Examination of Witness (Questions 186
- 199)
WEDNESDAY 27 FEBRUARY 2002
MR BOB
KILEY
Chairman
186. Good evening, you are most welcome here.
Would you be kind enough to tell us who you are?
(Mr Kiley) I will, Chairman. Thank you for the invitation.
My name is Bob Kiley and I am the Commissioner for Transport in
London.
187. Thank you very much. Did you have something
you wanted to say, Mr Kiley?
(Mr Kiley) I will say something very brief, if I may,
Chair. I know the clock is running down here. I think we should
probably get back to the basics at this point, having sat through
the last hour and a half with some fairly arcane conversation
coming from this table. Essentially, I think the Underground,
when it responded as to who started all this, said their problem
was they could not really deal with the infastructure because
there was insufficient funds, so you have infastructure decay
on the one side, and inadequate funding on the other side. Now,
where are we at this stage, four years into this procurement?
We have a programme reflected in this most recent set of what
are now called "final documents" that has changed very
dramatically, especially in the last six months. Essentially,
what we have ended up with at this point is a maintenance scheme,
and the capital improvement programme, the renewal programme,
has almost disappeared. So one of the reasons why the Underground
was interested in this, and may have been coaxed or teased into
it, seems to be going off the charts, at least for the next seven
and a half years, which is the whole renewal programme. The second
question has to do with money, and I guess there is not anyone
in the room right now who is in a position to know whether there
will in fact be a commitment. We do know there have been conversations
going on between DTLR and the Underground, having to do with the
next spending review period, and that those conversations undoubtedly
reflect joined up Government thinking about what will happen to
the Underground. So we must be very close to knowing what the
initial projections are. My suspicions are that there are people
alive and living in this town or near it who actually do know
what those numbers are, so I think we should all persist in trying
to find that out. Finally, I might say that the undergirding tenet
of Government financing has seemed always to be the transfer of
risk to the private companies that will assume ownership of the
Infracos at some point in the not too distant future if PPP continues
to be pushed. That risk transfer has also gone the same route
of the capital renewal programme: it has all but disappeared.
On the one hand—this is the tender that started all this.
There is a provision in here which says that if there are any
cost overruns for the life of this programme—30 years—all
that exposure will be on the backs of the infastructure companies
or the private contractors. About a year ago, that was changed,
and for the seven and a half year period that we are talking about,
the cap was put at £200 million. That is a pretty significant
sum, but it is nothing like unlimited exposure, which would have
represented genuine transfer of risk. In the most recent round
of documents, that £200 million figure has been reduced to
£50 million or roughly £7 million per year, and £7
million per year in a £1 billion programme is almost inconsequential.
Risk gone? Risk, where is it? You are looking at him. So that
is the very raison d'être this programme has essentially
gone south on us, and most of it has happened in the last six
to ten months. The original purposes have basically been abandoned,
so, in effect, we have ended up with a glorified maintenance programme
and what I would call a "set of cost plus contracts".
Cost plus contracts, that is a bad term, unless you are going
to war or a national emergency of some other kind that has occurred
that causes you to resort to almost desperation circumstances,
which is to pay contractors almost anything they submit to you
in the way of an invoice to fix the problem. I would submit that
while the situation is not what we would like it to be at the
London Underground, we are not facing a force majeur, and we are
not in those circumstances. We have come to a pretty sorry pass
at this point. This procurement has absolutely changed from the
day that this document was distributed. So I would be very happy
to answer any questions. I guess I should add, I am bound to add,
that once again, we have had problems getting documentation from
the Underground, supporting materials for the assessment report
that they were discussing earlier. And to this day, we are in
day 14 now of 20 working days of consultation, and we still do
not have complete documentation. The question was asked here about
the rate of returns, and especially the return on equity. Well,
knowing what the return on equity is, and we should be able to
know that if these are final prices, almost everything else you
try to do in terms of value for money is for nought, it is theoretical
and truth. So our position is that consultation has not begun
because we do not have adequate documentation to do it with, and
if in fact that documentation was not available at the time that
the London Transport Board took its decision and made its recommendations
to the Secretary of State, and then the Secretary of State made
his decision, they were really working on a basis of inadequate
information. We understand that negotiations are still going on
with the bidders, and that is probably a mistake, to continue
negotiating with the bidders after a set of recommendations has
been made. So this is a very constrained consultation process
that we are going through right now. We are probably going to
be arguing one day soon that it is no consultation process at
all and that the clock should be rewound and perhaps some of the
decisions that have been taken dissolved.
