground gets through fares and its costs; so that derives directly from what goes through London Underground's business. So the figure you quote is not, strictly speaking, a revenue number, the revenue number is the number of passengers and the—


  190. But it is the number that will be used for the calculation of the 30 per cent that you have to talk about?
  (Mr Callaghan) The number that is left over is what the London Underground contributes from its operations to funding the—

  191. So, therefore, it is an important number?
  (Mr Callaghan) I agree, it is an important number, but, in terms of the question of the risk that the private sector are taking, that is not part of their risk calculation.

  Chairman: No, I think that is what we realised.

Mr Stevenson

  192. And, very finally, those headings, and if it is not possible to do it today, perhaps if we can have some more detailed information, has there been any value assessment put on these risks that are not going to be transferred to the private sector, both perhaps annually, seven and a half years and over the 30-year period?
  (Mr Poulter) Some such risks have been quantified. I think most of the ones that you are talking about there have been assessed qualitatively, not financially.

  193. Not financially; so, as things stand, subject to the additional information we get, all these risks that will remain in the private sector have not been quantified financially?
  (Mr Poulter) Where possible, they have been, but, as the National Audit Office commented, some of the risks are not capable of quantification.

  194. I am sorry, but I did make the distinction between what the National Audit Office said and others. So it is the second lot, and, to repeat, revenues, safety, legislative and environmental change will not be transferred to the private sector, you have not disputed that statement; what I want to know is, have those risks that will remain in the public sector been quantified financially?
  (Mr Callaghan) Let me deal with two examples. Revenues, yes, it is part of our normal practice to estimate what the range of revenues could be. In terms of legislative risk, that is one, as Tony said, that cannot be quantified because it is impossible to foresee what legislative changes might happen, so this is one you can only deal with when—

Andrew Bennett

  195. Can I pursue you then on the safety one, and the engineering standards, they are not adequate at the moment, are they?
  (Mr Callaghan) They are adequate at the moment, yes.

  196. I thought they had to be actually overhauled in order to make the Public Private Partnership work?
  (Mr Callaghan) That is a point of view which has been expressed, but which is certainly not our judgement.
  (Mr Smith) Chairman, I wonder if we might clarify the position on our engineering and safety standards, for the Committee. Mr Strzelecki probably is best able to do that.
  (Mr Strzelecki) Yes, Mr Bennett. We have a framework of standards which has been developed in the company over the last decade, and we also, where appropriate, comply with national standards. In the framework of the PPP contracts, there are other things that also help to manage safety, like the powers of intervention London Underground have, like our health and safety management system, which is mandated on the infrastructure companies and is part of the safety cases which they are required to have to operate. And the standards are a continually developing set of documents, for a railway which is disparate and old, and we are continually improving them and making them more applicable to the changing railway. So that continues under the PPP.

  197. And have you done all the work that is necessary for that, or is it behind schedule?
  (Mr Strzelecki) No, it is not behind schedule, it is on programme, and, just to emphasise it, it is a continuing process. If I go back just over ten years, the underground did not have standards in the form it now has, this is something that we have developed over the last decade, or so, as part of our safety management arrangements, which are extensive and rigorous, and we will go on continuing to develop that, and it is mandated in the PPP contracts that improvement must continue.

  198. Who pays for it?
  (Mr Strzelecki) It depends. Basically, if London Underground decides, and it has the power to decide, that it needs to introduce a new standard for safety reasons, or any other reason, then the underground pays, because, obviously, it would not be proper to expect the Infraco to have priced for something it did not know about in advance. And if it is a legislative change, because Parliament decides that new regulations are required, new laws are required, then also the underground pays, the public sector pays.

  199. Right. Now all of this needs a fair number of skilled people to do it, does it not?
  (Mr Strzelecki) It does.

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