Examination of Witnesses (Questions 160-179)
DEPARTMENT FOR
TRANSPORT, PRICEWATERHOUSECOOPERS
AND LONDON
UNDERGROUND LIMITED
23 JUNE 2004
Q160 Mr Curry: Patience Wheatcroft, who
writes on financial matters for The Times - and not as
far as I know a rabidly left wing journalist—when she read
the Audit Office Report she wrote the following: "To paraphrase
the carefully crafted prose of Sir John Bourn this looks like
a potentially very expensive scheme that may not deliver very
much in the way of benefits to travellers but is certainly a bonanza
for the private sector. For everyone from consultants and lawyers
to engineers and construction companies, the Tube has turned into
a gravy train. Gordon Brown is the driver. The Chancellor has
determined that Ken Livingstone would not have his way and finance
the much needed revamp of the Underground through a bond issue.
As far as the Chancellor was concerned it was PPP or nothing and
eventually he fought London's Mayor throughout the courts to get
his way. Mr Brown's devotion to the PPP was not wasted on those
who might put it into practice. They saw a desperate customer
coming and as the NAO relates pitched their charges accordingly."
If one picked a scale of zero meaning she is absolutely all over
the place and ten just about spot on, where would you put that
comment?
Mr Rowlands: One.
Q161 Mr Curry: Which bit has she got
right?
Mr Rowlands: She has captured
the notion of the complexity of the PPP but for the rest she is
a journalist, it is good copy but I do not agree with it.
Q162 Mr Curry: I am a journalist as well.
The suggestion that the thing can be defined as being wrong because
it is written by a journalist, which seems to be the implication
you are making, does seem to me to be one I would be slightly
cautious about in general. Has she misinterpreted the National
Audit Office Report or is that a criticism you would make of that
Report?
Mr Rowlands: I do not know what
her interpretation is apart from the words on the page in The
Times with which basically I do not agree. I do not believe
this was a gravy train for consultants or advisers and the NAO's
own Report says the costs were reasonable in relation to the scale
and complexity of the deal. These are £30 billion worth of
contracts. The costs though in absolute terms largely represent
about 1½% of the total cost of the contract. That is not
outrageous or unusual in relation to a contract.
Q163 Mr Curry: It is true that on this
occasion on this deal, which you say is enormous, very long in
its timescale and extremely complex one did have two principal
political personalities engaged who had opposite views of the
way to go forward and neither of whom were inclined to give way,
and in the end it had to be fought out on a legal basis. All might
be changed now though, we will not comment on that, but would
it have been easier, do you think, had there been a greater harmony
between those personalities?
Mr Rowlands: I suspect the answer
is yes but that is about as far as I can go really.
Mr Williams: It is a question of how
far the witnesses can go in this direction.
Mr Curry: No, no, I do not intend to
take him any further at all. The Audit Office Report itself made
reference to that, which was why I asked the question.
Mr Williams: It puts him in an embarrassing
position as a civil servant.
Mr Curry: We ought to have the Chancellor
here.
Q164 Jon Cruddas: Just one question that
has not been covered in all this. The Committee of Public Accounts
in other analysis of PPPs looked at the way the terms and conditions
of employment had taken the strain at times. As far as I picked
out, when I read these Reports, there are two references to the
employment conditions of those workers transferred over which
I think amount to some 7,500. It hints that certain understandings
were made about the protection of those workers. Could you give
some details about that?
Mr Rowlands: Yes. This is from
memory. It was made explicitly clear by the Government at the
time the PPP was initially conceived that the terms and conditions
of any members of staff transferring into an Infraco would not
suffer detriment and that in particular the Infraco's membership
would remain in the existing pension scheme and not be placed
in another one.
Q165 Jon Cruddas: Does that include new
recruits as well because there has been quite a significant amount
of recruitment as well?
Mr Rowlands: I need to come back
on that, if I may, but my recollection is it did not and could
not cover new recruits because you could not define the position
25 years out for a new recruit into one of the Infracos.[13]
Q166 Jon Trickett: Something which has
not been addressed and it is very hard to understand from this
Report, is this issue of the compensation we pay to bidders. Companies
or consortia which were bidding for the contracts were reimbursed
the cost of their bid. I think we see reference to it on paragraph
3.16 on page 32. It seems that one company bid for two contracts
and was reimbursed £116 million, which was Metronet, and
another company called Tube Lines which bid for only one line
was reimbursed £134 million, more than the consortium's bid
for two lines. When I went to paragraph 3.16 and table 14 on that
page there, there is an analysis of the expenditure by Tube Lines
on the bid and it appears that most of the expenditure which that
company had took place after the contracts had been awarded. First
of all, how can you reconcile the fact you paid more to a company
which was only bidding for one contract than you paid to a company
which was bidding for two contracts? Secondly, can somebody explain
this table to me in a way which makes sense? If I have understood
it correctly how on earth have we given them the money for bid
costs after they have won the bid?
Mr Rowlands: Can I start with
your second question, if I may?
Q167 Jon Trickett: Sure.
