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

Examination of Witnesses (Questions 320-340)



  320. You can never be found wrong; well that is very useful. Is it possible to assess value for money over 30 years when prices are given for only seven and a half?
  (Mr Colman) That, I think, brings me back almost to the first thing I said, which is that you can do a calculation that takes account of what can be quantified; at best, that calculation is only part of the story. In the case of this deal, you can quantify what you think might happen in the first seven and a half years, you can quantify what might happen in the next 22Ö; that is even more uncertain than usual, because of the break-points in the contract. And so that means that, in taking a decision on value for money, one of the points to be taken into account is the very uncertainty created by the break-point. So the justification for doing this PPP, or any PPP, must rest on a strategic view about how the business is to be run. If it is considered necessary to have break-points in the contract, and I can well understand why that should be, then that is an issue to be considered, it is one of the wider factors; it is very difficult to calculate what the impact will be.

Chris Grayling

  321. Can I take you back, you made the point about it is impossible to judge in ten years' time what the cost of renewing an escalator at King's Cross may be, but, as an auditor, if you look at the way in which the current contracts and costings are being framed, is it your view that there is enough knowledge about the current state of London Underground's assets to be able to make what in your eyes would be a satisfactory assessment of the costs that will be incurred, even in that first seven and a half year period, to meet the standards you would expect, as an auditor?
  (Mr Colman) I think, as an auditor, I do not have an opinion about whether now is the right time to do the deal. If the Department and London Underground decide to do the deal now then they have to manage the risk that is created by the fact they do not have a very full knowledge of their asset base. I think, as an auditor, I have no opinion as to whether they should do it now, or—

  322. I am not asking you about whether it should be done now or not, I am asking you, is it your opinion that enough information is known about the current state of London Underground's assets to enable a contract to be signed with a price attached to it?
  (Mr Colman) I do not think I have a view about that, as an auditor. I can imagine arguments that could be used to justify proceeding, even in those uncertain circumstances, with a contract, along those lines. I do not think those arguments are necessarily wrong.

  323. But if I were building a house and you were my accountant and I was doing it on the basis of no knowledge of what the subsoil was, you, as my accountant, might question the judgement I had made about the overall costings of it; and that is what I am trying to get. Do we actually have enough information about London Underground's assets to enable us to take a financial judgement about the cost of modernisation?
  (Mr Colman) If I were your accountant, Mr Grayling, you would be paying me fees for my advice.


  324. You would be a very expensive accountant, I suspect.
  (Mr Colman) But very good value for money, Madam Chair. The situation I am in now is not as an adviser to London Underground or the Department, my position here is an independent external auditor on behalf of Parliament, and I really am not in a position to advise them on what they should do.

Chris Grayling

  325. I am grappling to understand why it is difficult to answer. I am not asking you to judge what Parliament should or should not do, but what I am trying to be clear on is the level of information at the disposal of the public sector to take a judgement about costs, and you yourself said, and I fully accept that ten years down the road the price of escalators may have doubled, for some unforeseen reason, but we are, nonetheless, expecting the Government to put a fairly firm price on the work to take place in the first seven and a half years. You all heard Mr Kiley's evidence, in which he said that there is no clear asset register which would enable us to understand the current condition of assets and make a judgement about the costs of improving those assets. Now my concern is, and the reason I am asking your view of this, as an auditor, is, is there an extent to which we are guessing at this? And that is what I am trying to understand from you. I am not asking you to judge the rights or the wrongs, I am just asking you to give me a professional judgement on the quality of information available to us and the degree to which that enables someone to make a realistic assessment of cost?
  (Mr Colman) It is quite clear that there is uncertainty about the state of the assets. Mr Kiley thinks, and he may well be right, that means there is very great uncertainty about the cost of debt and the cost of the capital programme; those are matters to be taken into account. I do not think I can add to that, really. I cannot say that nothing should be done until that risk has been removed, because that would be going beyond my role.

  326. Can I just ask you, there has been a significant deterioration over the past two years in London Underground's operating profitability, or lack of it. The cash flows of London Underground are supposed to be a crucial part of the funding of the PPP exercise. In your judgement, given the change to London Underground's financial position that has taken place over the last two or three years, does it have sufficient operating cash flows for us, as a Committee, to be confident that it will be able to service the PPP?
  (Mr Colman) I do not think I know the answer to that question. It is again a question that will take me into the executive role, which I am very keen not to be taken into.

Dr Pugh

  327. You have talked of subjective factors, you talked of wider factors, you resisted being drawn into a value for money assessment; is it the case, and this is a technical question, I think, that how the value for money assessment comes out may depend on precisely which group of consultants one chooses to do it, in other words, different consultants may reach different results, while being true to their craft?
  (Mr Colman) I think it depends what question the consultants are asked. If the consultants are asked—

  328. I asked about the value for money—
  (Mr Colman) No, no; if I may. That if the consultants are asked, `estimate, please, what this is going to cost, on the two bases,' I would hope that professional consultants would be reasonably close on the range in which they were talking. And if they were not close on the range I hope they would be able to find out why they differed and what assumptions they differed on, and someone could take a view about those assumptions. On the wider issues of value for money, I actually do not think that anyone should rely on consultants; those are absolutely decisions for the executive, in this case the Board of London Transport and the Department. It is their responsibility to decide what they want to do and how to justify it.

