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

Examination of Witness (Questions 373-406)




  373. Good afternoon to you, Mr Cassidy. I apologise for keeping you waiting. Could I just ask you to tell us precisely who you are?
  (Mr Cassidy) Yes. I am Michael Cassidy. I was appointed the Chairman designate of the LINC Consortium, February 2000, and the purpose of that was to have somebody in place ready to run the company that would acquire the Infraco if we had been successful in either of the two bids that we delivered. In fact, the Consortium was unsuccessful, we were placed second in both of those bids, and so the Consortium effectively came to an end in September.

  374. Can I ask you to what extent the instructions from the Treasury caused changes to be made to the bids?
  (Mr Cassidy) This was a scheme that was, in my view, conceived, designed and manufactured by the Treasury, this was a Treasury project. It was almost like designing a new racing car, they were the designer, they manufactured it, the chassis may have come from a previous model, subsequently found to be disappointing, the steering was completely different, but this was a Treasury-conceived motorcar, and it was assigned to the Department of Transport to actually manage the project, and London Underground were the drivers. So, from the outset of my involvement, my perception was that this was a Treasury project which they had primary responsibility for, not day-to-day but primary responsibility, and, to me, that was an important comfort factor in the bidding groups incurring the costs they did, in setting about mounting these bids, because the costs, frankly, were enormous. Subsequently, it was apparent, at various stages of the bid process, that it was necessary for the Treasury to exercise their role of influence on the bidding process and change the direction in which that car was going. So although, week by week, our particular negotiating team were meeting with the London Underground team, who had been involved in this for a very long time, they were very experienced, they knew exactly what they were about, but there were various junctures at which the Treasury decided that it was appropriate to make an intervention.

  375. So was that made very clear to you, as bidders?

  (Mr Cassidy) Not directly. I think there were only two meetings that I went to, face to face with Ministers and civil servants, which involved all of the bidding groups together, it was a large room full of people, but only two of those I recall taking place. So the interventions, when they did occur, tended to be passed down through the Department of Transport, through London Underground, to the bidding groups.

  376. So you were clear that this was not either the intention or the desire of the people whom you were dealing with directly, but definitely instructions they were receiving from the Treasury?
  (Mr Cassidy) Bear in mind, from the point of view of the bidding groups, we were issued with an Invitation to Tender, a document which gave a menu list of things that we were meant to be bidding for; we priced that contract based on the initial assessment of what work needed to be done. It was only as the negotiations proceeded that it was apparent that that particular set of goal-posts were going to have to move. So, for example, tasks were added and the bidding groups were asked to please price for those and adjust their total price accordingly; at a later stage, all of the bidders were asked to kindly look at removing chunks of the tasks, in order to achieve a lower overall cost for this project.

  377. So, in effect, you had almost three-stage bids?
  (Mr Cassidy) There were probably four, actually, looking back at it.

Chris Grayling

  378. Can I ask you, following on from that, obviously your team, I appreciate your own role in this, but the team you were working with who were doing quite detailed work on the project, in the judgement of your team, what difference to the modernisation process, the practicalities and the time of the modernisation process, did the Treasury's intervention make?
  (Mr Cassidy) Yes, quite. Our team was 70 people, full time, for two and a half years; so, yes, a lot of work was done on it, and this was complex work, because, obviously, there was risk from the point of view of our five companies. There were complexities about doing it over 30 years and there were tasks to do with what modifications were appropriate for various chunks of the work to be added or excluded; I will give you just one example. I think it was in the summer of 2000, we were all asked to go away and price for graffiti removal for 30 years; now, for overseas companies, most of mine were overseas companies, the question of graffiti removal is quite difficult to assess, because the amount of graffiti on underground trains is actually a product of the extent of the policing of the operator, if you have poor policing you get lots of graffiti. And I think it is fair to say that our group, because one of the dominant members was North American, decided that that was going to be quite a pricey item, graffiti removal, and, who knows, that may have contributed to our bid being probably too expensive. But that sort of thing was coming and going all the time. But the very big intervention came at Christmas 2000, when the Departments concerned would have seen the totality of the bids for all three lines, for already by then sub-surface lines were at a stage where people could see the rough size of the project and the likely costing, and it was at that point that we were all told, all of the bidders, by the Treasury, that the totality of this project was now too expensive for the nation to afford, so please go away and readjust your bids by taking out sectors of the work or delaying expensive parts of the work to later years, so that the overall figure was less.

