Examination of Witnesses (Questions 180-186)
DEPARTMENT FOR
TRANSPORT, PRICEWATERHOUSECOOPERS
AND LONDON
UNDERGROUND LIMITED
23 JUNE 2004
Q180 Mr Jenkins: I understand that, but
what I am concerned about is the fact that this cost a lot of
money to knit together, when we handed it over the arrangements
were in place and although I expect that they will gain some money,
I also expect the return to come back to the taxpayer. What you
are telling me now is not only will they get one billion pounds,
they will also get the windfall gains of refinancing deals by
the public private sector, is that right?
Mr Callaghan: They being TfL.
London Underground get it, London Underground's owners get it
and, therefore, TfL get it.
Q181 Mr Jenkins: On top of the £1.1
billion we are putting in and then they subtract it from that
£1.1 billion?
Mr Rowlands: It is not subtracted
from the £1.1 billion.[16]
Q182 Mr Williams: Following on what Mr
Jenkins said, since the deal was entered into and established
clearly with the concept of it being a high risk project, and
I think we have established it is a much lower risk project, does
that not suggest there is now still a substantial scope for a
refinancing of the scheme? Who is it best to put that to? Mr O'Toole,
are you the best person to answer that?
Mr O'Toole: No.
Mr Davies: I will be best. Can
I break that down into parts firstly. Firstly, talking about whether
or not we have established it is a high or low risk project, can
I differentiate between the equity investment made by shareholders
and the bank debt. Can we first focus on the equity because I
think there was some confusion earlier in the discussion. The
equity rate of return is higher, as the NAO point out, than the
standard PFIs but this is a totally different kettle of fish than
a standard PFI. If you contrast a standard PFI between—depending
on the scale—a 10 and 15% rate of return, say building a
road where you would have a piece of open ground, no previous
asset condition and building a road which is relatively low tech,
or building a new hospital on a greenfield site, which is classic
PFI territory, you compare that risk to the risk of putting together
working multiple assets, line upgrades implemented on an existing
working line, what is called system integration risk which is
bringing new signals, new trains and putting them all together,
it is a different proposition. I think to compare them in rates
of return to standard PFI would be wrong. Earlier on people were
asking what other deals could you do as an example. Probably the
best example I can think of is an earlier one which was at the
time described as PFI, which is the Channel Tunnel Rail Link.
There the equity investors were looking for over a 20% rate of
return and that is not atypical of project finance deals. For
the equity component, for the shareholders here, there are big
risks and there are big downsides if they get it wrong. If they
perform, for instance, like the Central Line, the Central Line
upgrade on the London Underground grid, they would lose almost
all of their equity, if not be completely extinguished and be
terminated by London Underground. On the equity side, personally
I would say it is very wrong to say there is no risk here.
Q183 Mr Williams: That is only 15% of
the deal, 85% is debt?
Mr Davies: Yes, 85% is debt.
Q184 Mr Williams: That is covered by
the 5% rule?
Mr Davies: And that has the 95%
underpinning it, that is correct, yes.
Q185 Mr Williams: Coming back to that,
I think with the 5% one would still presume there must be considerable
scope for refinancing?
Mr Davies: Yes, which is exactly
what Tube Lines has done on that basis because it has said given
that underpinning we can refinance.
Mr Rowlands: Just to pick that
up, the point about over time TfL will get 70% rather than the
60% share upfront is that there is scope some years on for a further
refinancing, certainly of part of the debt, from which under the
agreement they can expect to get 100% of the benefits. It is uncertain
how much that is worth because it will depend on interest rates
in a few years' time but, yes, the scope for refinancing has not
disappeared.
Q186 Mr Williams: Thank you. It has been
a fascinating hearing but there are follow-ups we will want because
we may be calling you back. Can I ask you to provide the following
information, please. First, following on from what we have just
said, could you let us have a note on the scope for further refinancing?
[17]Secondly,
Mr Rowlands, you drew the distinction when I asked about the arbiter,
his decision being contractually binding, you said binding but
not contractually binding. Can you give us a note on the distinction,
as you see it, between those two comments, yours and mine, and
are there any penalties for non-compliance with the arbiters and,
if so, what, with the arbiter's decision? [18]Can
you also let us have a note on the convergence of the comparator
and the market figures, please, because it will be interesting
to see—can we have figures—the trend, not just a diagram
but matching figures. [19]Finally,
following on Mr Jenkins' point about the ratio between subsidy
and share, would it be possible for London Underground, because
they must have this information available—Mr Jenkins pointed
out it is a one to one ratio at the moment—could you give
us the moving ratio year by year for the last 25 years because
that may help to explain various matters relating to the knowledge
and condition of the infrastructure, is that possible?
Mr Rowlands: I will provide whatever
information is available. [20]
Mr Williams: Thank you very much. We
have given you a somewhat rough time and we have got a lot to
read, as you gather, but there is a lot of preparation for you
to master the two documents. We have to take that into account.
We do reserve the right, which we will consider briefly after
this meeting, whether we do want to recall you and we will let
you know our decision on that. Thank you very much for your patience
during the long break in between. Thank you, gentlemen.
16 Ev 26, 28¸30, 31 Back
17
Ev 26 Back
18
Ev 26 Back
19
Ev 27, 28¸30, 31 Back
20
Ev 27, 28¸30 Back
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