Examination of Witnesses (Questions 320
- 339)
MONDAY 14 MARCH 2005
SIR HOWARD
BERNSTEIN, COUNCILLOR
ROGER JONES,
MR CHRISTOPHER
J MULLIGAN, LORD
SMITH OF
LEIGH AND
COUNCILLOR RICHARD
LEESE CBE
Q320 Mrs Ellman: On these schemes
you are now looking at, the extensions you are looking at, which
are more important: regeneration issues or alleviation of congestion?
Lord Smith of Leigh: I think it
is a false dichotomy, if I may say so. We think connectivity is
the key to economic success, transport success and regeneration
in a major conurbation and we think that is what we will get out
of Metrolink. There will be an efficient means of transport which
will encourage a large number of people to use it, which in turn
will regenerate the conurbation.
Q321 Chairman: Mr Mulligan, would
you like to add to that?
Mr Mulligan: No, that has been
dealt with satisfactorily.
Q322 Ian Lucas: I want to ask you
about risk. Mr Smith, you particularly mentioned risk as being
the reason why there had been a large increase in the cost of
the project. Can you expand on that? What type of risk and how
did that manifest itself in the process?
Mr Mulligan: If I can illustrate
from some of the figures which we have that when we had the arrangement
with the Minister back in January 2002, the gross capital cost
of the scheme was £705 million. The scheme which was rejected
in October 2003 had gone up to £824 million and we think
about 50% of that was due to a very cautious attitude on behalf
of the private sector.
Q323 Chairman: "Cautious",
by which you mean they wanted to transfer all the risk from them
to you?
Mr Mulligan: Yes, but the most
startling thing which happened in the net cost was in January
2002 we were told the private sector equity in the scheme would
be £252 million; by October 2003, that had shrunk to £60
million, based largely on Standard and Poor's view that light
rail was a risky investment based on private sector experiences
dealing with the SRA where the revenue risk was being taken and
based basically on the fact that the private sector felt that
overall these schemes were extremely risky because they have got
into trouble themselves and so have others. When we talk about
schemes trebling and that sort of thing, the capital costs have
not trebled, but the perception of risk, which is a concessional
value, is the one which collapsed.
Q324 Ian Lucas: Your analysis has
led you to stay with the Design, Build, Finance and Operate structure,
but put in some extra safeguards to protect the public sector.
If you were to start again, do you think that is the correct approach?
Sir Howard Bernstein: Put simply,
what we have said is given the existing risk profile which you
are trying to achieve on procurement, our procurement approach
has been appropriate. Equally, I think it is fair to say, also—and
we acknowledged this in recent meetings with the Department for
Transport in working party meetings over the past few months—the
existing procurement approach, which we have been pursuing in
the context of private sector assumption of risk and their appetite
for risk, is not as efficient as it ought to be. Therefore it
would be appropriate to review procurement options, and we said
as much in working party meetings with the Department just before
Christmas.
Q325 Ian Lucas: Which other options
would you like to look at?
Sir Howard Bernstein: I think
there are a variety of options, as I think was indicated towards
the end of last week under your cross-examination of ministers.
Looking at a lack of private sector appetite for risk starts to
generate the question, "Is the public sector procurement
and operation an option which needs to be reconsidered?",
and the answer to that is, "Yes". Equally, there is
some evidence elsewhere in Europe where the appointment of an
operator and the development of single line bids on an incremental
basis have also demonstrated the ability to capture efficiencies.
There are a range of options which we are currently evaluating
and which need to be brought to bear as part of the process.
Q326 Chairman: What was the response
to this suggestion?
Sir Howard Bernstein: There was
no answer to that.
Q327 Chairman: There was no answer
in the sense that no one commented or that the discussion moved
on? What was the response?
Sir Howard Bernstein: They would
go away and look at that and they came back to it and said: "We
need to do a lot more work". Certainly, in the context of
the substantive discussion we had around new procurement options,
there was no detailed response given to us.
Councillor Leese: The question
rightly focused on risk within the procurement process. One of
the other factors for increasing cost is the slowness of the procurement
process. Quite often there are six to 12 month delays in getting
responses from the Department for Transport. Again, another factor
which is taken into account in our written evidence is that any
advantages we might gain from an alternative procurement process
might be lost simply because the time delays would put the costs
on in a different way.
Q328 Chairman: Did you tell us why
you went to Design, Build and Operate in the first place?
Sir Howard Bernstein: That was
the Department for Transport's preferred approach. Chris and I
led those negotiations over a period of some years. There were
two broad options, the traditional PFI approach or, alternatively,
the DBOM approach, which is the one we subsequently moved forward
with.
Mr Mulligan: It is true—I
was doing those negotiations—that the Department preferred
DBOM.
Q329 Chairman: Design, Build and
Finance.
