Examination of Witness (Questions 373-406)|
WEDNESDAY 28 NOVEMBER 2001
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
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
(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
(Mr Cassidy) There were probably four, actually, looking
back at it.
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
(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.
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
(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
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
(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
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.
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
393. Without there being any benefit in that?
(Mr Cassidy) Not from our point of view, no.
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
(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
(Mr Cassidy) Oh, yes, yes, and certainly my group
were prepared to commit themselves to that, and promise the finance
to deliver it; yes.
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
(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.