  379. What kinds of things did that involve?
  (Mr Cassidy) Amongst the menu of choices, of course, you could look at delaying delivery of new trains, so that the cost of those new trains was pushed into, say, years eight to ten, instead of four to five; you could look at concentrating on short-term, easy improvements, like cleanliness, which involved much less capital expenditure at the outset. So that the whole profile of the investment programme could be shifted over a greater period of years, and in the later years they could actually see an increase of revenue flow coming from the railway system that would offset the capital going in for that year, so the whole thing began to look more acceptable.

  380. In terms of delivery of trains, one of the criticisms levelled against the scheme when it was first detailed was that a number of the lines did not receive new rolling-stock until close to 2020; was that a factor in the Treasury's decision, rather than an operational decision by the Underground?
  (Mr Cassidy) Yes, because we were keen to deliver the biggest improvements right at the beginning, because part of the financial incentive of the PPP is that if you get your capital outlay in early we, as bidders, obviously have a better chance of increasing our total returns.

  381. So, from your perspective, as bidders, if you look at the time-frame that is now in place, under PPP, and what your team believed was feasible and viable, how much difference is there, how much quicker could this scheme be implemented?
  (Mr Cassidy) It could be implemented quicker, but it would definitely be more expensive.

  382. How much quicker; how much difference in time did the Treasury's intervention add to real improvement?
  (Mr Cassidy) If you look at the biggest item, which is new rolling-stock, it takes 30 months to build a new train, from the point of the order to the point of delivery, so the earliest that the bidders could have produced new trains would have been within that timescale. In fact, under the indicative timetable that we were all asked to bid to, as the final stages came through, you will find that the delivery of rolling-stock was pushed into years eight to 12.

  383. A final, quick question. The quality of the assets; with how much detailed information was your Consortium provided about the quality of the assets, and how reliable do you think the information available is about the quality when it comes to assessing what the real outturn of the cost of the project is likely to be?
  (Mr Cassidy) All of the bidders were provided with an evaluation of the assets that London Underground had themselves obtained in the two years prior to the bid process commencing, I think Ove Arup did that. Each of us, once we had cleared the first stage of acceptability as bidders, were allowed a degree of due diligence, but in the time available to being required to come in with best offers, that was rather limited. So a fair amount was taking a judgement, first of all, on the trustworthiness of the LUL material, and secondly on the probability of some of that being a mis-assessment.

Andrew Bennett

  384. How far was the competition closed too soon; would it have been much better for other bidders to have stayed in for rather longer in the process?
  (Mr Cassidy) Not from our bidders' perspective, no.

  385. So you were quite happy to be closed out relatively early?
  (Mr Cassidy) It has to be said that, for this type of project, you go to preferred bidder at a much earlier stage than this one did, because, otherwise, what you are causing the bidders to incur is lost costs, if they happen to be unsuccessful, as indeed happened in this case. But if I can just illustrate where that becomes important, that not only are you incurring the costs of your staff in keeping coming back with revised prices, and all the rest of it, but once you reach preferred bidder stage you are then incurring huge investment banker and legal fees, in delivering a signed contract. So I do not think there is any possibility of having two preferred bidders going into this very latest stage.

  386. But there is quite a possibility that the people who get the final contract actually will be getting more money for it than you wanted for doing it?
  (Mr Cassidy) Yes, because there is a lot of last-minute negotiating going on; that is right, that is quite true.

  387. How much of your bid costs have you managed to reclaim?
  (Mr Cassidy) Our total bid costs, from memory, were £20 million. We negotiated with London Underground in the summer of 2000 an arrangement, in order to keep two preferred bidders in the frame, at that stage, which they were desperate to achieve, we negotiated that the winning consortium would pay the losing consortium £5 million. Subsequently, I believe, that was raised to a higher figure; but, until the process is completed, I do not believe any of the unsuccessful bidders have received any compensation.

