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

Examination of Witness (Questions 235-259)




  235. Good afternoon. I am very sorry that we have kept you waiting. I wonder if you would be kind enough, well-known star of stage, screen and radio, to tell us who you are?


  (Mr Kiley) Thank you, Madam Chair. My name is Bob Kiley, and I am the Commissioner of Transport for London, and I am glad to be here.

  236. Did you have some remarks you wanted to make, Mr Kiley?
  (Mr Kiley) If I could just take one or two minutes; thank you for the opportunity. I think it would be appropriate for me to say, up front, since we tend to concentrate on the problems of PPP, at least I do, something about what the alternative might look like, in just a moment or two. The one thing that we would do is to assemble a very strong management team for the Underground, which has to be done, in any event, but it would be one concentrating on the engineering and construction and renewal problems. We would do something that I have been concerned about from the moment I got here, which is to do a `stem to stern' assessment of all the physical assets, which has not been done thoroughly to date. On the basis of that, we would develop a five-year plan that would include well-specified projects, you would have their scopes, their time-frames, schedules and their budgets; these would be subject to annual review, but they would be very clear, they would be solidly based on inputs arising from the assessment of the physical plant. Our financial plan, we would hope, and we would certainly like to have Government support for this, otherwise it becomes difficult, to get us access to the capital markets on our own, which will be a much less expensive way to raise the money that will be required over a 20- to 30-year period. And, finally, we would rely very heavily on the private sector to do the capital works and a fair amount of the maintenance activity, but, in our case, we would be seeking to get more companies than are likely to be involved under PPP, keep competition going throughout the life of this project, and the work would correspond to the assessment of the physical plant and the priorities established in the capital plan. Thank you.

  237. In that case, can I ask you whether your assessment of a fixed annual Government subsidy of £623 million is realistic?
  (Mr Kiley) I have seen estimates that range all the way from just over £600 million upwards of £1 billion, and I do not think we know for sure, before the final bids are in, just what PPP is projected to cost, but my view is that we will be able to do the renewal of capital works for less than is now being estimated for PPP.

  238. So, supposing there were some kind of dubiety about the Government's level of funding, would that undermine the success of what you are putting forward?
  (Mr Kiley) In truth, the Government has not yet made a clear, explicit, written commitment, it certainly has not done that for 30 years, and it is difficult, in any event, for one Government to bind another. But I get a little nervous about what happens after seven and a half years, even if the Government makes good on its commitment for the foreseeable future, because there is contract language now that suggests that if the private sector is unable to raise resources in the market-place themselves they will come to Government, which by that point will be my organisation, and make claims on us which we will be obliged to respond to, with or without central government support.

  239. I suspect my colleagues will want to be asking you about that, exactly that point. London Underground have said your proposed management plans are insufficiently detailed to be evaluated. Have you looked to them for any discussion, have you discussed any of this with London Underground?
  (Mr Kiley) We have produced three iterations of this plan, starting last December, almost a year ago, a second, more fully refined plan was produced in April, and yet another one toward the end of the summer; it is on our website, it has been publicly available, it has been distributed to the Underground. But, no, there really has not been an extensive discussion with either the London Underground or the central government.

  240. Whose fault is that? Let us take London Underground first: whose fault is that?
  (Mr Kiley) The London Underground has a clear remit from the Government, and that is to negotiate PPP, so there has been no sign of interest in any alternative, to date.

  241. They have not asked to discuss any of the details in your plan?
  (Mr Kiley) No.

  242. And you have not asked them to discuss them with you?
  (Mr Kiley) It has been in their hands, and perhaps we should be more aggressive in getting them to sit and listen for any length of time to what it is we have to say.

  243. And you made it clear to us that you have tried very hard to speak to the Chancellor of the Exchequer, on the basis that his was the final decision on the plans, and you have not had a response; is that still the situation?
  (Mr Kiley) That is still the situation.

