Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 27 FEBRUARY 2002
MR BRIAN
APPLETON, MR
PAUL GODIER,
MARTIN CALLAGHAN
AND MR
TONY POULTER
160. And you think that is still the figure
that is necessary?
(Mr Godier) Yes, it is, but the point I am really
trying to make is that we would still incur a substantial amount,
possibly even more of those costs, if we were seeking to fix the
tube in some other way.
161. And at the seven and a half year break
point, are those costs not going to be much higher?
(Mr Godier) Our own contract administration costs?
162. Yes.
(Mr Godier) There is no reason to suppose that they
would be.
163. You have got to renegotiate a lot of it,
have you not?
(Mr Godier) There is no question about negotiating
our own contract management costs.
They are for us to decide.
164. But your contract management is going to
be negotiating with the Infracos at the next stage. So is that
not a cross between more than just managing it?
(Mr Godier) In our forward plans, we have provided
for the costs of managing the review periods—
165. How much is that?
(Mr Godier) Off the top of my head, I am afraid I
do not know, but I can let the Committee have a note.
Chairman
166. If you have a big document that we are
told is 3000 pages long, does it not seem very possible the sort
of contract you have come out with is going to be highly complex,
and far from it being easy for you to terminate an Infracos relationship,
if for any reason they are not delivering, it is going to be extremely
expensive?
(Mr Godier) We have been shadow running the contract
for two and a half years, and we have a very good way of knowing
whether or not a supplier is performing because we have subsidiaries
doing this work for us now.
167. So we are back to faith again?
(Mr Godier) No, no, it is a relatively simple matter
to know whether or not the private supplier is performing to their
obligations.
168. At this moment, where we are talking about
seven and a half years ahead, we are also talking about differences
in all sorts of pricing between now and then.
(Mr Godier) But we are monitoring very closely the
performance of the private sector's obligations every single month,
and it will be no more difficult at year seven and a half to judge
whether they are performing correctly than it will be in the very
first month of the contract.
169. So you think that the value for money analysis
demonstrates conclusively that the PPP offers better value for
money than the alternative?
(Mr Godier) Especially when taking into account all
of the factors that need to be weighed in the balance.
Chairman: All the subjective factors that need
to be taken into the balance. Mr Grayling.
Chris Grayling
170. But surely, we have just heard from Ernst
& Young, that in its most simplistic form, what they were
asked to do was check you sums. They were not asked to assess
the project; they were just asked to check that you can add up.
So how, therefore, can you make a statement that their project
could assess the viability of the entire project?
(Mr Appleton) I did not hear that Ernst & Young
had done what you say. What I had heard was that the Government
had asked them to assess our approach, and secondly, to assess
whether we had done it thoroughly, and they have given us a green
light on both.
171. But they very expressly, in the introduction
to their report, say that they have based their assumptions on
the information provided to them by the London Underground management.
They have made no attempt to assess the validity of that information.
(Mr Appleton) They did the job exactly as asked by
the Government, yes.
172. But there is an important distinction between
the two.
(Mr Appleton) Yes, I recognise the distinction.
173. So therefore, I go back to saying what
they have done is to check that you can add up. What they have
not checked is that they know that you knew how to put together
the project, and whether the project itself was well founded?
(Mr Appleton) No, they have not checked that we can
add up, we would take that for granted. They have checked that
we have done a thorough job; we have tackled it in the right way;
we have taken notice of all the guidance we can find on how you
do such a job; and they have checked that we have been intellectually
honest in doing it. What they cannot do is check the final figures.
It is not in their area of expertise.
174. No, but let me give you an example: one
of the great uncertainties within the rail industry has been assets;
we have addressed this briefly at the previous hearing, but if
you look at the current condition of the London Underground assets,
you have had some bad experiences. You allocated Earls Court station,
where you started doing some work and, as a result, the cost quadrupled.
(Mr Appleton) Yes.
175. There is no certainty that as you go through,
that, in the eyes of the consultant, that the judgments you have
made in creating this project about the condition of the assets
are accurate. They do not know whether you are right or wrong,
but they are taking your word for it. That is just one example.
(Mr Appleton) I understand what you are getting at.
As Mr Callaghan led the team that made such judgments, I think
he should respond.
(Mr Callaghan) Yes, I find it slightly difficult to
respond to, because I think there is quite a lot that needs unpacking
from what you are saying. The way in which our estimate of doing
this in the public sector works is that we have gone back and
used our experience over a number of years of doing projects like
this, including station works like Earls Court, which is a particular
example of one where there was much more work there to do than
we first anticipated. We have looked at the difference between
our initial estimates of what these works would cost and what
they have turned out to cost, and, therefore, we do have, built
into our figures, an assessment of what those differences historically
have been, and we have made a projection about what they will
continue to be in the future. That work has been done by our own
people. It was validated by our engineering advisors who are Ove
Arrup, and we have done all of that work in a way which is consistent
with the guidance that exists from the Treasury, which, as the
Chairman has said, does not go all the way because mostly it has
been developed in relation to PFI schemes where the work is upfront.
176. I am not necessarily challenging the quality
of the work you have done, what I am saying is that Ernst &
Young did not assess the quality of the work that you have done.
What Ernst & Young did was to check that the methodology,
in financial terms, added up. They were very explicit in the introduction
to their report in saying, "We have based our assumptions
on the information provided to us by London Underground management."
Therefore, the point I am driving at is: is it not correct to
say that it would not be appropriate or possible to use the Ernst
& Young report to justify the viability of the PPP; what it
does is it justifies the assumptions you have made about the PPP?
(Mr Appleton) I think that is an accurate statement.
No, you could not, you could only use it to justify certain things:
that we have done a proper job. What they cannot do—that
does not justify the figures. We stand by those figures. We have
done the most thorough job possible in developing them, and "subjective"
normally means "plucking out of the air". It has not
been like that —
177. I am not saying or implying the quote—
(Mr Appleton) But it has, and we stand by that. They
are our figures.
178. Mr Donohoe raised the issue with you, Mr
Callaghan, about the £2 billion worth of savings. Would it
be correct to say that in cash terms, that £2 billion does
not exist; it only exists when you take into account the invisible
factor of the social cost benefits?
(Mr Callaghan) It is true to say that in terms of
our assessment of the gap between what it will cost to deliver
these outputs in the public sector and our assessment in the private
sector makes an allowance for the difference in the quality that
we expect to occur. But one of the versions of the analysis that
we have done, in order to shed light upon the importance of this
assumption, does look only at the underlying costs. So yes, on
one version of our analysis, indeed on both the bond version and
the traditionally financed version, it is both a combination of
cash savings and financial benefits, but there is also a version
of the analysis that we have done which disregards the performance
differences and looked at the underlying costs.
Chairman
179. But that was not the one that you asked
Ernst & Young to look at?
(Mr Callaghan) We asked them to look at all the versions
that we did.
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