  388. If the whole process fails, would you expect to get some more money back?
  (Mr Cassidy) I think, any of the unsuccessful bidders, if the process fails for political reasons, would be looking for the return of all their costs, yes.

  389. And how far do you think that Mr Kiley's arguments, that he wanted more contractual powers, made the early bidding process much more difficult and expensive?
  (Mr Cassidy) When that intervention occurred, in the early part of this year, the sorts of areas that were indicated as being necessary concessions to meet his objections would undoubtedly have added to the cost of the bids; and I think I said to the press at the time that, at the maximum, those requirements would perhaps have made the bids unfinanceable, in other words, the banks would simply have said, `we can't afford to come in on this basis.'

  390. Would not they have been fairly crucial to the good management of the system in the future?
  (Mr Cassidy) That was actually for others to judge; we were simply looking at it from the point of view of a senior consortium trying to win a major contract.

Mrs Ellman

  391. Have you reached any conclusions about the PPP project and its processes, as a result of your experiences?
  (Mr Cassidy) I have reached the conclusion that the method by which Whitehall perhaps manages these contracts needs to be reconsidered. Certainly, in the City context, which is my essential background, if we had been involved in something comparable to this in its complexity and its size then I think we would have made sure that the instructions were coming from a recognised team, or chief, who would take primary responsibility for the negotiations. In this case, I think the responsibility was somewhat disparate. Secondly, I would have to say that the PPP for the Underground is bigger than all of the other PFIs that have even been done in this country, so, in other words, it warranted, by virtue of its size and complexity and cost, the very highest level of attention, right from the outset, and I do have a question-mark as to whether there was consistent attention at the highest level during the process that we went through.

  392. When you say the control was disparate, where were you saying it actually came from?
  (Mr Cassidy) The day-to-day negotiation was with the London Underground management team, who were undoubtedly very knowledgeable and skilled. However, when it came to the essential direction, strategy, if you like, of the contract, they did not have the authority or discretion to make the changes, in other words, that was a political judgement, or another Department's judgement, and so that, I think, extended the timetable over which this occurred.

  393. Without there being any benefit in that?
  (Mr Cassidy) Not from our point of view, no.

Mr Stevenson

  394. Forgive me for having to pop out. Mr Cassidy, I was intrigued earlier on, you indicated that the goal-posts were changed on a number of occasions, in pretty serious areas. How could those goal-posts be changed in terms of the assets and the need for capital investment in the assets, when, as far as we are aware, no detailed analysis of the condition of London Underground assets was available, even though Ove Arup may have been involved?
  (Mr Cassidy) We were given a programme of likely work, which, in the case of the Bakerloo, Victoria and Central Line, which was the first one we bid for, virtually had a programme which applied to every single station, every single kilometre of track, and pretty much the whole lot needed replacing over the life of the contract. So, in other words, leaving aside disastrous things, like tunnel collapses, and so on, if you just looked at the infrastructure, you could reckon that most of it would need replacing at some point during the 30 years; and, I suppose, the skill of consortia like mine is, essentially, to price the cost of that at a certain date, given the particular menu list, as I said, of things that needed doing, that is their skill. So I do not think we found that particularly difficult, but it was necessary, it is true, to take a view about the unplanned things that might happen during the life of the 30-year contract.

  395. On that basis, and forgive me if this question has been asked in my absence, I am intrigued, I think the Committee is intrigued, about the criticism of the basis of the contracts post seven and a half years; fair prices up to seven and a half years, 22Ö years we do not really know. What was your assessment of that; was that a realistic way of approaching a contract, for 22Ö years of which prices would be really unknown?
  (Mr Cassidy) To be honest, I think that focusing on the seven and a half years has been a product of the negotiation period that we have just seen; in other words, people have concentrated more on what they could promise to do in seven and a half years than perhaps when we started. When we started, we were certainly looking at the 30-year commitment.

