Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 23 FEBRUARY 2005
MR KEITH
HOLDEN AND
MR STEWART
LINGARD
Chairman: May I welcome you most warmly
to the Committee. It is good of you to come. You are very welcome.
We have one or two little bits of housekeeping which we have to
perform before we start. Members having an interest to declare.
Mr Lucas: I am a member of Amicus.
Mrs Ellman: I am a member of the Transport
and General Workers' Union.
Chairman: I am a member of ASLEF.
Mr Donohoe: I am a member of the Transport
and General Workers' Union.
Mr Stringer: I am a member of Amicus.
Q1 Chairman: Thank you very much.
I wonder, gentlemen, if you would be kind enough to identify yourselves
for the record. You know how Select Committees work, so you will
know that the microphones in front of you will record but not
project your voices. If you just remember this is a room which
absorbs sound.
Mr Holden: Thank you, Chairman.
My name is Keith Holden. I am the National Audit Office Director
responsible for Transport Value for Money studies.
Mr Lingard: My name is Stewart
Lingard. I am an Audit Manager in the National Audit Office with
the responsibility for transport studies.
Q2 Chairman: You can tell we are
your greatest fans, otherwise we would not have asked you to come
along so we can pick you brains. Mr Holden, did you have something
you wanted to say about context or are you quite happy to go ahead
with the session?
Mr Holden: Chairman, I am more
than happy to answer any questions you might ask.
Q3 Chairman: Thank you very much.
Can I ask you, your report says all the old tram systems were
closed down because they could not compete with motorised buses
and cars, why do you think we have a light rail revival?
Mr Holden: There has probably
been a recognition at the local authority level that there has
been an increasing problem with regards to local traffic congestion,
as well as a recognition in terms of social exclusion, which may
be associated with access to public transport where there was
a degree of under-investment over a period of years in the early
part of the 20th century and, also, probably a recognition that
something also needed to be done at a local level in terms of
regeneration. Against those sorts of issues, there was a recognition
at a local authority level, and this was manifested also at the
central government level, that there was a need to improve public
transport and light rail could be one way of doing that.
Q4 Chairman: In other words, it is
one of a package?
Mr Holden: At least it should
be one of a package. Light rail is not a panacea in itself.
Q5 Mr Stringer: You are both experts
in cost benefit analysis, are you not?
Mr Holden: Yes.
Q6 Mr Stringer: If you look at page
10 of your report, paragraph 17, you talk about assessing value
for money and then you move straight on to comprehensive evaluation
of the costs and benefits. Can you explain to the Committee what
the differences are between value for money and cost and benefits
and why you have not made that distinction clear in your report?
Mr Holden: In the Department's
approach to investment appraisal they will use what they now call
the new approach to appraisal, and that came out of some work
which civil servants in the Department did around road schemes.
Traditionally, benefit cost ratios and investment appraisal have
been around hard numbers, for example in terms of a public transport
system, be it building a new road, a new train route or light
rail. It is very much around issues to do with, for example, reduced
journey times and putting a cost on the amount of time which is
saved, then multiplying that up by a million or so passengers,
whatever it might be and arriving at a figure at the end of that
and then accumulating those benefits and comparing it with the
cost of the construction or operating. That is only as far as
those quantifiable benefits can go. Value for money goes beyond
that where it will take account also of some of the externalities,
some of the by-products, which may come from a particular spending
programme which may be negative or positive. The Department's
new approach to appraisal tries to do that, so at its core it
will have investment appraisal and benefit cost ratios, for example,
but it will take account also of some of the factors to do with,
for example, tackling social exclusion, economic factors with
regards to regeneration and, in particular, accessibility, helping
to connect people in a particular locality, linking them to jobs
and, also, providing them access to public transport. All of those
things are also relevant in the transport sphere, they are all
adding up to what you might consider to be a judgment about VfM,
but above and beyond the straightforward investment appraisals
which tend to manifest themselves in terms of business cost ratios
and that type of thing.
Q7 Mr Stringer: That is very interesting.
Can you answer the second part of that question of why you did
not make that clear in the report?
Mr Holden: I think we do make
it clear in the report that there are issues to do with costs
and issues to do with hard benefits with regard to patronage numbers,
revenues and operating losses or profits for these schemes.
Q8 Mr Stringer: All those issues
are touched upon, there are quite clear definitions. I do not
want to go too far down this path because I want to get on to
the cost issue. Do you not think it would have been helpful if
those issues had not been used interchangeably because you could
have something of a positive cost benefit ratio which is not value
for money, I suppose, you could have that the other way around?
Do you not think it would have been useful if you used those terms
to explain that to readers?
Mr Holden: On reflection, yes,
it might have been. At the time, I think what we were trying to
focus on was what were the actual costs and benefits which were
anticipated for particular schemes, have they been delivered to
cost, to time, and have the benefits been delivered associated
with those particular schemes. I do not think we considered that
we then needed to arrive at some sort of overall judgment about
business or is it not VfM, which, I think, at the end of the day,
is quite difficult, you cannot drill down to a particular number
that says, "This adds up to VfM", but you can obviously
assess whether or not it has been delivered to time and cost and,
also, whether or not the benefits are being achieved as they were
planned.
