Examination of Witnesses (Questions 340
- 359)
MONDAY 14 MARCH 2005
SIR HOWARD
BERNSTEIN, COUNCILLOR
ROGER JONES,
MR CHRISTOPHER
J MULLIGAN, LORD
SMITH OF
LEIGH AND
COUNCILLOR RICHARD
LEESE CBE
Q340 Mr Stringer: When do you expect
the Department to give you an answer on that?
Mr Mulligan: The Minister of Transport
was given the application for phases 1 and 2 in January. About
a fortnight ago I received a letter with a whole series of questions
about this scheme, largely dealing with issues which, I must say,
had been dealt with at length in the preceding months. Last week
there was a meeting held on 8 March and the Department made it
fairly clear that they were going to treat this as a fresh application
for a major scheme. I think that we are in for a little bit of
a minuet, Chair, with Department of Transport officials and civil
servants before this scheme sees the light of day.
Chairman: It sounds more like a funereal
march to me!
Q341 Mr Stringer: We have had some
answers so far on this arrangement, and there is some evidence
in your written submission, but I would like to be clear about
the increased costs. How much is due to utilities; how much is
due to delays by Government; and how much is due to a change in
financial environment?
Mr Mulligan: I would say a fairly
small amount was due to the utilities because the order which
increased the proportion which was payable by the PTEs had come
and gone before phase III. Delays by Government: in January 2002
we had the initial bids at £520 million. In December 2002
we received approval from the DfT. In May 2003 we had discussions
with the department over their best and final-offer funding requirement.
In December 2003 the final submission for the revised scope, and
July in 2004 funding was withdrawn. Between our meeting with Mr
McNulty in February 2004 and August 2004 there was absolutely
no correspondence between ourselves and the Department; and I
rang weekly, and I was told that it was all part of the public
expenditure review.
Sir Howard Bernstein: Something
like £200 million, which is the difference between the private
sector equity contribution, took place between January/December
and October 2003; so we are effectively talking about an increase
of the order of £350 million in total cost, something like
£200-250 million was attributable to what Chris has already
described as being the outcome of the private sector either taking
a much harder view about risk assumption both in terms of operational
costs and revenues and also in the context of what they would
wish to bank in terms of capital and its impact on the Capex programme
itself. The net public sector grant requirement, which went up
by about £350 million—something up to £250 million
was attributable to changes in the private sector risk profile.
Q342 Mr Stringer: Could you have
gone ahead in January 2002 if the Department had been lightning
fast in its responses? Could you have gone ahead in January 2002
at those earlier costs?
Sir Howard Bernstein: No, for
the simple reason that Chris and I took to the Department at that
stage what was clearly coming out which was provisional outcomes
in terms of the tendering process. We were very clear that we
did not wish to waste more time and contractors' time or expense
in terms of overseeing the process without registering with Government
that costs were increasing and the reasons why costs were increasing
as well. At that stage, revised funding arrangements were agreed
and then the private sector bidders were then asked to bid within
that overall envelope.
Q343 Mr Stringer: Mr Mulligan has
partly answered this question, but if you were given now carte
blanche to go down any procurement route or any mix of those,
what scheme, if you could determine it, would you follow?
Sir Howard Bernstein: At this
stage there would be two broad options, and I do not think anyone
can make a final decision on that. One would be the public sector
option, and the other would be a single operator and the ability
to differentiate between the actual building of individual lines;
so somebody to come in and build individual lines, ie, contractors,
and also a separate operator. One of the reasons why the private
sector risk has changed quite considerably is the particular mix
of contractor, operator, mechanical engineering type of activities;
and that particular mix has contributed very significantly to
a downgrading of risk which they are prepared to assume. That
point has become widely acknowledged certainly within the industry.
Q344 Mr Stringer: The Secretary of
State and all ministers who have been questioned in this Committee
and on the floor of the House of Commons have said absolutely
categorically that the only issue for them has been affordability
of this scheme. Do you accept that, and within that affordability
can you come forward with another scheme that would satisfy the
Government that the scheme was a good one?
