Examination of Witnesses (Questions 80-99)
DEPARTMENT FOR
TRANSPORT, PRICEWATERHOUSECOOPERS
AND LONDON
UNDERGROUND LIMITED
23 JUNE 2004
Q80 Mr Bacon: There is a reference in
the Report also to the repayment. Do you not think it would be
helpful—perhaps the National Audit Office could answer this—to
have a chart summarising all these transaction costs in one place?
Sir John Bourn: Yes, and we will
rework it and give it to you.[6]
Mr Bacon: I have run out of time, unfortunately.
Thank you very much.
Mr Williams: You can have extra time
if you want.
Q81 Mr Bacon: Mr Rowlands, other external
advisors, it says £26.5 million. Who are these other external
advisors? What did they each get?
Mr Rowlands: We would have to
give you a note on how it breaks down. As the Report says, in
one place earlier on it covers Hornagold & Hills who were
paid from memory, I think, £6 million out of that sum for
project management. It covers KPMG and, as the Report says, it
covers 25 other providers. I am afraid I do not have with me how
that sum of 20 odd million breaks across 27 different companies.
We will have to let you have a note.[7]
Q82 Mr Bacon: I am looking at an article
here from the Mail on Sunday from February last year in
which it says that one of the consortia bidding for the taking
of the London Tube is refusing to disclose how much it is paying
to bankers and to legal advisers. A spokesman from Metronet confirmed
the consortia would not be disclosing the full figures, and I
quote: "It was very clear that we did not have to and we
did not want to", he said. "Details have been passed
to London Underground . . . " so to Mr O'Toole " . .
. but we will not be making it public". Do you think that
is an appropriate attitude with taxpayer's money?
Mr Rowlands: No.
Q83 Mr Bacon: You do not think it is
appropriate?
Mr Rowlands: No, and I think the
position will change statutorily from January of next year with
the Freedom of Information Act coming into effect.
Q84 Mr Bacon: I am aware we got to this
£455 million but still I would hope perhaps at some time
we will get, before this inquiry is over, a much more thorough
breakdown of what went where—£170 million of it is
only some way down the line—and also some sub breakdown
of how Freshfields managed to run up costs of £29 million,
how the accountants managed to run up costs of £21 million,
how Arthur Anderson—spelt with an "o" instead
of an "e" I see—ran up a cost of £13 million
and how PA ran up costs of £12 million. It would be interesting
to see a breakdown of each of these.
Mr Rowlands: We will supply, if
the NAO are happy, in conjunction with the NAO, so they are content
with the figures, as detailed a breakdown as we are able to give
you.[8]
Q85 Mr Bacon: If it is possible to have
that before the next hearing that will be most helpful.
Mr Rowlands: We will do that.
Q86 Jon Cruddas: Can I start from a slightly
different tack, Mr O'Toole. Many of the improvements including
line upgrades, which the Chairman touched on, to increase the
capacity of the network are not intended to be delivered until
after the seven and a half year contract but, according to the
Mayor's own spatial economic development plan, London is growing
quite extraordinarily over the next ten to 15 years, possibly
up to 800,000 new people living in the city, possibly 5-600,000
extra jobs. Are you concerned about the lack of constraint in
capacity versus the huge growth in prospective usership?
Mr O'Toole: I am concerned about
it. I think it points up why it is so critical that financial
commitment has to be followed through into that second period.
Some of the time we have to wait but we have to be sure that it
is not delayed and you know these public spend projects -worldwide
I am speaking—do not have a great record in terms of being
turned in on time and on budget. It is absolutely critical that
we have the information, that we are able to chart this and drive
it so that it comes in on time. I would say further, however,
and I do not mean to cause an unnecessary digression but this
is why we have to have CrossRail.
Q87 Jon Cruddas: Sure. There are other
issues in terms of total infrastructure. Do you model prospective
usage of the Tube versus the capacity of the network, notwithstanding
the CrossRail issue, over the next seven and a half years?
Mr O'Toole: We do model it. We
are seeing the ridership on the Tube at the moment fairly flat
but as there is further development to the east there are going
to be more and more demands placed on especially those arteries
going out to the east which is why it is so critical, for example,
that the Jubilee Line upgrade comes in on time because our capacity
will go up between 40% and 50% when that new signal system is
put in place.
