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

Examination of Witness (Questions 580-599)



  580. No doubt, Secretary of State, you had somebody listen to the evidence of Mr Kiley last week. Why is he so opposed to the concept that you have of the preferred bidder?
  (Mr Byers) I think he has a different approach to these major contracts. He has very strong views from his experience in New York that almost the old style works contract is the one he prefers. There are arguments which can be put forward to support that particular approach. I happen to believe it is the sort of approach which led to the problems we saw on the Jubilee Line Extension, and I think there are better ways of approaching these major investment decisions particularly the transfer of risk from the public sector to the private sector, and that is something we intend to achieve through the modernisation proposals.


  581. It is also something we will not be able to judge until we see all the detail. Will it be clear from the contracts, because frankly if there is not to be a transfer of risk—and previous history of other deals has shown the risk has not been taken out of the public sector and loaded on to the private sector—it will be very difficult to justify this entire deal.
  (Mr Byers) I think you are right, Mrs Dunwoody, in pointing out that this whole question of risk transfer is one of the key issues that will need to be addressed.

  582. You are satisfied this is going to be the case?
  (Mr Byers) Like you, I am waiting to find out.

Mr Donohoe

  583. Predecessors of yours, Secretary of State, were satisfied that what they were seeing as bids coming from the private sector as far as the operation of the railways was concerned were satisfactory, and look at the mess we have there. If one compares that to what you are proposing, there is not a lot of difference, is there?
  (Mr Byers) I think there are differences. I think the acid test is going to be when we have the details of the contracts and when we have all this wonderful advice from the various consultants, then we can have proper consultation and we can make our decisions. I have no doubt this question of risk transfer is going to be at the heart of whether or not value for money is going to be achieved. I have a very robust view about this, I am not quite sure what my predecessors may have thought of it but my view is very clear, if we do not achieve value for money these will not go ahead. It is as simple as that. The whole point of this is that basically we have a once in a generation opportunity to get it right and we are not going to blow it just because for dogmatic reasons some people may think that a PPP is the only way forward for London Underground. It has to achieve value for money and it has to be safe. If it does not deliver on those two then as far as I am concerned it will not proceed.

  584. What happens if one of the bids which have been analysed does not prove value for money?
  (Mr Byers) Then we will need to have an alternative which we can put forward. What I do not want to see is further delay.

  585. What alternatives?
  (Mr Byers) We are working on those at the moment. They will be worked up in time for the decision to be taken on whether or not the three contracts achieve value for money and we will look at them in the round but we will also look at the contracts individually to see each one of them achieves value for money. I was rather alarmed by Mr Kiley's comment last week when he seemed to imply that you had to look at all three together, because in fact the way the contracts have been drawn up you could arrive at a situation where, for example, two of them were value for money but one of them was not, because they are separate contracts. We will have to look at that and decide accordingly whether that is the case or not. But these are all issues we will need to look at in January and February. We will also need to make sure, as part of good, proper contingency planning, if we decide after the consultation and after the advice that one or all of them is not value for money that we have an alternative to turn to, and that has to be the case. I want to make sure it is an alternative which does not build in a year or two years' further delay. We have to have something where we can move quickly and make sure the investment can continue to go in even under a different model than the present one being considered.


  586. Who finally takes that decision though, Secretary of State? Is it you or is it the Chancellor of the Exchequer?
  (Mr Byers) It will be a Government decision.

  587. I realise you are both in the Government. Could we have a little more precise information? Frankly, there is a definite view that the Treasury are having a very important role to play at every level of this. When you say, "It will be value for money", "We will evaluate it", who will finally decide? Will it be you on transport grounds, or will it be the Chancellor of the Exchequer on the grounds of overall public expenditure?
  (Mr Byers) The level of public expenditure is such that it is only right and proper that the Treasury will be closely involved, because we are looking at £13 billion—

  588. Being closely involved and taking the decision are not quite the same thing.
  (Mr Byers) The decision, for better or worse, will rest with myself.

  589. Would you like to say that again?
  (Mr Byers) Yes. The decision on behalf of the Government will rest with the Secretary of State for Transport, Local Government and the Regions.

  590. With a certain amount of consultation with the Treasury.
  (Mr Byers) On behalf of the Government. So we will consult as is appropriate.

Miss McIntosh

  591. Can I repay the compliment the Secretary of State paid to us at the beginning of the afternoon by saying it is good to talk to the Secretary of State. Can I ask, Secretary of State, what happens if during the life of the PPP contract one of the contracting companies goes bust?
  (Mr Byers) There are provisions, in fact they are within the Greater London Authority Act, about the measures which will be put in place if one of the companies goes into insolvency, because what we cannot afford to happen is for the system not to operate. So there are measures which are contained within the legislation which will be implemented.

  592. Are you aware, Secretary of State, that a number of witnesses have said this is a very complex procedure and that the cost, in terms of possible cost to the taxpayer and an ever spiralling subsidy, could be enormous?
  (Mr Byers) The cost of?