Sir Howard Bernstein: The answer
to that is "no". Affordability has not been the only
issue. There has been more on the table in relation to Metrolink
than just affordability. Very early on in the process of the working
party, as Chris has already indicated, for the third time we were
asked to evaluate buses as an alternative to Metrolink, and we
were able to show again, in our view very, very clearly, that
in terms of the quantum of change we needed to deliver in terms
of the scope and nature of the benefits we wanted to capture sub-regionally,
Metrolink not only was the best value for the public sector but
was the only optimum public transport solution. I still think
that within the Department there are still very clear views that
the bus is a more low-cost option to Metrolink and should be pursued.
Councillor Leese: If affordability
is the sole issue, then I would say the issue should be about
the pace of delivery rather than whether Metrolink is delivered
or not. That is something that we have always been open to discuss
with the Department, the phasing of delivery so that it can fit
in with an affordability profile that meets Government expenditure
requirements.
Councillor Jones: Madam Chairman,
I hope this is not a red herring but—
Q345 Chairman: I shall tell you if
it is!
Councillor Jones: I should not
have said that, should I? We have had a proposal in Greater Manchester
for many years now for a guided bus-way between Manchester, Salford
and Leigh. We can argue about exactly how long that has been on
the stocks, but let me say six years, and even now we do not have
government approval, although we are told it may come later this
year. So much as I am annoyed and upset about what has happened
with Metrolink, I have to say that for the Department to say the
bus may be an alternative in certain circumstances, I cannot understand
why, after six years of proposing a guided bus-way, where the
total costs even at current prices are around £42 million,
we are still waiting for approval.
Chairman: Councillor Jones, you are obviously
having difficulty understanding the difference between a bus and
a guided bus!
Q346 Mr Stringer: Last Wednesday
the official from the Department of Transport, supported by the
Minister, said that there was no problem—I paraphrase—in
taking into account regeneration objectives because although they
were not the four objectives in local transport plans, they were
in an overall framework and therefore regeneration was right at
the top of the Department's agenda. Is that your experience?
Councillor Leese: I can quote
from a report published by the Office of the Deputy Prime Minister
in January of this year, prepared by Professor Michael Parkinson.
This is talking about delivering regeneration and competitiveness
and talks most especially about the constraints placed on urban
competitiveness and cohesion by transport policy. This is the
section dealing with the approach of different Government departments,
so it would appear that at least one part of government believes
that the current approach being taken by the Department of Transport
is not taking proper account of regeneration and the economic
agenda, and indeed is an obstacle to taking proper account of
those factors.
Q347 Mr Stringer: If you were given
the go-ahead now to produce Metrolink, how long would it take
you to deliver the original project, and how much would it cost,
if you could go down any procurement route?
Mr Mulligan: Of the order of £900
million over a period of 5-7 years, depending on how fast you
were allowed to proceed with the availability of funding.
Sir Howard Bernstein: Based on
where we are now, I think we would do very well to secure an operator
within two years, but, equally, we should be starting building
new lines within that two-year period. We believe that that is
in the context of the existing three and a half line expansion
package, that between five and seven years all of those lines
will be wholly implemented.
Q348 Mr Stringer: So this delay we
have been through means you have lost the potential bidders.
Sir Howard Bernstein: Yes, there
is no doubt whatsoever about that.
Mr Mulligan: Both of the leading
consortia for the scheme have invested many millions of pounds
in developing a scheme in design and build terms, all of which
will have to be written off by them.
Q349 Chairman: They were however
the same people who managed to up their prices.
Mr Mulligan: Yes.
Q350 Chairman: So we do not have
to worry too much about them.
Mr Mulligan: I do not shed tears
at night, but many million of pounds have been spent.
Councillor Leese: Whilst, Madam
Chairman, we might not shed tears, history would suggest they
will get those costs back and probably from other public contracts
somewhere else.
Q351 Clive Efford: In regard to your
answer to Mr Lucas about design, build, finance and operate, that
was the model put forward by the Government that you were encouraged
to follow. In your opinion, could you have got better value for
money under another model and have you any idea what sort of model
that might be?