188. Could I ask you, do you have the faintest
idea of what the criteria is being used now to judge this PPP,
since it manifestly is not the document you started off with,
and since—I suppose I am right in assuming that you have
not managed to talk directly with anybody from the Treasury?
(Mr Kiley) You are correct.
189. I do not know how I guessed that. And there
have been these enormous changes, and you heard from London Underground
how great a role faith is playing in these negotiations. Could
you tell us: what kind of criteria do you think are actually being
used to judge this PPP?
(Mr Kiley) I think that there is four years of commitment
from those who are sponsoring this procurement. A fair amount
of resource has been invested in this, well over £100 million.
Four years is a long time, and I think the central criterion that
now seems to be in play is, "Let's just get it over with",
and "We have the power to push it through". I do not
think it is a lot more sophisticated than that. It has been a
long time since I have heard a ringing defence of PPP other than
the mantra that £16 billion or resource will be unlocked.
All of it, by the way, eventually will be public money because
these are loans or investments that all must be repaid, or on
which there must be a return, so this is not exactly manna from
heaven; this will all come out of the taxpayer or the farepayers'
pocket. As to the question of whether there is a guarantee involved
here: what my colleagues from LT and the Underground neglected
to mention is that there is an LT guarantee of the Underground.
That gets transferred to Transport for London at the time
of transfer and takes on a wholly different significance, because
Transport for London is a very different body than LT was.
LT is basically a creature of the Central Government. TFL is,
in effect, a creature of the Greater London Authority. So that
guarantee will be transferred, and the question of the comfort
letter really is one of whether or not the Government will be
in the queue. It will be at the end of the queue, but will it
be in the queue at all? I submit that no serious banking concern
is going to get into this, unless there is, in effect, a Government
assurance that they will not be left high and dry under any circumstances.
Mr Stevenson
190. Mr Kiley, you say it is a long time since
you have heard anyone present a defence of the PPP, but one of
the defences or rationales put forward in support of the PPP is
that—we have heard this before, have we not—there
is no alternative. Indeed, I understand the Secretary of State
has actually said as much. He is on record as saying, "If
we do not go ahead with this PPP, we could look forward to yet
more delay while different plans are prepared and a new procurement
exercise put in place." Do you accept that argument, that
there is not any alternatives and, even if there are, the delays
would be disastrous for London Underground?
(Mr Kiley) I do not accept that argument at all. I
never have. As a matter of fact, I think if we transfer the London
Underground without PPP to TFL now, we would be in a position
to produce very visible improvements sooner than PPP will. After
all, the private companies have not really mobilised themselves
yet; they do not have the people who are going to be doing the
work on their payrolls—the payrolls actually do not exist,
except for the small group of people who are negotiating these
contracts. They are going to have to get their acts together.
Do not be lulled into thinking that these consortia are anything
other than paper organisations right now consisting of individual
companies of some strength, but who will be the people who will
be mobilised? Who will be the CEO of tube lines? Is it the person
who just replaced the CEO who left two months ago to go to work
at Railtrack? He must have considered that a step up, otherwise,
why would he have done it? And who is going to be the CEO of Metronet?
If the current CEO is successful in getting new employment—I
know he is looking for work because he actually interviewed for
a position where I have some knowledge of who the candidates are.
So let us make no mistake about what it is we are dealing with
over here: on our side, we have commitments from four banks that
they are prepared to underwrite in successive tranches over a
period of seven and a half years upwards of 3 billion of loans,
and we will be able to get to the capital markets within three
to six months of the starting point and we will be able to begin
procurement processes for both new rolling stock and refurbishment
processes for rolling stock that can still be fixed and have their
natural life extended very substantially within that three to
six month period. So we will be in a position where we will have
new rolling stock and completely refurbished, not cosmetically
refurbished, but thoroughly refurbished rolling stock coming into
the system within the next two years, and my commitment would
be that the entire train fleet will be replaced or refurbished
within seven and a half years. That is exactly what was done in
New York with a fleet that is twice the size of London, and that
is what we are going to do here. PPP will have 12 trains in the
system by the end of seven and a half years.
191. So there is no ambiguity about this, because
you appreciated, by the tone of your answer that this is a crucial
issue, you are saying that if your scheme, Transport for London,
were given approval next week, within two years, all that could
be done, and there would be no problem with the finances. You
have talked about refurbishment of rolling stock. What about refurbishment
of infastructure and stations and so on?
(Mr Kiley) Well, it is true that there are crucial
stations that need attention, but stations in the early going
would receive a lower priority than getting at the line upgrades
and the replenishment of the fleet, because, I think what our
customers are going to be mainly concerned about is improving
the reliability and the quality of the actual service that they
use, and they will endure the stations and experiences on the
platforms in order to get that because there is not enough money
to do all these things at once, you have to determine some priority.