  593. The protracted negotiations of a company going bust and Transport for London having to come in and take that over? It is a very convoluted process and there will be a cost implication.
  (Mr Byers) I would hope that none of the preferred bidders will become insolvent but these things do happen in a commercial and marked-led world. What I think we need to do is to make sure that the procedures are in place to cover that eventuality whilst hoping it does not occur. As I say, the provisions have been laid down very clearly in the Greater London Authority Act.

  594. I do not know if you had the opportunity to see Mr Kiley's evidence last week to us in our evidence session, but he went so far as to say, "I think it is poor public policy" not to have such a procedure. Do you not accept that over the life of a contract, especially one lasting 30 years, something might indeed go wrong and that ultimately a company may be able not to perform and perhaps you should have envisaged that in the contract?
  (Mr Byers) I agree, I think there will be appropriate procedures put in place, but I am very mindful that sometimes when proper contingency planning occurs and people do draw up proper procedures ahead of that eventuality, they could be criticised for it by saying they have pre-judged their own decisions. I am sure we all want to make sure in the context of London Underground we will put in place the appropriate procedures as well, because it is proper contingency planning.

  595. I think I understood you to say that this is not privatisation. Is that a yes?
  (Mr Byers) Yes, this is certainly not privatisation.

  596. If I was to play back to you something we received in written evidence from Transport for London, they said that insofar as the infrastructure companies maintain long-term control over the Underground infrastructure, coupled with the long-term economic interest in that infrastructure, that effectively vests the infrastructure companies with ownership of the infrastructure over the 30 year term of the contracts, and I put to you, Secretary of State, that to all intents and purposes, all substantive purposes, that is privatisation.
  (Mr Byers) No, it is involving the private sector, and I do not have a problem with the private sector being involved provided we do so to achieve the means of improving public services. That is what I believe we will need to see from these negotiated contracts. A number of the critics have said, "This is a Railtrack on the Underground", the important thing to make very clear is that the only shareholders in the London Underground will be the people who buy their ticket to travel the system, and they are the people who have to be the priority. So it is not a privatisation, as some people have said. London Underground is not going to be quoted on the stock market, London Underground is going to continue to be a publicly owned company. They will enter into contracts with the private sector but this is not unusual. For example, if you look at any school building, the school remains in the public sector but it is often built by the private sector. There is not a problem here and I think we have to make a clear distinction between the involvement of the private sector, the private sector working for a publicly controlled London Underground, as opposed to the private sector calling the shots and being able to dictate the priorities, and that is not going to be the case. It is not going to be the private sector accountable to shareholders, but London Underground accountable to the travelling public.

  597. Why is there no right to resume public control of the network if an infrastructure company becomes insolvent?
  (Mr Byers) It is laid down in the statute and these were debated in the Greater London Authority Act and the provisions are there and they will be introduced if this happens, but it is a hypothetical situation. I think you are right to point out that we do need to make sure that proper procedures are in place if this ever happens, and I will certainly make sure that will be the case, because it is proper contingency planning, which is what we have to be prepared for.

  598. Would you at any future stage seek a power of direction to intervene were a company, an infrastructure company, be seen to be under-performing in not delivering your test of improving the infrastructure?
  (Mr Byers) The prime responsibility has to be with London Underground as the contracting body, and it is very important that they have powers within the contracts they negotiate to move in and terminate contracts if there is under-performance. I think we will see when those contracts are negotiated that such a power will rest with London Underground. I also think it is important, because safety is so significant, that London Underground should have step-in rights if they feel any work is being done which is not up to the appropriate safety standards, they can move in, they can take the company off the job, they can put their own people in to do it properly and they can bill the private sector as a consequence. I think it is important those powers are contained within the contracts as well. This is all part of getting a good deal for the travelling public. Certainly I hope that London Underground will be negotiating such terms and conditions with the preferred bidders.

  599. Finally, would you agree that the key role of the arbiter is to determine contract pricing at the time of the 7½ year review, and that the ability of the arbiter to perform this function will depend on the quality of the information available and the reference to comparable businesses, and that we are slightly handicapped by the fact there are no comparable businesses and it may well be the infrastructure companies are effectively left with a virtual monopoly which they are free to exploit?
  (Mr Byers) I do not think that will be the case. The arbiter is appointed by the Secretary of State as a result of provisions contained within the Act. I have no doubt they will be able to find an effective way of identifying whether or not the infrastructure companies are delivering, and when they come to do the periodic review after 7½ years, there will be, if we do achieve value for money, if value for money is identified by the three preferred bidders, an element of cross-referencing between those contracts because they will not all be held by the one consortia, so there will be opportunities there. I do think there are ways in which the arbiter will be able to judge whether or not we are getting a good deal as far as the taxpayer is concerned, and also whether or not the infrastructure companies are getting a good deal themselves as well. But that is going to be the challenge for the arbiter. These things are never easy but I do believe within 7½ years they will be able to identify ways in which they can do it.

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