  244. If this PPP fails, how long would it take to put your management plan and your finance into place?
  (Mr Kiley) Let us try to understand what is involved with the PPP and then I will compare what we will try to do, by contrast. The Secretary of State suggested, just over the weekend, that the review of the safety case might not be complete until April, and that conforms with what we have heard as well. There will still be a period of time, even if they reach commercial close with the bidders, where serious discussions of how this will be financed will really commence. It is very hard to know how long that will take, I believe. I believe it will take longer in the current economic climate than one might have anticipated, say, as recently as a year ago. So it would not surprise me if, as the Secretary of State seemed to be suggesting, the actual completion of the entire process and the transfer of the asset to Transport for London could go as late as this coming summer, it could last even longer, depending on what happens in this last round of bidding and contractual negotiations. If the PPP were to end today, we are in a position to move very quickly, and if transfer could be executed very fast, it has been estimated to range anywhere from two months to four months, and I think a lot of that could—

  245. Whose estimate was that?
  (Mr Kiley) This was an estimate that was given to me last summer, at the time that I was talking to the Government about becoming Chair of London Regional Transport. When I suggested that they actually begin the transfer process right then and there, they do not have to pull the final trigger on it, but they could get a lot of the bureaucratic requirements out of the way, in parallel with whatever was happening with respect to PPP; they could still do that, and I think it would be in their interests to do it, but it would take us a matter of months to get organised. It is critical to get good talent into the engineering and construction management oversight areas, and that will probably be the most substantial undertaking that we will have to take. I know of a number of people who would be interested in getting involved with the Underground, if they felt it was manageable; getting the finance together will depend, at least in part, on the Government's willingness to continue a commitment to the renewal and the support of the Underground, and we would hope that we would be able to get to the private finance markets through securitising, for example, a small fraction of ticketing income.

  246. Before I open the questioning to my colleagues, I just want to clear one thing with you. You say you have not been able to meet the Chancellor of the Exchequer; have you talked to any other Treasury Ministers?
  (Mr Kiley) No, we have not. I did speak to—no, only civil servants or political advisers.

Mrs Ellman

  247. To your knowledge, have any of the value for money studies looked at the alternatives?
  (Mr Kiley) The value for money analysis that has been done to date, by the Underground and their advisers, including PricewaterhouseCoopers, has always compared the bids to the public sector comparator that they have created, largely the creation of PwC. That public sector comparator has changed and it has had embellishments added to it over time, so it is never static. Our view is that the public sector comparator is not a fair representation of what an actual public sector performance might be, and we feel that there are real shortcomings in that model; but even with that model our feeling is that the original estimates of savings, done in 1999 by PwC, the same organisation that does the analysis of the comparator itself, where an estimate of £4.5 billion was projected over the life of the franchising process, has just turned out to be dead wrong. And even by our analysis done in April and then in September, most recently in connection with the designation of the preferred bidder on the sub-surface lines, is that there are almost no savings to be realised, even in terms of their own analysis.

  248. Has the public sector comparator looked at improvements in efficiency that might be possible in the public sector?
  (Mr Kiley) I think that assumptions have been made, that lie at the base of the public sector comparator, that suggest that the public sector will be a relatively inefficient way to go. So I do not think they have had a model that, while there are ranges in the model, a model that is based on an aggressive, forward-leaning, well-managed, public sector alternative; and there certainly are those alternatives around the world. Perhaps there has not been any recent experience with one here, and it tends to slant people's view of what ought to be done.

  Chairman: I think you can say that without fear of exaggeration, Mr Kiley.

Mrs Ellman

  249. Could you give us any information about improvements that good management structures can make, from your own experience?
  (Mr Kiley) In my view, if you are very aggressive about creating a plan and specifications for individual projects, that are very precise, and if you put the effort in and take the time to cost out what it is you are planning to do, before you put it out for tender, no matter how large the project or complex the project, your chances of being able to deliver that project, getting a bidder and a contractor who will deliver that project, on budget and on schedule, are greatly enhanced. There are situations in which you can go forward without necessarily finishing design, as long as you are very clear-headed about where it is you are going, and as long as your financial people are constantly on top of the design process so that it does not spin out of control; there are instances when you can do it that way, because you can save time. But those are the key ingredients to successful project management. And you have to have the talent, the human resources, to make this possible. You can have all the money in the world and it can be squandered.