Having said that, PPP, in this tender, originally, by the end
of the first period, most of the lines were to be to the 20 per
cent upgrade mark. What do we have on our hands right now? Nine
of the twelve lines will get no upgrade activity at all in the
first seven and a half years. One line will get a 15 per cent
upgrade, that is the Jubilee line, and then Waterloo & City,
and—I forget what the third line is—will get very,
very modest improvements, and the Jubilee line improvement is
in the last year of the seven and a half year period.
192. Mr Kiley, because I have interpreted your
answer as effectively saying that infastructure, in the sense
of stations and so on, would be given a low priority, ergo later
on, perhaps after seven years, are you not, therefore, running
the risk of facing the same criticism, if you like, of what is
happening at the moment in the evidence we have heard this afternoon,
of similar infastructure projects being pushed back, post seven
and a half years, because of financial considerations?
(Mr Kiley) No, I simply said let us assume we had
the capital renewal envelope of somewhere in the neighbourhood
of £600 million, this is putting aside the maintenance, that
will buy a lot of activity over the next seven and a half years.
It will buy an entirely new or refurbished train fleet, 3,200
cars; it will get a start on half a dozen upgrades that will have
to continue into the second period, because these really do take
time; we are talking here about roadbed, track, signals and major
work being done. It will not all be the same kind of work because
some lines are in relatively good condition and will not require
as much effort in the immediate future. Other lines require a
great deal of effort and they require it very soon.
193. Two further questions, correct me if I
am wrong: have your plans, as you briefly outlined to us this
afternoon, Mr Kiley, been subjected to any outside analysis?
(Mr Kiley) Such as, say, Ernst & Young, or—
194. I use the term "outside analysis"
advisedly. Perhaps I could think of another word to use. Has any
other organisation, not connected with Transport for London, made
any critical assessment at all of your plans?
(Mr Kiley) Well, we have distributed a major document
which is really a summary of our plan, it is not 3,000 pages long,
it is much shorter than that, and we have been in consultation
with the banks that I mentioned to you that are committed to raising
upwards of £3 billion and they have taken a very careful
look at this programme as to financial feasibility and whether
or not we will be able to deliver the competence on the staff
side to actually carry the programme forward.
195. And those banks have produced their analysis,
have they?
(Mr Kiley) They have not produced to me an analysis,
all they have done is made a commitment in the form of a letter
to finance the scheme.
196. This is the point I am getting at. This
is a complicated issue, it does not matter which way it is done,
it is certainly complicated. I think it is reasonable to ask yourself
and your organisation this question. You say this can be done;
you say, "Go ahead", and within two years this will
be done and that will be done and so on, and the banks are committed
to you, you say. But by definition, that is your analysis of what
can take place and, to add the "robustness", using that
word, would you not agree that some other organisation should
be scrutinising your proposal, your assumptions—
(Mr Kiley) Any other organisation is welcome to come
in and look at—
197. But, as yet, that has not been done?
(Mr Kiley) We are all prisoners of our own experience,
in a sense. In New York and in Boston where programmes of at least
this magnitude were launched, we did not really get into complicated
long processes leading to four year—
Chairman
198. We are not asking whether you spent £128
million on advisors, you are just telling us, very simply, you
have had to make a business case to the banks, they have looked
at your figures and they have accepted?
(Mr Kiley) Yes, and people are welcome to come and
look at—
Mr Stevenson
199. Finally, you mention £3 billion. We
are talking here about investment or anticipated investment of
what, £15 billion over the period? How do you equate the
two?
(Mr Kiley) That is a very interesting question because
I think there is frequently misunderstanding of what it is that
lies at the heart of PPP. Originally, this was a scheme that envisaged
both major capital renewal and the Infracos doing all of the maintenance
work of the London Underground. So when people talk about pricing
that, they are talking about one price covering both of those
activities. We would separate out the maintenance. We would bring
the maintenance back into a unitary management structure, which
I think is one of the most fundamental flaws in this scheme, the
fact that it is separated out. When you take out the maintenance,
let us just say arbitrarily that you cut the amount of money in
half, so the £ billion number that has been thrown around
somewhat loosely I think, probably comes down to around £600
million for the capital renewal programme. So the amount of money
that we are talking about, which would be focused on capital renewal,
is less than the amount of money that would be embedded in the
combination of the maintenance work and the renewal. It is not
very well delineated in the contract documents, because it is
in the nature of these documents that you do not ask them for
plans. They do not submit plans for either capital improvements
or maintenance upfront.
Mr Stevenson: Thank you.
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