Examination of Witness (Questions 260-279)|
WEDNESDAY 28 NOVEMBER 2001
260. Is it your view then that the London Underground
modernisation project, whether it is being done through PPP or
being done through another financing route, risks the same kind
of unexpected and substantial cost overruns that we have seen
on the West Coast Mainline?
(Mr Kiley) If you do not know where you are at the
start of the project, if you are not aware of the condition of
the road ahead, you are almost certain to blow it. It is in the
nature of human beings to low-ball it, at the start, because we
are all in a political environment, and then costs usually go
in one direction; if you have been lax on that front and if you
do not have good information, they rise, and the West Coast Mainline
is a good example of that. It is just best to do it right at the
start and to keep it right, yet stay with this development of
knowledge within the asset register; the needs assessment is an
ongoing process. As I said when I made my opening statement, we
will do that, it will take some time, but some things can go forward.
For instance, you can begin the process of ordering new rolling-stock
and beginning a tender for refurbishing of existing rolling-stock,
because that is more knowable; it will take some time to be actually
clear about that, than much of the rest of the physical plant,
so there will be early activity. But this assessment would have
to be done on an urgent basis, you would have to be prepared to
spend some real resources on it, and I cannot tell you for sure
how long it will take, it will take as long as it takes to finish
it; but, certainly, it should be able to be done within 18 months.
Chairman: It sounds altogether too logical for
British railways, Mr Kiley.
261. When is it that your organisation takes
complete control of London Underground, if at all?
(Mr Kiley) That is a subject for the National Lottery,
because I do not think anyone can answer the question really,
because we do not get control of it until this procurement is
finished, one way or the other, and then there is a period of
time where the transfer occurs. So it could be anywhere from,
if you take Mr Byers' estimate of April, before the safety case
was done, if you use that as a possible in-point, which I am not
at all certain about, and you add to that three or four months
to transfer the Underground, which was the estimate I heard last
July, that takes you well into the summer. So it could be as late
as the end of next year, if things go wrong.
262. Do you think that is affecting the performance
of London Underground today?
(Mr Kiley) Yes, I do.
263. What would you want to see happen, to avoid
(Mr Kiley) I would like the London Underground to
be transferred to us immediately and we will get on with it; it
is exactly the same thing that I said to the Prime Minister in
April when he asked me the same question.
264. When you were in New York and Boston, did
you use consultants?
(Mr Kiley) We used contractors, consultants, we had
a whole variety of private sector companies involved in the rebuilding
process; in fact, we relied heavily on them, probably 90 per cent
of all the activity was carried out by private contractors.
265. But, specifically, here, in London Underground,
in looking at the evidence that we are receiving and on the basis
of a fairly sizeable amount of work being undertaken, we hear
the costs of using consultants?
(Mr Kiley) Oh, you mean the current costs of using
266. Yes; and also the fact that they seem to
use these consultants, when I would imagine it would be by far
better, if you were moving into the future, to have expertise
that you are looking for from the likes of consultants in-house?
(Mr Kiley) If you do not have internal expertise and
rely on it to the maximum extent possible, you are going to run
into serious troubles down the road. And I know that an enormous
amount of research has been expended on consultants and legal
resources here; it is a procurement that has taken almost four
years, but that is, what, £50 million a year, that is a large
price tag. Because of the role that we have played, of trying
to argue that there is another way to go than to keep PPP, we
have spent close to £2 million ourselves on the total resources
and trying to keep up with all of this; so that is money, all
of this is money, that could usefully have been put into the physical
plant, and that is unfortunate.
267. But, in specific terms, if you take the
Government's appointment of Ernst & Young to carry out a value
for money case, to satisfy the request for an independent assessment
of the PPP, was that money well spent?
(Mr Kiley) Let me answer that in two ways. One is
that this has been advertised as an independent review of the
value for money exercise, and I do not really think that is the
way to go. The National Audit Office was called into this, thanks
in no small part to the concern of this Committee, just about
a year ago; it reached the conclusion that the value for money
case had not been made at that point, it made a series of recommendations,
they have kept track of this. I think, if we were to scour the
countryside in the UK for the one independent body left, it would
be the National Audit Office, and I hope there will be the opportunity
for them, before contracts are signed, to get into it, do its
analysis, reach its conclusions, make them public, make them public
before the contracts are signed. Ernst & Young, a fine accounting
firm, is, I think, not as independent as the National Audit Office
would be. After all, Ernst & Young has been brought into play
by the Department, with respect to Railtrack, before it went into
administration, and are still being paid by somebody a substantial
amount for administering Railtrack. So I would not challenge the
integrity of any of the people involved with Ernst & Young
in these efforts, but we have to be mindful of the appearance,
not just the actuality of independence, in a project that has
been so contentious and controversial and time-consuming as this
one. And I hope that the Government sees it this way; sometimes
they sound that way, other times they do not.
268. But is it not your experience of the use
of consultants that on occasions they give you the information
that you are looking for, or think that you are looking for, and
are not as subjective as they might be?
(Mr Kiley) I do think that consultants make an earnest
effort to be professional, and I do not question the professionalism
of any of the significant accounting firms and consulting firms
that have been involved in the PPP effort, we have had some involved
ourselves. But the fact that they have all been involved, they
have all done important pieces of work, and that some of them
continue to be involved, says that, strictly speaking, they are
not independent, and we do need an independent evaluation of the
value for money case.
Mr Donohoe: Did the Government consult you before
they agreed the terms of reference given to Ernst & Young?
269. Did the Government actually discuss with
you the terms of reference given to Ernst & Young before they
started on the project?
(Mr Kiley) No, they did not.