  250. Could you give us any examples of achievements you have been able to make, in that field?
  (Mr Kiley) I have overseen renewal programmes in two cities, Boston and New York, I was in New York for seven years, and, there, we had the opportunity to spend, during the period that I was there, close to $12 billion, and, among other things, we had a subway car fleet, 6,200 cars, carriages, that were in a state of acute disrepair, and over that period of time we were able to replace or refurbish the entire fleet. And, at the start of that road, the then existing fleet, which was in very bad shape to start with, was covered from stem to stern with graffiti, the 485 subway stations in New York were similarly covered, and by the end of that period of time the graffiti was gone. And so I think the car fleet went from being among the worst in the world, in terms of performance as measured by the distance travelled between failures in the car, to what is now, today, one of the most successful car fleets in the world.

Helen Jackson

  251. Those examples are both from the United States. What discussions have you had with either management, personnel, in this country or trade unions that lead you to believe that those examples can be replicated in London, in the UK?
  (Mr Kiley) There is no question that in the London Underground there are managers, employees, workers, who really desperately want a renewal programme to begin. Clearly, one of the reasons why the Underground signed up for PPP was on the belief that this was the only way in which resources were going to come to the system; so I give them A for desire, not such good grades for recognising a lemon when they saw one. But I understand how that desire can get in the way of judgement. I think there are also people in the Underground who are very talented and committed and who would like to stay the course, once the renewal programme begins; there are not nearly enough of them, and there will have to be some additions, especially to project management, if we go that route. If we are into a contract administration mode, which is what would happen with PPP, as I said the last time I appeared before this Committee, it is very difficult to imagine how this will be managed, from either TfL's standpoint or the London Underground's standpoint, because this is such a complex, convoluted regime that there are all kinds of odd-sounding titles that will be involved in this, fault attributors, infrastructure controllers, it is almost Orwellian. And I have to confess that gearing up for that, I think, is going to be extraordinarily expensive, very distracting from the business of actually running the trains and doing the programme; and it is one of the reasons why this is a dangerous scheme, because the contract regime is so difficult, I think it just gets in the way of rational management. You asked about the unions. I have spoken to them on several occasions, they are very eager to get on with it. I realise that industrial relations leave almost everything to be desired right now in the Underground, and I think this frustration and this sense of drift is as much the cause of that as any particular grievance.

Miss McIntosh

  252. Mr Kiley, clearly, you are not wedded to the concept of the PPP.
  (Mr Kiley) Yes, that is clear.

  253. If it were to go ahead, in the form that is proposed, and you do not modify your view, do you envisage tensions between yourself, the contractors and London Underground?
  (Mr Kiley) I think that any sensible, rational management of PPP, if that is what it comes down to, will have to continue to look very hard at the contractual arrangements; they are very, very, very inadequate, they do not lend themselves to management. And I think any responsible management, with the public interest keenly in mind, would be pressing very hard on the contractors to make changes in the contracts that will lend itself to sound management, and I think that will become evident in very short order. That is not a desirable outcome, but, if we get PPP in roughly its current shape, that is almost sure to happen.

  254. Can I ask you about the contractual arrangements. If, during the life of a contract, one of the contracting companies goes bust, what would be the potential cost, first of all, to you, at Transport for London, and, secondly, to the taxpayer?
  (Mr Kiley) That is a good question. I would rather not just pull a number out of the air and give it to you. I can think about that a little and get back to you with a number. But even when a consortium goes bust, or gets into financial trouble, or wants, for whatever set of reasons, to disengage, there is a protracted process to which we will all go while a new company, or consortium, is found to take its place. So it is not as if a company goes down, unless there is some huge safety challenge that is presented, that the public sector steps right in and simply takes over the operation, that is not the way it works; in fact, it is much more difficult to do what happened to Railtrack at the beginning of this month, with respect to PPP, it will not work that way. There is no public interest termination right built into this contract, that right basically has gone.

  255. So could I just press you on this point. Because we have had Railtrack forced into administration, and we have seen the consequences for the performance by the existing rail operators that that has brought about. In your view, this gap, is it going to have grave consequences for the delivery and for any potential investment under a contractual arrangement?
  (Mr Kiley) When you say `this gap'?