Sir Howard Bernstein: We are all
professors of hindsight, but at the time the DBOM model certainly
served phases 1 and 2 of the Metrolink system very effectively.
Given the private sector's changes in risk and how they perceive
risk—my personal view is that DBOM is no longer appropriate
if you are going to secure maximum efficiencies in the way that
light rail in particular has delivered. The reasons for that is
that the mix of contractor, operator, maintainer, all militates
against the definition and delivery of shared values, about outcomes,
about performance targets, which therefore impacts upon the level
of risk that consortia in cumulative terms is prepared to assume.
If you are looking at the alternatives, we have already given
the answer to Mr Stringer, which is that because of the question
of risk we need to look at the public sector option more carefully
in the future, alongside other innovative approaches that seem
to have worked well in other countries, notably the single operator
and the ability to bring in constructors to build particular lines.
Q352 Clive Efford: If you go down
the route of more conventional funding, and that requires
conventional borrowing approval, do you have any other localised
forms of funding that you might consider, for example the Transport
Act 2000 gives local authorities the right to raise money through
congestion charging or workplace parking charging? Is that an
option in Greater Manchester?
Councillor Leese: Can I deal with
the congestion part of that, and Sir Howard will deal with other
finance alternatives? First of all, I do not think there is a
lot of evidence that congestion charging is an effective alternative
form of taxation, which is what it would be if it was simply being
used to finance alternative forms of public transport, but we
do need to look at congestion in the context of Greater Manchester,
which is at the moment primarily within the motorway network rather
than the A and B road network, the sort of corridors we are talking
about in terms of Metrolink expansion. Over 1991 to 2002, traffic
on A and B roads only grew by 2% in Greater Manchester, whereas
it grew by about 50% on the motorway network; and clearly congestion
charging, in the way it has been operated elsewhere, would have
no impact on that whatsoever. A number of measures have been taken
to deal with traffic management, in particular reducing road capacity,
and coupling that road capacity with quality bus corridors by
limiting, particularly in Manchester city centre, the availability
of long-stay commuter car parking and also more positive measures
of putting park-and-ride in at various locations on both the light
rail and heavy rail networks. That, over the last four or five
years, has led to an increase from 51 to 59% of people accessing
the regional centre by public transport rather than by private
transport. The economy of Greater Manchester, although Peter Smith
talked in the introduction of the improvements, it is still a
fragile recovery. One of the things we need to be very careful
about is not taking restraint measures that would damage rather
than contribute to the economic development of the Greater Manchester
conurbation.
Sir Howard Bernstein: In terms
of the funding, my basic point is that we need to join up the
debate on reform of local government finance with the debates
we are now having about initiatives such as this. I think if you
talked to national figures from the CBI or any of the other private
sector-based organisations and discussed business rates, they
would tend to move in one particular way, and that would be against
any reversion to local control. I think if you had the same conversations
with local business leaders, certainly in the city region of Manchester,
they will say, "providing we have real influence over the
way in which those supplemental rates were deployed, and we were
satisfied that they were adding real value to the sub-regional
economy"; then that is a debate we ought to be having about
business rates, no differently than we should be looking at the
whole question of land value, and also on the back of the transport
innovation fund that the Government is to introduce—though
we await for guidance about how that will operate in practice,
we would be keen to see local authorities being able to use prudential
borrowing and to have capacity through the TIF to see that borrowing
re-financed as resources coming forward; and it gives us a real
opportunity to connect mainstream funding for major transport
projects with local initiatives of strategic significance.
Councillor Jones: We mentioned
Lyon in our submission. When we talked to the Mayor there, not
only did he say he had one bus operator running the whole service,
which I was rather jealous of I have to admit, but he also said
that he did have access to local business tax that he could put
forward to that kind of extension of light rail. Again, it is
something that ought to be looked at.
Chairman: Lyon is a wonderful city, Councillor
Jones, but access to some methods might get you into a certain
amount of difficulty.
Q353 Clive Efford: Would business
enterprise zones not apply in this case where you hypothecate
a top-up of the business rate to put back into the transport scheme?