Mr Rowlands: Can I begin by, I
am afraid, repeating myself. All winning bidders recover their
bid costs in their contract prices. If winning bidders do not
recover their bid costs they go out of business in the end. What
this process did was make visible, if you like, what the bid costs
were in relation to these particular contracts. To take your second
question first, most of the work that both bidders did happened
in the latter stages of the process because this was when Metronet
were putting into place the contracts that it was supplying its
outputs through and Tube Lines was beginning to do due diligence
in relation to the contracts it was going to let. This is a heavyweight
expenditure on financial and legal advisers in relation to closing
out the contracts. So, for example, on the financial side, the
Tube Lines' bid costs include tens of millions for the financing
fees for debt that was put in place and tens of millions for the
insurance with which they wrapped some of the debt to get a better
interest rate on it and insure some of it in the market.
Q168 Jon Trickett: Can we have an analysis
of the differences between the two amounts of money?
Mr Rowlands: Indeed. I have already
promised we would send these details.[14]
Q169 Jon Trickett: It has been a long
hearing for you and no doubt for others as well. Secondly, given
the fact that competitive tension had gone out of the bidding
process once a preferred bidder had been determined, how can we
be certain that the bidders who had then been excluded would have
spent less money on the post tender bidding process, as you seem
to have described it? It seems to me hundreds of millions of pounds
here, probably £200 million between the two contractors,
after they had been given the tender but still allegedly part
of the bidding process. Where was the competitive tension to make
sure they got a decent price for those amounts of money?
Mr Rowlands: I am afraid that
once this competition moved to preferred bidder, although there
were reserve bidders they were not undertaking this activity,
they were not closing out on the deals so they were not spending
this kind of money.
Q170 Jon Trickett: The taxpayer reimbursed
that amount of money, although it was part of the bidding process,
the bidding had finished, had it not?
Mr Rowlands: But they had to move
from preferred bidder through to financial close and that meant
putting in place very large debt facilities and financing costs.
Q171 Jon Trickett: Why did the bidding
process not ask them to put a price in for the post tender so-called
bidding, which is not really bidding at all, is it, but the post
tender preparatory work?
Mr Rowlands: They did.
Q172 Jon Trickett: Can we have a note
on it?
Mr Rowlands: Yes.[15]
Q173 Jon Trickett: There are tens, possibly
hundreds of millions of pounds here.
Mr Rowlands: We will do that.
Q174 Mr Jenkins: I want to get something
clear in my mind, I want to revisit the financing deals. I am
not sure I have got this perfectly clear. The example we have
got here on page five is one of Tube Lines. They refinanced and
they disclosed a gain of £84 million and so 60% was the share
to the public sector which will rise to 70%. Now that 70%, where
does it come from?
Mr Rowlands: This refinancing
happened after the transfer to TfL was negotiated by TfL with,
in this case, Tube Lines. If I can help you. What was generated
was cash, up front, of which TfL, through their 60% share, got
60% of £84 million, about £42 million from memory. That
is cash that has gone to TfL.
Q175 Mr Jenkins: Since the taxpayer is
funding this package they must have been in on the contract, the
arrangement would be to pay TfL rather than pay it back to the
Treasury, yes?
Mr Rowlands: The arrangement in
the contract provided for TfL and the Infracos to share any refinancing
gains, though this particular split was negotiated by TfL after
transfer, 60:40 split.
Q176 Mr Jenkins: Since we are well aware—and
this Committee has highlighted the refinancing arrangements in
this area—and since we have spent so much time and very,
very heavy costs on lawyers knitting these views together, why
was it left to somebody else after we handed it over? Surely we
should have handed over a complete package which included any
refinancing gains coming back to the Treasury?
Mr Rowlands: I cannot speak for
TfL but they might have been reluctant to accept such a package.
What it means, certainly, is that if TfL do not get any share
of the gain you have removed one part of the contract's interest
in what is going on. I am not clear, you will be at the mercy
of the Infraco to conclude whatever arrangements it wanted if
you were not careful on refinancing. This was policed by TfL.
Q177 Mr Jenkins: The private sector,
when they are going to refinance a deal, refinance the deal because
they make quite a heavy profit, a windfall gain. They are not
loath to passing some back if we negotiate in the contract they
must pass back 50/60/70%.
Mr Rowlands: Yes.
Q178 Mr Jenkins: I understood this deal
was all sewn up, all knitted together before it was handed over?
Mr Rowlands: The refinancing was
done after the event and it was not worked up before transfer.
Mr Jenkins: That is appalling.
Q179 Mr Williams: Hold on. To the Treasury:
you gave us an indication that some guidelines had been agreed
some months ago on the minimum share that should come to the public
sector in the case of refinancing. Would that have been relevant
at the time of this?
Mr Glicksman: Yes. The guidance
was 50:50. TfL negotiated a better deal than that, they negotiated
60:40, 60% to the public sector, so they did better than the Treasury
guidance.
Mr Rowlands: They negotiated—I
may have this wrong—in effect 70% over time because some
gains come later. If all the gains from a refinancing were to
go to the Treasury, why would the infrastructure company bother
to refinance because it gets no benefit from it, it simply goes
to the Treasury?
Mr Callaghan: If I may help, Mr
Jenkins, I think you asked two questions. One was were there refinancing
provisions in the contract? The answer to that is yes. In general
the Treasury follow the Treasury guidance and in relation to this
specific refinancing, which was in contemplation when the contracts
were finalised, it was 60:40. In the negotiations that happened
subsequent to the contract, TfL and LUL did a better deal than
that. The answer to your second question, which is why is it TfL
and not the Treasury, is that the contract is between London Underground
and the private sector so the money went to London Underground
and ultimately to whoever owned London Underground at the time
it was done, which is why it was TfL.
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