Mr Mulligan: Yes, Design, Build,
Operate and Maintain. At that time the Treasury looked favourably
on the Private Finance Initiative, similarly to the Nottingham
Scheme. We had a happy nine months debating with the Treasury
and the then DETR as to whether it should be DBOM or PFI.
Q330 Chairman: It is not true that,
in effect, the time taken in order to get this scheme off the
ground was entirely due to people sitting on it, it was rather
due to the fact that you could not agree in the first place what
you were doing?
Mr Mulligan: Before we went into
the market and before we were allowed to put an OJEC in the European
press we had to decide with the Department—
Q331 Chairman: What is an OJEC?
Mr Mulligan: It is a journal of
the European community which would advertise a scheme to prospective
tenderers. Before we were allowed to do that, we had to establish
the procurement methods to the Government's satisfaction.
Q332 Miss McIntosh: Have you quantified
the work you did? One of you said you did some work on the buses
for the Department for Transport, have you quantified what the
cost of that work would have been?
Sir Howard Bernstein: Page eight
of our detailed submission identifies both the cost and the benefits
of our Phase 3 expansion and, also, the comparable alternative
options in relation to buses. What we clearly show there is that
Metrolink has a superior cost to benefit ratio; total benefits
are nearly three times those of the bus; Metrolink carries 25%
more passengers than the bus; it takes 3.6 million more journeys
off the roads and would generate an operating surplus. Indeed,
the cost of bus is at £527 million compared with the cost
of Metrolink of £764 million.
Q333 Miss McIntosh: Yet earlier on
one of you said that 85% of the journeys that would have been
made are travelling by bus?
Mr Mulligan: Correct. 85% of the
public passenger transport trips are taken by bus within the county
and about 15% are by heavy rail and light rail. Of course they
are subsidised, whereas Metrolink is not. If you look at the same
figures which Howard is talking about, operating costs of £16.1
million for the bus option and £15.4 million is the revenue,
so there would be a real subsidy required for the bus network
and that is not the case for the Metrolink network.
Q334 Miss McIntosh: Would you agree
or disagree with the National Audit Office report which found
that while light rail had improved the quality and the choice
of public transport, it had not brought all the benefits expected?
Mr Mulligan: I would disagree
extremely strongly. I wish to dispel an illusion that the National
Audit Office was anti-light rail in its report. I read it and
there were various comments which I disagreed with, but one of
the exceptions they made within that report was in talking about
Manchester Metrolink which they described as one of the most successful
schemes in patronage terms which the country had experienced.
Q335 Miss McIntosh: If you look at
France, they have much more landmass than we have in this country
and that is why, I understand, with transport, planning tends
to go much quicker in countries like France. Do you have evidence
that it is the consultants seeking to prolong the process for
putting forward an application?
Councillor Leese: No, I do not
think we have evidence of that. We have clearly looked at other
examples like cities like Lyon, which will probably have similar
densities and in part of the city even greater densities than
the Manchester conurbation, and they appear to be able to accelerate
the procurement at every stage of the process. Compared to the
United Kingdom, more of the expenditure decisions are taken at
a local level and do not require this batting backwards and forwards
between the local level and government.
Q336 Miss McIntosh: Would you say
the fact that Metrolink was not extended has been to the benefit
or disbenefits of passengers?
Councillor Leese: Overwhelmingly
to the disbenefit.
Q337 Miss McIntosh: Would you like
to elaborate?
Councillor Leese: In a number
of areas. First, journey times along those corridors are significantly
longer by public transport than they need to be, and with Metrolink
they would be a lot quicker. There are lots of people now who
do not really have a good choice of public transport, and Metrolink
would give them a good choice. The evidence does come from phases
1 and 2 where we have had very significant modal transfer that
far exceeds modal transfer that comes from bus-based alternatives.
Both in terms of choice, accessibility and journey time, passengers
have a disbenefit in all those ways.
Lord Smith of Leigh: Part of the
extension is on existing heavy rail routes, which are in a state
of dilapidation, and there is very poor experience for the passengers
that use them, so we wanted to improve that, very much as we did
on the Bury/Manchester line.
Q338 Miss McIntosh: What is the difference
between modal transfer and integrated transport?
Councillor Leese: Modal transfer
is jargon shorthand for getting people out of cars and onto public
transport.
Q339 Mr Stringer: We are getting
a very different impression here today than we had last Wednesday
when the Minister told us that he was cracking the whip over officials
to get a decision on refurbishing the current Metrolink lines.
Is that your impression?
Councillor Leese: No, it is not.
It is a question that has already been asked about how often we
have, and did we, do a bus comparison with Metrolink; and it would
appear yet again on the refurbishment of phase 1 and phase 2 that
we are having to do a benefit cost analysis from scratch, which
would include those sorts of comparisons, which from our point
of view does not seem to go along with "cracking the whip"
not least because that is work that has already been done and
has already been presented to the Department.
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