Examination of Witnesses (Questions 222
WEDNESDAY 6 MARCH 2002
222. Secretary of State, I want to come on to
the PPP for London Underground. London Transport told us that
it started the Public-Private Partnership "in order to get
the funds to fix the tube". Does that mean that this is a
failure on the part of the Treasury?
(Mr Byers) A failure on the part of the
223. Yes. Do the Treasury not understand the
interests of public transport, or do they just think this is a
business rationale for adopting the PPP?
(Mr Byers) No, I think the PPPthis is the important
thing for me as Transport Secretarywill secure the investment
in the London Underground that has been denied for generations.
224. So it was not just decided that it was
a good way of ensuring no public money went into it?
(Mr Byers) I think the figures will show that there
is a significant amount of public money that will be going into
London Underground, both in terms of the modernisation of London
Underground as part of the Public-Private Partnership, but also
in terms of the grant that we make available for other operating
225. But of course it will not be recorded in
quite the same way in the Government's balance sheets, will it?
(Mr Byers) That is true, because it is a public-private
partnership and it will be so operated.
226. So it is quite a good wheeze in one way,
is it not?
(Mr Byers) Some may say it is a good wheeze. I think
the important thing is whether or not the travelling public in
London will see improvements to the London Underground. I really
do believe that as a result of the effectively £1 billion
a year investment that will be going in, then we will begin to
see improvements as far as the Underground is concerned.
227. I think my colleagues might want to take
up various aspects of that. Is there any reason why a properly
funded public alternative could not provide all the benefits that
are suggested by the Public-Private Partnership?
(Mr Byers) I think one of the reasons why we wanted
to be clear that value for money would be achieved was to look
at those alternatives, and I believe that that has been done.
As the National Audit Office said, the problem with a value for
money test is, it is not a pass/fail, there is always going to
be a sort of subjective element, and a Secretary of State or London
Transport will be judged on the decisions that they take. What
is very clear to me is that this is a scheme that will secure
lasting benefits as far as the Underground is concerned.
Chairman: Perhaps we can discuss that with you.
228. Risk transfer, Secretary of State. When
you gave evidence to us in December, we understood that the risk
transfer for cost overruns was £200 million per contract
period. We now understand that this is £200 million per contract
over 30 years of the contract. Is that the case?
(Mr Byers) No, the infrastructure companies will bear
the full risk of any cost overruns that result from their own
inefficient or uneconomic behaviour; they will bear the full costs.
229. The original tender documents stated that
any cost overruns for the life of the programme (30 years) and
all that exposure beyond will be on the backs of the infrastructure
companies or the private contractors. We understand the current
situation to bethat is, the current situation, the most
recent round of the documentsthat the £200 million
figure that I quoted previously has been reduced to £50 million,
something like £7 million per year of the contract, in expenditure
of £1 billion a year. Can you confirm that, or is that not
(Mr Byers) No. The situation is that all of the equity
put in by shareholders will remain at risk if the companies fail
to perform, and I think the shareholders' equity is something
like £500 million which is being put in. That is going to
be at risk for cost overruns that result from inefficient or uneconomic
behaviour, and that is a significant amount. So I saw the figure
as well being quoted, and the figure does not accurately reflect
the true situation which is revealed in the contracts.
230. Is there not a cap, Secretary of State,
on the amount of money that may be called in from the Infracos
if they are deemed to be inefficient?
(Mr Byers) There is no cap.
231. There is no cap?
(Mr Byers) No. All of the finance provided by the
shareholders will be at risk if they fail to perform, which will
provide strong incentives for good performance. There is no limit
on the size of penalties for poor performance. If I can give an
example of that, for example, under the contracts, a signal problem
which delays services on the Jubilee Line for a day could be a
penalty of over £300,000 being imposed on the infrastructure
company, with no cap.
232. Secretary of State, this, as you well know,
is somewhat contrary to the information that we have, so can we
be very clear on this, because I do not want to misunderstand,
as I am sure you do not. Are you advising the Committee, on the
record, that there is no cap on the amount of resource that could
be called in from the Infracos if they are deemed to be inefficient
and not carrying out their contract obligations?
(Mr Byers) The cap is the limit of the finance being
provided by the shareholders. That is, I believe, about £500
million. That is all at risk if they fail to perform, and the
sort of penalties that can be imposed are like the one I just
referred to in relation to the Jubilee Line where potentially
there could be a penalty of £300,000 a day for a signalling
failure there which delays services.
233. So there is a cap?
(Mr Byers) There is a cap based on the equity being
put in by the shareholders, but that is £500 million.
234. Yes. I am a lay person here, so I am looking
to you to help. Irrespective of where it comes fromshareholders,
Infracos, whateverthe Infracos have got a cap on the amount
of resource that can be called in, from whatever quarter, within
(Mr Byers) The cap is based on shareholder finance
which totals around £500 million in the first 7½ years.
235. It is £500 million in the first 7½
years, it is not £50 million?
(Mr Byers) No, it is £500 million.
236. So it is £500 million in the first
7½ years. What is it over 30 years, Secretary of State?
(Mr Byers) I do not have that information in front
of me, but I can certainly let the Committee know.
237. Would you do that, please?
(Mr Byers) Yes, of course.
238. The information we have is that over 30
years it is something like £300 million out of a total anticipated
investment of £15 billion. Are you not arguing about the
inefficient and inefficiency in terms of performance of the Infracos,
and are you not saying that they can only lose on that inefficient
(Mr Byers) Yes. I am talking specifically about their
own inefficient or uneconomic behaviour. That is when this £500
million over 7½ years would be at risk.
239. I think we are going to have to return
to that. Can I turn to one other question, and that is that evidence
that we took, I think, last week, which I thought was quite disturbing
or potentially disturbing, which relates to possible conflict
of interests. Would you confirm, do you know, Secretary of State,
that PricewaterhouseCoopers are auditors to Bechtel (Tube Lines),
the same company are auditors to Halcrow (Tube Lines), the same
company are auditors to W S Atkins (Metronet), the same company
are auditors to RWE, the parent of Thames Water (which is Metronet);
Ernst & Young, whom of course you quoted widely from in your
statement of last week about the benefits of the PPP, are auditors
to Jarvis plc (Tube Lines), the same company are auditors to Bombardier,
Canada (Metronet); Cap Gemini Ernst & Young have a £25
million joint venture with W S Atkins for IT development, and
Ernst & Young were appointed by your Department as administrators
for Railtrack? I do not want to mention Enron, but is there just
a touch of potential conflict of interest in that situation, at
the very least?
(Mr Byers) I think the problem we have is that there
are only five major accountancy firms in the UK that do this sort
of business. You will also find, I think, that at least one of
the firms that has been involved in advising those involved in
the PPP have also had contracts from Transport for London,
from the Mayor and from Bob Kiley, so it is a question of looking
at the work which is carried out by those organisations. As to
the Ernst & Young work certainly that they have done for me,
I have been very open, there has been a full disclosure of all
the information that they have provided to me, and people will
make their own judgement, but I am afraid it is just the nature
of having only a handful of major accountancy firms that do this