270. Mr Kiley, three areas, please, of questioning.
What is your assessment of the risk transfer elements, in the
situation we have at the moment, to the private sector in the
(Mr Kiley) There is some equity commitment, or rather
wobbly equity commitment, by the bidders; so they have some money
at stake themselves, but it is overrated. So I think that, given
the contractual commitments that continue to pile up as we move
along, the amount of risk that is really being transferred is
barely perceptible. As I said, even the risk that securities purchasers,
bond-holders, investors in Railtrack took was greater than that
being asked of the contractors here in PPP, and I mentioned some
of the reasons for this, almost impossible, in fact, literally
impossible, to terminate the arrangements. If we take the cost
overrun situation, for the first seven and a half years, which
are the only ones that are likely to be financed under this arrangement,
the exposure that any one Infraco will have for cost overruns
over seven and a half years is limited by contract to £200
million, or roughly £30 million a year. When you exceed that,
providing that a third party, if there is a dispute, says that
it is economic and efficient, which could take years, I guess,
to sort out, then it is the Government's responsibility for picking
up any of the overruns, and I do not call that much of a risk.
271. Can I then ask about the arbiter, because
in all your documentation you are quite critical of that proposition,
that there would be an arbiter after seven and a half years to
adjudicate, in any dispute, between the Infraco and, presumably
then, your organisation; why are you so critical of that proposal?
(Mr Kiley) Between the arbiter and other third party
dispute resolution mechanisms that are built into these contracts,
and given the variety of opportunities that there are in 135 volumes,
3,000 pages and two million words for disagreement about what
language means, essentially, we are likely to be turning the management
over to people we do not even know now, the arbiter, the dispute
resolution mechanisms, the nature of which probably no-one in
this room could really explain. And that is one of the inanities
of this contract regime, that in the end people we do not even
know about, mystery people, will end up making the determinations
about how the place will be managed; it is just intolerable.
272. But, I think it is fair to say, you suggest
perhaps even stronger than that in your evidence to us, that the
fact that the Infraco will be a monopoly, basically, then any
power that the arbiter may be able to exercise will be limited,
to say the least. Is that a fair assessment of your position,
and, if it is, why is that the case?
(Mr Kiley) I think what you have just said is a commonsense
assessment, you have just said it very well, that the drift in
the power relationships will mean that it will be a rare arbiter
who will be flying in the face of what the Infracos really wish
273. My last area of questioning is about value
for money, very subjective, very difficult to tie down, as the
National Audit Office, of course, said; but, nevertheless, assessments
are being made. Have Transport for London been involved
with PricewaterhouseCoopers in determining any of those factors,
that could lead to assessments being made?
(Mr Kiley) We have certainly had discussions at various
points over the past year with PricewaterhouseCoopers about their
work, but we have had no involvement in their determination of
the model, or models that are being used and the assumptions that
are being built into the models.
274. May I offer one example, Mr Kiley, that
bothers certainly myself, I raised this with PricewaterhouseCoopers
at our last evidence session, and that is the Deloitte & Touche
report, which you were kind enough to circulate, I think?
(Mr Kiley) After some struggle to get it out.
275. Well, nevertheless, you managed it. One
of the findings in the Executive Summary, in this area of value
for money, is the quote: "highly material adjustments to
the public sector comparator are judgmental, volatile or statistically
simplistic," and it gives, as an example, one of the largest
adjustments, amounting to £1.17 billion, related to performance,
and it represents an expected failure of London Underground Limited,
under the public sector comparator, to meet the performance requirements
of the projects; in other words, they are bowling in, well, it
is bowling in, an assumption that the public sector would not
perform. (A) is that your reading of that situation, and (b) have
you, in the light of this report, made your feelings clear to
PricewaterhouseCoopers, or London Underground, or the Government?
(Mr Kiley) We have tried, steadfastly, often and frequently
in purple prose, to make our views on these subjects as clear
as possible. We thought that the Deloitte & Touche report
was spot on, but we had done our own analysis before Deloitte
& Touche had, back in April, and then in September, as I mentioned
to you. So the variable that I most enjoyed reading about was
the one entitled `reputational externalities', which, to this
day, I have trouble really understanding and believing could really
be taken as seriously as the makers of the model seemed to take
it, and I hope and pray that `reputational externalities' will
sort of disappear from the scene by the time they do the final
276. Can I just take you back to the issue of
consultants, very, very briefly. I think I understood you correctly
as saying that you thought it unlikely that Ernst & Young
would be in a position to provide a fully objective analysis of
value for money; was that what you were saying?
(Mr Kiley) I think it is difficult for them to do
an analysis which will be viewed as independent by most of the
people who are going to be party to this, including ourselves.
277. But you believe an objective assessment
is, in principle, possible, if not done by Ernst & Young?
(Mr Kiley) I think that by far the best way to go
in this environment that we are in, and we have to be aware where
we are in this process, is to rely on the National Audit Office's
good offices to do this independently and objectively.
278. Is that because you prefer their methodology,
or because it is an agreed methodology?
(Mr Kiley) It really has nothing to do with their
methodology, it has to do with the fact that they have maintained
an independent air throughout this entire process, and that is
the one thing that Ernst & Young cannot really claim, because
they have been working for the Department which has a very vital
interest in the outcome. Deloitte & Touche would not be viewed
as independent by the London Underground, or the Department, and
that would be fine.
279. Specific to the PPP, the seven and a half
year figure, have you seen a satisfactory business case as to
why seven and a half years should be the only period where the
contract is really firm, it is a fraction of 30, I can see that,
but, so is three, so is five, so is ten, why seven and a half
(Mr Kiley) I was not around, but actually I think
that the people who were preparing the tender actually had this
debate about whether it should be five, seven and a half, or ten.