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

Examination of Witnesses (Questions 1 - 19)



  Chairman: Good afternoon, gentlemen. Before we begin, we have a little bit of public housekeeping. Those who have declarations, could they make them at this point?

  George Stevenson: Member of the Transport and General Workers' Union.

  Chairman: Member of the Rail and Maritime Transport Union.

  Mr Donohoe: Member of the Transport and General Workers' Union.

  Mrs Ellman: Member of the Transport and General Workers' Union.

Miss McIntosh: Interests in Railtrack, Eurotunnel and First Group.


  1. Gentlemen, you are very welcome this afternoon. Perhaps, for those of you who have been here before I do not need to repeat this but, where you are in agreement, I would prefer you not to repeat what somebody else has said; where you have a different point of view, can you make that clear. Can I begin by asking you to identify yourself?
  (Mr Joyce) Nick Joyce, Assistant Director, Ernst & Young Project Finance Team

  (Mr Middleton) Dougald Middleton, Partner, Ernst & Young
  (Mr Neal) James Neal, Partner, Ernst & Young
  (Mr Blaiklock) Martin Blaiklock, Independent Project Finance Consultant

  2. Gentlemen, in this room, there is a tendency for the sound to be absorbed. You must not be misled by the microphones in front of you: they are recording what you say, they are not projecting what you say. We are going to need a great deal of voice. May we start with Ernst & Young. Do you have a few remarks you would like to make?
  (Mr Middleton) I believe it will be helpful to the Committee if we were to set out very briefly what our roles and responsibilities were in preparing a report for the DTLR and set out its broad conclusions for you. Ernst & Young was appointed in October 2001 by the DTLR to undertake a review of the overall robustness of the value for money assessment which was prepared by London Underground. To be clear, we were not appointed to complete a standalone value for money analysis, nor to make recommendations on the way forward for the PPP. We were not asked to consider alternative methods of raising capital, nor were we asked to review the underlying assumptions in London Underground's assessment. Based on this, our report has made some clear conclusions, but these were subject to a number of issues, and I think it would be helpful if I set those issues out as background. The first is: at the time of completing our report, the final prices and risk transfer proposals were not completed in terms of contract negotiations, and we would assume that they will not change materially between now and contractual close.

  3. You are assuming that they will not change?
  (Mr Middleton) That is right. The report is written on that assumption, yes. The other issues are: the need to consider explicitly the different levels of performance and cost between the public sector comparator and PPP proposals; that the contract's structure, although tested through the shadow running period, remains to be tested in practice; the requirement that the contract structure should operate efficiently once implemented; and we are also working on the assumption that the efficiency gains which were set out in the public sector comparator were a reasonable reflection of what would have happened in practice, had the project gone forward in the public sector. Based on those assumptions, our conclusions are that the overall methodology adopted by London Underground in the assessment of the value for money of the PPP proposals was robust and appropriate. The second and linked conclusion is that London Underground's recommendation that the Public Private Partnership proposals deliver value for money is one which is supported by the analysis, although it has to be recognised that that judgment is a subjective one. That is all I really want to say at this point, and I hope that it is helpful in your deliberations.

  4. Well, it is interesting. Can I just begin by asking you: since you consider it best practice to compare the differences in cost between the public sector work programme and the private sector bids, to understand where they are different, can you tell us why the National Audit Office recommended the analysis in December 2000, and why it has not been possible to do this?
  (Mr Middleton) Can I just clarify that question, Madam Chair: is that a reference to the base cost comparator?

  5. Yes.
  (Mr Middleton) Yes. We agree with the NAO that a base cost comparator would have been helpful in the value for money analysis. The benefit that that analysis would have brought would have been to demonstrate more fully what the cost drivers were, and where the efficiency gains vis a vis—

  6. But that was why you were doing the thing in the first place. When we are talking about base costs, at page 17, you say: "Over 30 years, the base cost for upgrading the London Underground is 14.74 billion for the PSC, and 15.35 billion for the PPP."
  (Mr Middleton) Yes.

  7. You are saying that the PPP costs are less initially, but then go on afterwards. Has there been a detailed analysis of why the base costs are different?
  (Mr Middleton) To be clear on this: what London Underground have done in preparing the public sector comparator is build up the costs incrementally, on an element by element basis. What they have not done in presenting the VFM analysis is set out a base cost comparator—

  8. That is rather important, is it not?
  (Mr Middleton) I think it is rather important presentationally, in that it would give a clearer, perhaps more fuller understanding of what the key drivers are within it.