  256. You say that there is no public sector. . .
  (Mr Kiley) I think it is poor public policy, for at least two reasons. One is that you always have to make some allowance in a contract, especially one that lasts for 30 years, for something going wrong, and the ultimate thing going wrong is a company that is unable to perform for some reason. You should have the ability to terminate the relationship; there will be some costs associated with the termination, to be sure, and you have to be fair in that process, but that is missing. But, secondly, and related to the first reason, that is the ultimate sanction, it is a very important pressure point, as well as a heavy weapon, it is one that you have to have in your armoury, and, if you do not have it, contractors, at some level or another, are not going to take you as seriously as they would if you did have it.

  257. You said that you would like to have the direct relationship access to capital markets; if that were to happen, in your view, do you think it would be easier or more difficult to raise the capital required, after September 11 and after Railtrack has gone into administration?
  (Mr Kiley) We certainly are in more parlous economic times than when this procurement began, almost four years ago. It is, I think, hard to assess what the longer-term impact of September 11 might be, it is not going to be particularly positive, but in this particular instance it may not necessarily be negative. I feel that if you are into the capital markets and you have something truly worth selling, in this case a security, let us say, based on ticketing income to the Underground, and if you have support from a Government entity for that, in this case GLA, then this will be a very inexpensive way to raise capital and there will be purchasers of these securities. This is not an unusual way to get to the capital markets for organisations like Transport for London, or the London Underground, it is done all the time around the world, and this is really the way, essentially, this was the essence of how the New York City subway system and commuter rail system was rebuilt.

Chris Grayling

  258. Can I start off by asking you, Mr Kiley, clearly, you would like to take direct responsibility for the modernisation programme, but we saw with the Jubilee Line Extension that London Underground proved very inadequate at managing a project and controlling its costs on that scale. Why would we be confident that Transport for London could deliver effective project management in a way that London Underground was not able to do over the Jubilee Line?
  (Mr Kiley) When I made my comments about the alternative, I was very careful to say that you had to have a plan, with projects that were very clearly specified, scopes clear, budgets clear, well costed, and that you had to have the certainty of available resources. And I think most of those elements were missing, especially the certainty about resources, which was not a problem created by the London Underground. That uncertainty, created by the Government, and the unpredictability of funding on an annual basis, with gaps existing, there was an 18-month period in which no resources were flowing, as people searched around in the private sector for resources, it is very difficult, if not impossible, to manage a project under those circumstances. So I do not want to mislead anyone here. If you do not get that commitment, over the long run, of financial resources, and if we are not all prepared to adhere to that commitment, as long as things are going well, then we will not succeed, and it might be better not to even try, because you end up with unfortunate outcomes like the Jubilee Line, which has simply not come close to delivering what it hoped to, by way of car throughput during the rush hours.

  259. When we have been discussing the problems facing the national rail network, one of the issues that has been raised is the lack of an asset register, which has had a knock-on effect in the cost overruns on the West Coast Mainline, it has proved to be much more expensive than expected. Is there, to the best of your knowledge, an adequate and up-to-date register of London Underground's assets which will enable either PPP contractors or indeed yourselves to create a genuine, true assessment of what the cost of modernisation will be?
  (Mr Kiley) I think that is one of the most serious problems permeating the entire procurement, that while there is some information about the condition of the assets it is very imperfect and incomplete. And were we to rewind the clock and start again, whether it was PPP or any other major effort to renew the Underground, the very first step that should have been taken was, as I mentioned earlier, the thorough-going assessment of the needs of the Underground, so that every part of the infrastructure to be potentially renewed would be known, and you would actually be able to put a cost estimate, which would not be the final cost estimate, and you would add that up and you would have the total universe of need. Based on that knowledge, you then would determine what are your priorities, what do you want to get done in the first period of time, let us say it is somewhere between five and eight years; out of that comes a plan, and you do more refinement of the costs, and there is far more knowledge up front than now exists in PPP, the contractors are to be, basically, rewarded or penalised, on the basis of what I would call once removed outcomes, is the service ultimately reliable, and ambience of stations and inside cars. And, while those are desirable performance outcomes, it has to begin with a certain knowledge of where it is you are going with the physical improvement; and that is missing from PPP, and the asset register will be developed over time. There should be an asset register now available that is complete, and there is not.

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