  329. So, unless the assessment is done by the National Audit Office, it will have an element of subjectivity in it?
  (Mr Colman) Well, I am. . .

  330. I was being slightly facetious. Can I ask you one final point. You do not want to do a value for money assessment, but you have used the words `financial analysis' and you are prepared to offer a financial analysis. Do you think it will be appropriate for the Government to go ahead only after they have had an updated financial analysis from you?
  (Mr Colman) I think the normal practice would be for a financial analysis to be done by, in this case, London Transport and their advisers and the Department; we would not expect to intervene. We have made our views very clear on how the analysis should be done, and we understand that our views are accepted.

Andrew Bennett

  331. Affordability; how far should that be taken into account when you are judging value for money?
  (Mr Colman) If I may say so, Mr Bennett, that is absolutely the crucial point; it is far more important than financial analysis of costs. The absolute question is what standard of underground system can be afforded; there is then a subsidiary question of how to finance and manage the transition from what we have now to that system. Affordability is essential.

  332. But if we are looking at a very lengthy period, 20 to 30 years, I could buy three refrigerators, all at the cheapest end of the market, and that would be poor value for money, for me, but it would be what I could afford in each step. Now how does the Government, or how do people, make a judgement here, to judge whether they should do it well, to start with, even if it costs a bit more money, which would be better value for money?
  (Mr Colman) This is a point on which the NAO has a very long-standing and clear line. We expect Departments to take a whole-life view on value for money, we do not expect people to compromise now, because they are a bit short this month, but to take a long view. And by affordability, I mean affordability in total over the whole life of the project, not what can be afforded this week or this month.

  333. So you do not expect Treasury's short-term sticky fingers to be involved in the negotiations?
  (Mr Colman) I used to work in the Treasury, and I am well aware of the competing considerations that Treasury officials have to bear in mind, and no doubt that will continue to be so.

  334. Lastly, you have been sucked into this process; do you think, in two to three years' time, you will be in a position to comment on this fiasco?
  (Mr Colman) I am not sure I accept the word fiasco, necessarily; but it is our practice to report on deals after they have been signed. We have not yet returned, but will, to deals after they have been operational for some years, just to see how they are going. In this particular case, it is more complicated, because the deal will be done by London Transport, and we are not the auditors of London Transport, but we probably would want to have a look at it in a few years' time.

  335. And is your gut feeling that it will not be a fiasco?
  (Mr Colman) I do not think I can answer that question.


  336. Mr Colman, I am going to let you escape in a minute, but you did not actually give us an example of another Public Private Partnership; you thought about it, when you were asked a question, are you aware of any other Public Private Partnership or any PFI that has similar difficulties?
  (Mr Colman) Similar uncertainties.

  337. Yes?
  (Mr Colman) I am going to turn slightly towards Mr Manning, who has not said anything yet.

  338. Could we be boring and ask for a specific example?
  (Mr Colman) The current crop; the Channel Tunnel Rail Link is, of course, a major project with huge uncertainties that we have already reported on. There is a project under way for the Ministry of Defence main building, that in a sense is simple, it is just a building, but that, too, has a lot of uncertainties about the costs. Almost any of the big projects have these uncertainties.
  (Mr Manning) There is one aspect of this scheme which is, I think, quite different, which is that the capital spending profile goes on for an awfully long time. In most PFIs, at least you are able to look at the capital spend over relatively short periods, so your major uncertainty is often to do with the revenue stream beyond the original capital spend; in this case, you have got uncertainties both in the revenue streams and also in the capital spend into the future, so it is, I think, on the very edge of the complex and difficult to analyse.

  339. And would it be true to say that many of the schemes you have talked about would have a large amount of their capital spend front-loaded?
  (Mr Manning) Yes.

  340. And that is a very, very vital difference?
  (Mr Manning) It is a significant difference.
  (Mr Colman) If I may say so, one of the crucial differences, in this case, is that these issues of how the project is to be financed are much less significant; the amount of money to be spent year by year under the PPP is not very different from the amount of money year by year on the public sector alternative. And so, supposing the public sector alternative were followed as the project, there would not be a need to raise an enormous amount of money at the start, there would be a need to find an enormous amount of money every year, but that is a rather different situation.

  Chairman: Mr Colman, I just want to put on the record my appreciation of your appearance here this afternoon, with your colleagues, but I also want to say to you that I believe that you are being asked to confront a series of difficult questions that have not confronted the National Audit Office before, but Parliament gains enormously from the fact that you have been prepared to take on this task and to look at it and to understand the complexities. I am sorry if we try to pin you down for opinions when the one thing you do not want to be held responsible for is opinions, but I should only say to you, in concluding, really, that this Parliament would benefit from an extension of the work that you have done from access to the information that you have given us up front, as opposed to after the deed is completed. And I am really extremely grateful to you and to your companions.

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