  9. That was the whole purpose, surely, to get a clear comparator that could be used to assess the different alternatives?
  (Mr Middleton) The question you are asking is about degrees of details.

  10. I am not an accountant, that is manifestly clear, but surely, it is not simply a question of detail, it is a question of starting from the same base that people can identify. You set out, before you began, four different groups of assumptions that you had used, and then you said, "We have come to these conclusions and we think that it was a robust assessment", and you based that on the information. All I am saying to you is why then is there this gap on the base costs, and surely that is rather important?
  (Mr Middleton) I think the conclusion which we reached and set out in the report on this issue is that the provision of such a comparator would have been an aid to decision making.

  11. So we are right?
  (Mr Middleton) Yes, I am not disagreeing with you, but, at the end of the day, we did not think it was a fundamental issue.

  12. Why, because you thought that you could make other assertions which would neutralise

  the difference between the base cost?
  (Mr Middleton) The work which we did and the discussions we had with LUL and their advisors satisfied us that the analysis which they had completed was sufficiently detailed to allow them to complete the value for money analysis. What we have said in our report is that the presentation of that analysis would have been improved by a base cost comparator. At the end of the day, through spending a lot of time with them, we were able to satisfy ourselves that the analysis had been completed.

  13. What you are saying is, "We looked at this, but our subjective judgment in the final analysis is that it was not sufficiently important to distort the conclusion we reached that it was a robust report". So that is another subjective judgment. This assessment has taken four years, and you still have uncertainty over how the private sector is going to offer the promised savings. Is it really too difficult to establish the potential savings of the PPP over 30 years?
  (Mr Middleton) I think the question you ask is a fair one. It is one which, through a lot of detail, we were able to satisfy ourselves that the analysis which sat behind the presentation of the public sector comparator value for money analysis was, in overall terms, a robust one. Why London Underground did not present a base cost analysis is a question which we cannot answer, and is beyond our brief.

  14. I understand that, but it is actually quite fundamental to understanding where we are at the present time. Mr Blaiklock, can I ask you the same question?
  (Mr Blaiklock) I think I share the same kind of confusions that you have, and I have been looking for a clear-cut recommendation, one way or the other, for such an important project, and a proposal which is, if anything, experimental.

  15. So you do not think it is unreasonable to say, "Why does it take four years and finish up with a result that is not clear?"
  (Mr Blaiklock) I would be disappointed if I came up with the result that has been brought to the table. We need a clear-cut decision, one way or the other, and I do not think we have it.

Mr Stevenson

  16. Mr Middleton, you gave us, in your opening statement, about four areas that you wanted to clarify for us. You said, I think in your last point, that you supported the London Underground arguments in terms of value for money, but that they were "subject to subjective judgments", if I can use those terms. In terms of the social cost adjustment, is it appropriate that such adjustments should be incorporated in such a value for money comparison?
  (Mr Middleton) Can I deal with the first point you made before you moved on to your question, Mr Stevenson, because I think, to be clear, what we said was that the London Underground recommendation that the PPP proposals deliver value for money is one which is supported by its analysis.


  17. By its analysis and not yours.
  (Mr Middleton) By its analysis. Going on to the social cost adjustment, I think the social cost adjustment is an attempt to recognise explicitly the fact that there were different levels for performance assumed under the PPP proposals and under the public sector comparator, and so the inclusion of the social cost adjustment was, if you like, to create a level playing field between the two.

Mr Stevenson

  18. Level playing field. According to the information we have, the use of these non cost items has led to an increase in the cost of the public sector option by 9 per cent, and a decrease in the cost of the PPP by 5 per cent, £2.1 billion, which equates almost exactly to the figure used by the Secretary of State in his recent announcement. The use of the social cost adjustment has a crucial effect on your judgments. Do you know of any other PFI or PPP that uses such social costs adjustments?
  (Mr Middleton) In our experience, we have not seen that in other PPP projects. It is, however, standard practice in cost benefit analysis on transport projects, and we recognise the sensitivity of this assumption in our report, and that is why we set out the value for money analysis with and without that adjustment, so the decision makers were very clear about the impact of it.

  19. It may be helpful for the decision makers; I am asking my questions to yourselves as the professionals in your particular field. To be clear on this: your answer to my question is you can identify no other example where such social cost inclusions in PPP or PFI have taken place?
  (Mr Middleton) That is right.

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