Examination of Witnesses (Questions 120-139)
DEPARTMENT FOR
TRANSPORT, PRICEWATERHOUSECOOPERS
AND LONDON
UNDERGROUND LIMITED
23 JUNE 2004
Q120 Mr Curry: To what extent were you
influenced, also, by the need not to carry this on the public
sector borrowing requirement?
Mr Davies: It is on, it is on
the balance sheet, so it was not a driver in the slightest, it
was only about value for money not getting off balance sheet which
is often a criticism people throw at these types of transactions.
Q121 Mr Curry: Right. There is a reference
to the beloved Mayor on page 29. Of course he has now been reunited
with his happy party, and I do not wish to comment upon that.
It says "In particular, the Mayor's opposition proved to
be more deep-seated than the Department anticipated and had a
more serious impact on completing the deals". Is that impact
one which is quantifiable in financial terms? It is not major
politics to say that the Mayor favoured one financial mechanism
and the Chancellor of the Exchequer was damn well determined to
get another. Between these two how much did it cost us to sort
this out?
Mr Davies: I cannot give you a
definitive figure, I can give you some indications.
Q122 Mr Curry: Give me some indications.
Mr Davies: Obviously there was
the whole issue of whether or not this delayed the transaction
which in my view it certainly did; not only the judicial reviews
but we did have a period where we were negotiating changes that
were asked and requested by TfL. That took time, and some of the
transaction cost which have been discussed earlier today were
directly as a result of that. The second thing, which may not
be financial costs but had elements within the transaction, was
we were negotiating on certain terms which were as a result of
the opposition of the Mayor to the deal. There was a period of
negotiation on those additional terms which were as a result of
concerns by lenders in particular to the political environment.
Mr Curry: I have been given a red light,
I will come back, if I may.
Q123 Mr Jenkins: I would like to reinforce
or reiterate the comments made by several Members about the lateness
of the Report. As a Member of Parliament of course we were sitting
here on Monday afternoon, reading a Report on Monday, I had other
things to do yesterday so it was difficult to get into this rather
complicated matter. Take it as a given that Members realise we
have to have some time to read these Reports or we have to have
an adjournment and call you back. Mr Rowlands, when you read this
Report and signed it off were you pleased by the Report or saddened
by the Report or just took it as a given?
Mr Rowlands: I do not think I
was either pleased or saddened by it. I think it underlined quite
rightly the complexity and it is a very complex set of contracts
to deal with a difficult problem. I think it flagged up—this
may be an own goal on my part—one or two lessons that the
Department can learn and perhaps other Government Departments
can learn from this. In one sense, and it is part of the difficulty
I have with the Committee, it is spot on in the way it said it
was difficult to have other than limited assurance about value
for money because of the nature of the contract because you only
know the prices for the first seven and a half years.
Q124 Mr Jenkins: This shortened structure
at the end was no-one's first choice so why do you think we should
believe this is the best option?
Mr Rowlands: Because other first
choices, and the Mayor and Mr Kiley, for example, would have had
a municipal bond issue to pay for remediating the London Underground,
that was a policy choice that was not open to Transport for London.
No local authority in this country issues its own municipal bonds,
it was not available as an option even though it was the Mayor
and Mr Kiley's choice, for example.
Q125 Mr Jenkins: If I look at page three,
figure one—simple question because most of the difficult
ones have been asked already so I will ask the simple questions—am
I right in looking at this and thinking that the Department of
Transport is putting something like £1.1 billion a year into
the system and fare payers are paying about a billion pound a
year?
Mr Rowlands: Yes.
Q126 Mr Jenkins: When I buy my £2
ticket on the Underground for Zone 1, effectively it is costing
me £4 because I am putting £2 in as a taxpayer, am I
not, is that right?
Mr Rowlands: Yes, in the sense
that the fare box covers about half the annual cost of running
the London Underground.
Q127 Mr Jenkins: So it has a 100% subsidy?
Mr Rowlands: It is 50% subsidy.
Q128 Mr Jenkins: 50% and matching it.
So to be self-financing, you have to double the fares?
Mr Rowlands: That is assuming
you do not drive the passengers off.
Q129 Mr Jenkins: They have got nowhere
else to go very often in London.
Mr Rowlands: Yes.
