Examination of Witnesses (Questions 60-79)
DEPARTMENT FOR
TRANSPORT, PRICEWATERHOUSECOOPERS
AND LONDON
UNDERGROUND LIMITED
23 JUNE 2004
Q60 Mr Bacon: If it had been publicly
funded.
Mr Rowlands: If it had been publicly
funded, triple A.
Q61 Mr Bacon: Am I to understand from
that the total cost of the debt would have been £3.35 billion
had it not been for the fact that the private funding was used?
Mr Rowlands: I am not sure that
is right.
Q62 Mr Bacon: I am subtracting £450
million from £3.8 million. Is that right?
Mr Davies: No. One is the size
of the original debt, which is £3.8 billion, the extra cost
of £450 million is the extra interest charge over 30 years.
Q63 Mr Bacon: Right. If you roll it all
up, my question was not what is the total debt but what is the
total cost of the debt? Can you give me an answer to my question?
Mr Rowlands: We will have to give
you a note on that.[3]
Mr Davies: We can give you a note
on that.[4]
Q64 Mr Bacon: You have come to this Committee
to talk about financing of London Underground and you do not know
the answer to how much is the total cost of the debt.
Mr Rowlands: No.
Q65 Mr Bacon: Do you really not have
that?
Mr Rowlands: Not off the top of
my head.
Q66 Mr Bacon: Why not?
Mr Rowlands: I am sorry, I did
not come with the figure.
Q67 Mr Bacon: Is it not pretty obvious.
It says here the extra cost of the debt, the extra cost of the
private debt rather than the public debt, is £450 million.
Mr Rowlands: Yes.
Q68 Mr Bacon: To arrive at that figure
you must be able to compare one figure with another and say the
difference between the two is £450 million. That is what
the Report says. I am asking you what are the figures, the difference
between them being £450 million.
Mr Rowlands: I do not have those
figures in my head.
Q69 Mr Bacon: Does the National Audit
Office?
Ms Leahy: We set out the amount
of total debts per Infraco and the extra costs of the debt per
year and we have worked out the total discounted value of the
extra interest. I do not think we added up, you know, the year
by year figures.
Q70 Mr Bacon: I am hesitant about the
phrase "you know" because if I knew I would not ask
you the question.
Ms Leahy: I think we could give
you a reasonable approximate value at the moment in the sense
that the discounted value of the total deal over 30 years is £15.7
billion and a very large part of that is the debt. It would not
be very dissimilar but I do not have the exact figure here. We
did not look at it year by year, the extra cost per year, and
as I say we did actually aggregate the extra cost over the whole
30 years. I do not think we did that for the particular debt figures.
Q71 Mr Bacon: Mr Rowlands said it is
a £30 billion programme, is the other £15 billion something
else? Is that equity or what?
Ms Leahy: That is the discounted
value. I would expect the other figure to be an undiscounted.
Mr Rowlands: The other figure
is undiscounted.
Mr Bacon: Right. I am slightly surprised
to have so little accurate information on something so fundamental.
Q72 Mr Williams: As we may be returning
to this subject, will you see if you can get that information
to us as quickly as possible after this hearing. I think we have
to ask the Department that.
Mr Rowlands: Yes.[5]
Q73 Mr Bacon: May I ask, while I am on
the subject, is this debt all on the balance sheet?
Mr Rowlands: Yes.
Q74 Mr Bacon: As far as the Government
is concerned?
Mr Rowlands: This transaction
is on the balance sheet.
Q75 Mr Bacon: If I could ask you to turn,
Mr Rowlands, in the first Report to page 31, which is figure 13.
This is another figure of £450 or, in fact, £455 million
which are the transaction costs. The Report says that the transaction
costs were £455 million. In this Report here it summarises
some of these transactions costs. Much has been made of the poor
asset condition and the lack of knowledge about asset condition.
You will notice Ove Arup, the engineering advisers, were paid
£6 million on the assessment of the asset condition whereas
at the top there Freshfields—a very blue chip law firm which
I am sure we would all want to go to if we could—were paid
£29 million. So the engineers who were assessing the asset
conditions got £6 million and the lawyers got £29 million.
Do you think that is the right way round? Do you think that is
an accurate reflection of the priorities the Department should
have?
Mr Rowlands: Yes, because you
would not have anywhere near bottomed the state of these assets
by spending two or three times as much money with Arup's.
Q76 Mr Bacon: Could you speak up.
Mr Rowlands: Sorry. You would
not have bottomed the problem with the state of these assets by
simply spending two or three times as much money with Arups or,
indeed, any other engineering consultancy. This is about the state,
for example, of Victorian tunnels which can only be discovered
when you start to take the brick work off and do the remedial
work and that is the risk the private sector is taking.
Q77 Mr Bacon: It was right to spend five
times as much on lawyers as on engineering consultants?
Mr Rowlands: In the context of
this deal, yes, because the risk that was so difficult to establish
was being passed to three infrastructure companies to handle.
Q78 Mr Bacon: One of the things that
worries me about this, and I share Mr Trickett's concerns, you
answered Mr Trickett's question: "This is good value for
money". "Do you think it is value for money?" and
you said "Yes". Mr Trickett earlier had asked Sir John
if it was good value for money and he said "We cannot tell".
Quite how the two are in sync with one another, I do not know.
It cannot both be the case that we do not know, we simply cannot
say whether it is good value for money or not, and that you say
it is good value for money. In addition to that, you then say
that there are these huge unquantifiable risks. It reminds me
of some computer contracts we have looked at where precisely because
the risks are unquantifiable the Government ended up recognising,
and the Treasury ended up recognising, that they are unsuitable
for Public Private Partnership or PFIs. Why is that not the case
with this?
Mr Rowlands: Because this is not
an IT contract. It has been structured on the basis where the
NAO's Report does acknowledge that basically all the project risk
is with the private sector. It will not come back to us. These
contracts place the risk of remediating these assets firmly in
the private sector's hands. They have bid a price for it and if
they have got the price wrong then they will bear the consequence
in terms of their rate of return or eventually loss of their equity.
Q79 Mr Bacon: This little lot here on
page 31, these fees that are referred to for various advisers
and so on, adds up to £170.4 million, the transaction costs
in the same Report were £455 million. What is the rest?
Mr Rowlands: The rest is composed
of bidders' costs, relatively small sums for the losing bidders
and, as the Report shows, from memory I think it was £134
million for Tube Lines' bid costs and £116 million, from
memory, for Metronet's bid costs.
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