Examination of Witnesses (Questions 500-519)|
WEDNESDAY 5 DECEMBER 2001
500. The best way of achieving it, not the best
way of not achieving it? You cannot by contract not achieve it?
(Mr Coucher) Correct.
501. So Mr Kiley is incorrect?
(Mr Coucher) I think Mr Kiley's comments referred
to a fixed contractual obligation to replace a rolling stock fleet
with, say, 106 trains. We are free to find the best way of doing
that and that may be faster trains but less trains.
502. You may be free to find the best way of
doing it, I understand that as a non-business person, but my question
is directed at are you free not to achieve it? Are you contractually
obliged to achieve it or not?
(Mr Coucher) Yes.
503. So Mr Kiley is not correct?
(Mr Coucher) I am not sure what Mr Kiley actually
504. I will quote it again. It is all here,
so the record is clear, "Infracos are free to depart from
asset management plans supplied to London Underground Limited
and have no contractual obligation to actually deliver the specific
investment suggested by their bids". That is what Mr Kiley
said. Is he correct or is he not?
(Mr Coucher) We have got fixed contractual obligations
laid out to deliver the obligations that LUL set for us and we
cannot depart from those.
505. So Mr Kiley is not correct?
(Mr Hoare) Can I help you just a little because I
did sit opposite Mr Kiley for six weeks in negotiations. One of
the issues that Mr Kiley had which brought this subject up, I
think, was we have to reach a specific output specification for
trains and signalling on a new line. Let us take an example. On
the Victoria Line we have to provide an output specification which
is based on a time base for passenger use and that specification
is very clearly laid down and is a contractual specification.
To do that we will provide new signalling and also, in this case,
42 trains. Mr Kiley was concerned, when I sat down with him, that
over that period what I could do to reach the specification that
I could reach was I might refurbish the trains instead of providing
new trains, but, in actual fact, when you looked at the specification
upgrade I needed to achieve I could not do it by any other means
except by providing new trains and new signalling. I think there
amounts some confusion.
506. So if the contract requires for your companies
to provide new trains and if during the course of the time period
in question your companies feel "wait a minute, hang on,
this maybe a bit too expensive, things are getting a little bit
out of control. We think we are better off providing refurbished
trains", you are free to do that?
(Mr Hoare) I would not reach, however, the performance
specification and in not reaching the performance specification
on the year described in the contract I then suffer penalties
and the type of penalties I would suffer are in the region of
£26 million a year if I do not do that on the Victoria Line.
507. So you are not free to depart from asset
management plans supplied to London Underground?
(Mr Hoare) In the way I have just described it, no.
508. In what way are you free to depart from
(Mr Hoare) I think the issue is, as I tried to explain
earlier, that I will put forward an asset management plan, we
have already put it forward in bids, we put forward an asset management
plan each year. I do not think there is anything devious or wrong
in this, but having put forward that asset management plan which
shows we are going to spend, shall we say, £8 million in
the next year on replacing track on the Bakerloo Line, if we then
find during the course of the next three months that we have a
very, very specific problem on track on the Victoria Line, we
may then go to London Underground and say "We were going
to put eight million into the Bakerloo Line this year and 12 million
next year, what we might do is put seven million this year and
13 million the next year and concentrate the extra money on the
problem on the Victoria Line". London Underground can turn
round to me and say "No, I do not accept that".
509. They have a veto?
(Mr Hoare) They have the right to turn round to me
and say "I do not accept it". At the end of the day
the responsibility for safety of that track and my responsibility
to make it work has got to come back into the Safety Case.
Chairman: Mr Grayling, we want all Members of
the Committee, please, sharp questions and sharp answers.
510. Did you, during this process of putting
bids together, as we have heard in evidence from other people,
rejig the investment plans so that bigger projects were pushed
into later stages of PPP at the suggestion of some or any part
(Mr Hoare) I saw this as the normal run of business.
What happened was when we put the first bids in, based on the
information we had on all the infrastructure, we put a series
of bids in front of London Underground and London Underground
came back to us and said "Some of this we would like to rejig
because it does not fit and we cannot afford it in certain areas".
I did not see that as any different from what I have done for
20 years in providing my capital expenditure budget to my board
and my board turning round to me and saying "well, actually,
you cannot spend that this year on that", so you move it
on. I saw it as the normal process.
Chairman: The answer is yes, Mr Grayling.
511. Was your understanding that decision came
from London Underground itself?
(Mr Hoare) It was certainly London Underground that
told us about it and as far as I was concerned it was London Underground.
512. On the subject of risk, the Government
said that you are going to be responsible for all cost over-runs
that result from you acting in what they call an "uneconomic
or inefficient manner" and they have said "the financial
risks associated with force majeure are retained by London
Underground". What is your understanding of what force
majeure actually means? If you modernise a tunnel and you
suddenly discover you need four bolts and not two, is that force
(Mr Coucher) We are responsible for our own performance,
so any cost over-runs associated with our own, as you say, uneconomic
and inefficient performance is our responsibility. The force
majeure regime applies to a very small number of things like
terrorist acts, flooding, the Thames Barrier breaking, things
like that. In your example, if it required four bolts or eight
bolts or ten bolts that is our risk.
513. So if you discover a tunnel that is fundamentally
less structurally sound than you believed at the start of the
project, that is your problem?
(Mr Coucher) Yes.
514. What happens if a company goes bust during
the life of the contract for a PPP? Do you believe that a Public
Interest Termination clause should be included in PPP contracts?
(Mr Hoare) Let me answer the first one first. If a
company goes bust London Underground will take back the Infraco
515. After a very long convoluted procedure.
(Mr Hoare) It is not that long. It may look convoluted
on a piece of paper but it is not that long. I am quite certain
in terms of a company going bust that emergency arrangements would
be put in place straight away.
516. By whom?
(Mr Hoare) By London Underground. The service contract
we have is with London Underground and, therefore, I think they
will put that into place very quickly. There is a procedure in
the contract for doing it. Your second question was?
517. Should there be a Public Interest Termination
clause negotiated in PPP contracts?
(Mr Hoare) Should there be or should there not be,
I personally do not think it is necessary. If you look at the
whole series of contracts on the contract map, everything we do
is in the public interest. In terms of what we are taking on here,
we are taking on a contract for 30 years. There is tremendous
flexibility in that contract for London Underground and its owners
to come to us and to change it and to do whatever they want. If
there is a safety problem there is a very clear, laid down procedure
whereby they can come in and claim a safety breach against us
on no notice whatsoever. So all the facilities and all the requirements
that I would suspect everybody would need on a contract basis
is there. A Public Interest Termination does not actually meet
what I really think people want in these contract terms.
(Mr Coucher) I have not much more to add.
518. If you agree with Mr Hoare, perhaps you
would not repeat it.
(Mr Coucher) I do agree but I would like to add that
this is a long-term contract. The assets for which we are responsible
are long-term assets, lives of 20 years and 40 years. What we
also bring is financial stability, long-term financing, which
is something which has suffered in the past.
519. But if your company went bust
(Mr Coucher) If it went bust exactly the same regime
which Mr Hoare has referred to applies.