Q130 Mr Jenkins: What did London Underground
do to maintain their own assets? Did they draw that from revenue
or were they subsidised through the amount they could spend on
maintenance?
Mr Rowlands: It is slightly complicated.
Prior to the PPP effectively London Underground received capital
grant from the Government in respect of the big enhancement projects
so the Jubilee Line extension was paid for by grant from the Department,
there was no borrowing by anybody other than the Government through
gilts in the first place. It sought to cover its operating costs
and at one stage the way it was accounted for, they were making
a surplus on operating accounts, although that surplus has now
disappeared I think.[10]
Q131 Mr Jenkins: In the last few minutes
I looked through and on page five, paragraph 11 there is "The
costs of the PPP". One of the things that Members have mentioned
is the total of £275 million of bidders' costs which are
reimbursed. I looked down what the bidders' costs amounted to,
how they are made up. I thought this should be simple enough.
I can understand what we have got here is, for instance, the costs
included success payment payable to the sponsors—which is
quite nice—the costs for lost opportunity of utilising this
capital to make other business investment returns, which I can
live with, I think, just about and then any risk of non recovery
of costs during the three year bid process. Can you explain that
to me please?
Mr Rowlands: This was, as I understand
it, Tube Lines putting an element into their bid costs as in effect
a reward for the risk that they might actually not be able to
recover any costs at the end of the bid process. I think I said
there were certainly some lessons in this Report for the Department
and perhaps for other Government Departments and I think there
is a lesson in relation to bid costs in this case. Certainly in
a project of this magnitude with these sums of money I think,
looking backwards, the Department and London Transport ought to
have established from the outset what was going to be a legitimate
element in a bid cost and in relation to this particular element,
although it was allowed as part of the bid costs, because it all
surfaced at a relatively late stage I think there is possibly
quite a strong argument that faced with such a proposition again
you might want to disallow it. I think that is a lesson for us.
Q132 Mr Jenkins: It is a lesson we have
learnt that when the private companies out there get their hands
in the public pocket they think it is Christmas. I could have
told you that before this process started.
Mr Rowlands: What happens normally
is you do not know what a winning bidders bid costs are because
they simply recover them through whatever their winning bid is.
In this particular project they were driven out publicly.
Q133 Mr Jenkins: Would you say that the
compilation of their costs was transparent and easily accountable
to you?
Mr Rowlands: It was audited by
London Transport and should have been transparent to them.
Q134 Mr Jenkins: Who paid it?
Mr Rowlands: It is ultimately
recovered through the monthly infrastructure charge over 15 years
and therefore is paid out of the grant that is paid by the Department
to TfL.
Q135 Mr Jenkins: We pay it, the taxpayer
pays it, do we not? If you look at page five—I am on refinancing—paragraph
ten, section c, it relates to the fact that we will get some money
back, as I read it—
Mr Rowlands: Yes.
Q136 Mr Jenkins: --- on the refinancing
of the debt. Is this across all parts of this package? Do we get
money back if any part of the package is refinanced?
Mr Rowlands: That is ultimately
now a matter for TfL and the Infracos. My understanding is, I
think I am right, that in the event of refinancing on the other
Infracos, TfL will also share in refinancing.
Q137 Mr Jenkins: Asset maintenance, we
have drawn a lot, and I was as much surprised as Mr Bacon we had
only spent £6 million establishing the state of assets with
engineering. You refer to the fact that we could not undertake
certain works because they were hidden, et cetera, I understand
that. If I look on page 19 at figure nine, there is this big uncertainty
of the asset base which caused us so much concern in the packaging
and the financing of this deal. Am I reading this right because
on figure nine does it not say there that rolling stock and signalling
capital expenditure is reasonably high, averaging just over 20%;
asset maintenance cost is probably less than 20% of the total
financing package? Am I right there?
Mr Rowlands: Yes.
Q138 Mr Jenkins: Down the bottom it says
track capital expenditure. I am not sure what track capital expenditure
is if it is not asset maintenance but I presume it is for replacing
the track?
Mr Rowlands: Yes.
Q139 Mr Jenkins: This 20% is approximately,
roughly, what £200 million a year on the actual maintenance
of the asset, refurbishment of the asset, yes?
Mr Rowlands: Yes.
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