Q88 Jon Cruddas: Mr Rowlands, it says
in paragraph 2.10 of Report one that by October 1999 bidder interest
in the PPP was fading. What was your Department's contingency
plan if the PPP had not been agreed?
Mr Rowlands: The Department's
position—as set out in the Committee stage I think when
the Greater London Act was going through—was that the Underground
would be transferred to TfL once the PPP had been completed. Formally
I think it is fair to say that there was no plan B if PPP had
never been completed, although if you want me to speculate—
Q89 Jon Cruddas: You had contingency
plans?
Mr Rowlands: —plan B, if
PPP could not have been completed, would have been to pass the
Underground to TfL, to the Mayor. I think that was effectively
plan B.
Q90 Jon Cruddas: Your earlier argument
was that the political dynamics which shadowed a lot of this created
a lot of risk and upset some of the discussions and made them
more protracted in terms of deliberations?
Mr Rowlands: Certainly it was
the case that in carrying the PPP through it was probably worth,
as the Report acknowledges, bearing in mind that it was subject
to two judicial reviews mounted by the Mayor.
Q91 Jon Cruddas: You would not accept
the charge, which is a charge that is quite commonly put, that
the refusal to consider alternative direct Government borrowing
not only resulted in a waste of public funds but prevailed in
powerful and unnecessary bargaining with leverage to the private
sector risk benefit?
Mr Rowlands: No, as a matter of
policy the Government decided that it wished the underground to
be refurbished by means of the Public Private Partnership. It
was prepared as a matter of policy to accept the inherently higher
financing costs in the public sector.
Q92 Jon Cruddas: Because of the political
imperatives, if you like, and the debates that occurred at that
time you do not see that tilted the negotiating framework in favour
of the prospective bidders?
Mr Rowlands: No. I think it made
it more difficult for London Transport and London Underground
to negotiate with the prospective bidders because there was a
degree of political uncertainty. Certainly it reflected itself
in a more prolonged process than anybody would have wished and
arguably it impacted on some of the cost of it.
Q93 Jon Cruddas: Mr O'Toole, if I can
come back to you, have you seen, I assume you have, the note from
Bob Kiley which was sent to this Committee?
Mr O'Toole: On the first Report?
Q94 Jon Cruddas: Yes.
Mr O'Toole: I have seen it but
the first Report is not anything that, I have to tell you, I can
comment very usefully on since I came to this story after this
battle was fought. I have focused pretty much on the matters that
are contained in the second Report.
Q95 Jon Cruddas: I think you have probably
just anticipated the question I am going to ask. I will still
try anyway. It says in point two that: "The Underground understood
that it faced a Hobson's choice: the PPP according to the terms
demanded by the private sector or no new investment programme.
Had a bond option been taken seriously, the final terms of the
PPP would likely have been far more favourable to the public sector—as
the bond option would have provided another `and quite viable'
form of competition to the private sector." Given your earlier
comments, do you feel you cannot comment on that?
Mr O'Toole: I do not think I can
comment usefully on that, no.
Q96 Jon Cruddas: Mr Kiley has commented
quite effectively in terms of his views.
Mr O'Toole: Yes.
Q97 Mr Williams: Before we leave that—if
you are leaving that—in paragraph 2.27 it says: "In
modelling this risk there was, over the bidding period, a noticeable
convergence between the public sector comparator (although this
was kept confidential) and the bids". Why was it kept confidential?
Mr Rowlands: Paragraph 2.27 in
the Report?
Q98 Mr Williams: Yes, 2.27.
Mr Rowlands: I have not seen Mr
Kiley's letter.
Q99 Mr Williams: This is in the report
which you signed up to. Paragraph 2.27 of the first Report on
page 22.
Mr Rowlands: As a matter of, I
suppose, in the end negotiating strategy, and perhaps policy,
we did not make public what the public sector comparator was saying
nor did we make available in any guise whatsoever any notion of
what we might be prepared to pay because otherwise you were setting
a target for the bidders to bid against.
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