  396. And could you realistically price a 30-year commitment, realistically?
  (Mr Cassidy) Oh, yes, yes, and certainly my group were prepared to commit themselves to that, and promise the finance to deliver it; yes.

Dr Pugh

  397. Mr Cassidy, you have been right at the heart of the franchising process, and what you seem to have told us at the start appears to me that you are actually saying, are you not, that the Treasury's fingerprints were all over the contractual process?
  (Mr Cassidy) Yes.

  398. You are categorically saying that?
  (Mr Cassidy) Yes, and I do not think there should be any surprise at that.

  399. Given that this Committee is charged with looking into franchising, the non-appearance of the Treasury, do you regard that as impairing our work? It will be more difficult for us to get to the bottom of what happened?
  (Mr Cassidy) I must say, I read that last week, and I was surprised to see it, because, undoubtedly, there has to be some responsibility there.

  400. Could I ask you to comment on why, given their apparent involvement, they do not wish to appear; what is your view on that?
  (Mr Cassidy) I can only guess, as perhaps you can guess. It may be that they perhaps do not want to concede the extent of their involvement throughout the period of the negotiations.


  401. I want to ask you, finally, a fairly straightforward thing. Supposing you were being required to consider whether your Consortium was going to go for a contract like this, but you had not the past history, what changes would you want to see in the way that negotiations were carried out, or the terms of reference?
  (Mr Cassidy) Thank you very much. It is true that my Consortium members will now think very hard and long before bidding for a similar contract here, under the rules that applied for this one.. It was not a happy experience, and it has been a costly experience. When I first became involved, I was asked the question, `do you think we should do this at all?' and I urged them to continue, because I thought their expertise was important to the upgrading of the London Underground. So, for a start, I would hope that it could be better and more quickly managed. And, secondly, I would hope that there were better, firmer, clearer arrangements for compensating bidders for undertaking a process that could be aborted, they could actually lose out, having spent a lot of money, and walk away with severe losses.

  402. But those are the negatives, what I am saying to you is something different. Let us ignore what has happened. I now come to you and I say, `here's the proposition, these same conditions, and I can't give you any more information, this is what is going to happen,' would you then go for it, and what would you demand before you were prepared to put in a bid?
  (Mr Cassidy) Personally, I feel that the partnership concept of the PPP could have been workable, I am not somebody who now believes that the whole project is fatally flawed and should never happen, I think it is possible to make it work. But it is only possible if both sides have a true partnership approach to it. So the attitude of Transport for London, on the sidelines, being the future owner of the project, if we had been successful, was a factor which added a huge dimension of risk for the bidding groups, and therefore that part—

  403. Which would have changed, if you had had them on the negotiating teams?
  (Mr Cassidy) Possibly; but since their avowed intention, politically, was to destroy the process, it may, in fact, have been rather unhelpful for them to be in the room throughout all the technical negotiations. But that is just a factor of this particular set of circumstances, I think.

  404. And any other changes that you would have wanted, before you were prepared to put in a bid?
  (Mr Cassidy) No. I think, as I say, our Consortium was five top international companies, they were keen to do the job, they were willing to commit the resources to take it forward, but, during the course of it, it turned out to be rather a nightmare.

  405. Mr Cassidy, did you at any point, once it had become clear that you were not going to get this contract, set out to the Treasury why you had found it extremely difficult to deal with the situation?
  (Mr Cassidy) We did not, because, having come second in the first set of contracts, we were still in the running for the sub-surface lines, and therefore it would have been unhelpful for us to.

  406. Well, given that you have now fallen at two sets of winning-posts, I ask you again, would it be the intention of your Consortium, particularly because you are, presumably, keeping the whole question of compensation in play, to set out to the Treasury where the difficulties arose and what you would expect in future from any kind of similar bid?
  (Mr Cassidy) It is a possibility, it is not active at the moment, because, on the afternoon that we were told we were second bidder, all our team disappeared to the winds, and have gone off to build other projects. So, in other words, there is not a coherent group there that I could get round a table and say, `now what shall we set out for the Treasury to think about,' it was not really practical.

  Chairman: Ah, well. That has been extremely helpful. Thank you very much indeed.

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