Q9 Mr Stringer: The costs of the
proposed light rail schemes have gone up and you list some of
the reasons for that. What you do not do is compare the order
of magnitude of the different parts of the reasons for the costs
going up, whether it is the diversion of utilities or whether
it is the transfer of risk or whether it is a non-standardisation
of vehicles. Do you think you can give us some idea of what the
balance of those factors is in the costs going up?
Mr Lingard: We did not analyse
the reasons for the cost increases in that way, in the exact monetary
term which you say.
Q10 Mr Stringer: Would that not have
been useful for us to know?
Mr Lingard: Yes, it might well
have been. I think we did identify the causes even if we did not
put a figure on them. For example, as we understand it, the private
sector has been putting a premium on for accepting all the revenue
risks and, certainly, that has been a big factor in the cost increases.
Q11 Mr Stringer: Would you say it
is half the increase of costs?
Mr Lingard: I would not like to
put a figure on it. As I say, we did not analyse that, so I cannot
say.
Mr Holden: This particular issue
came up when our report was taken by the Committee of Public Accounts
in the autumn. One of the Members of the Committee asked us this
particular point about whether or not we could quantify each of
the cost drivers which were associated with the escalation in
costs and, in particular, around the issue of revenue. Some of
them are quite difficult to quantify because to some extent, for
example with regard to revenue risk, you are trying to get inside
a contract between the private sector body and a local authority
and trying to get inside that private sector organisation's view
of risk and the extent to which it has tried to build a premium
in. We know it is there, but it is quite difficult to quantify
it if obviously those organisations want to keep that sort of
information commercially sensitive. Also, there is an issue to
do with some of these other issues, for example, lack of standardisation
or the application of heavy rail standards for light rail systems,
where, in order to identify the additional cost, you would have
to know what the opposite would be and you would have to know
the counter-factual. That is really rather difficult if they do
not exist. Trying to say: "To what extent does lack of standardisation
drive up costs?", we know that it does, but how you measure
that is rather difficult if you then do not have another control
set of light rail systems where they are, for example, yielding
or being able to take the benefit of coming in to scout this organisation,
you do not have a comparator to work out the quantification of
additional costs.
Q12 Mr Stringer: What is your understanding
of why all the bodies that are procuring light rail systems have
used the Design, Build, Operate and Maintain process?
Mr Lingard: Hitherto most of the
schemes existing schemes have used that model.
Q13 Mr Stringer: Yes, why?
Mr Lingard: Yes, why, quite, when
it has not proved too successful.
Q14 Mr Stringer: Is that not because
the Department for Transport have insisted on that?
Mr Lingard: It would seem to be
the Department have encouraged that approach. As you will be aware,
one of our recommendations is that it should rethink this and
investigate which is the best model and advise promoters to use
that model.
Q15 Mr Stringer: It is not that the
Department for Transport have advised, they have insisted, have
they not?
Mr Holden: I do not think we have
any evidence to say that is the case.
Q16 Mr Stringer: Did you try to find
that evidence? It seems pretty extraordinary, if this is the process
the Department has strongly advised or insisted on and is responsible
for the costs, that you have not bothered to find out whether
that was Government policy or not. Why did you not find that out?
Mr Lingard: It has not been the
universal approach to these because we know for the Docklands
Light Railway scheme, for instance, they have used a different
approach there, so there are alternatives.
Q17 Mr Stringer: For the modern tram
schemes, there are a lot of different things about them, like
the light rail, that have been universal for the modern tram schemes
as opposed to the light rail schemes in Tyneside and Docklands.
I ask the question again, if this is a major driver of the costs,
because of the risk transfer and various other factors, why did
you not find that out?
Mr Holden: Taking it to its logical
conclusion, if it is Government policy, then obviously the NAO
cannot question Government policy.
Q18 Mr Stringer: I was not asking
you to question Government policy, I would have thought it was
your job to find out what the cost of Government policy was and
to do that you would have to know whether it was Government policy
or not?
Mr Holden: As far as I am aware,
it is not Government policy that they would insist they would
have to use that particular model because, as my colleague, Stewart
Lingard, said, there are other examples of light rail systems
which have not used that particular model. Indeed, we point out
the consequences of this particular model in the report and we
make a recommendation that the Department should consider other
models, the best way or alternative ways in which we can procure
light rail systems, which we think is the way forward.
Q19 Mr Stringer: In terms of the
extra cost of the utilities, did you have or find any evidence
that the utility companies were taking advantage of the 1991 Act
in putting extra charges on? You made the recommendation that
this should be looked at, but did you find they were ripping off
the public sector?
Mr Holden: I do not think we did.
Mr Lingard: Not ripping off the
public sector, but I think what has happened is that on the advice
of the utility companies, the promoters of the schemes have gone
along with their advice that utilities should be diverted in every
case. We do not think that is necessary in every case, there are
alternatives to wholesale diversion of utilities which we think
should be investigated by the promoters more assertively than
they have done in the past.
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