Under a prudential borrowing scheme, 10% of your £10,000,000
of finance is roughly £1 million—is that right? How
big a scheme would you need and how big a top-up on the business
rate would you need to finance a scheme like that, if that is
the option you are considering?
Sir Howard Bernstein: We are looking
at all of those options at the moment. I am more or less talking
about the principles that are involved here. Very clearly, based
on the conversations we have had, there is a lot of support locally
to examine those sorts of initiatives, particularly having regard
to the fact that Manchester taken in isolation is a net contributor
to the central business pool of something over £100 million
a year.
Q354 Clive Efford: I am trying to
find out whether there are local funding methods that you have
considered other than straightforward—
Councillor Leese: At the moment
there are not because the ability to raise local income is very
much circumscribed by government. Sir Howard is saying that a
review of local government finance could bring forward solutions
that could do a lot more, but by and large they are not available
at the moment because the amounts they would generate are very
limited. An additional caveat is that in some parts of the Greater
Manchester conurbation—and I go back to parts of Oldham
and Rochdale—we are talking about bringing back values to
where they were some time ago, rather than getting lots and lots
of added value. We are talking about stemming decline.
Lord Smith of Leigh: When the
phase III extension was announced by Mr Prescott, he brought in
another TIF scheme, then called the Transport Infrastructure Fund,
which was to help those two authorities, ie, Wigan and Bolton,
which were not benefiting directly from the Metrolink because,
as I said in my introduction, we all contribute to the cost of
Metrolink and it would seem to be a fair and equitable thing to
do. So, what we would have to do to visit the kind of thing you
suggested would be to go back and sit down with all 10 different
authorities and all the separate decision-making bodies to find
out how we could fund it. Quite frankly, the imperative for us
all has been to produce the integrated transport strategy, which
is what the Department said was the priority. I think you have
had a draft. That is what we have to do first of all. Then we
submit that to see whether we can get some of the new transport
innovation fund and then we can see what we need to do to raise
the rest of the money.
Q355 Clive Efford: Why do utilities
need to be diverted?
Mr Mulligan: Quite often utilities
are required to be diverted, but one of the big problems that
scheme promoters have had in recent years was the decision taken
by the Government that when these utilities are diverted and moved,
there is always an element of betterment, in the sense it is bringing
forward the replacement, or replacing it with better equipment.
Until two or three years ago the Government used to say that 18%
of the cost of utility diversions was attributable to this type
of betterment. Then out of the blue came an order that 7.5% was
attributable to betterment, and I know that has caused a major
problem for many scheme promoters. I said earlier that we have
factored it in to phase III of the scheme, but we have never received
a convincing explanation of government apart from the lobbying
of the DETR as it then was by the private sector utilities as
to why that was done.
Q356 Clive Efford: In a nutshell
you are saying that when public sector schemes like this come
about, the private sector makes a killing by masking some of its
costs.
Mr Mulligan: They do tend to mask
some of their costs. The difference between 7.5% and 18% is quite
considerable when there is a large bill for utilities to pay.
Q357 Clive Efford: What is loose
current?
Mr Mulligan: Stray current. It
takes a technician to answer you properly but let us put it this
way: at 750 volts you will not feel very much; but when I told
BBC GMR it was 750 kilovolts you would be fried alive, that is
stray current.
Q358 Clive Efford: What dangers does
it pose?
Mr Mulligan: I think a technical
person would have to answer that question.
Q359 Clive Efford: Is there an additional
cost involved in dealing with that?
Mr Mulligan: Insulating against
it. Network Rail is extremely sensitive because safety systems
can be influenced by stray current. For example, it can turn a
red light green.
Chairman: You are really telling us that
the scheme has taken an inordinately long time, partly because
of the debate between yourselves and the Department as to the
method of finance; you have more than once done the estimate of
bus substitution and come up with factual information that you
have handed on to them; there is still an argument because there
has been change in minor elements but important elements like
the costs of the movement of utilities, and it is still not clear
from the Department's overall view whether they accept the fact
that what you are putting forward is a viable scheme. That is
quite clear, gentlemen. Thank you very much indeed for coming
this afternoon.
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