Select Committee on Transport Minutes of Evidence


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 In December 2003 the final submission for the revised scope, and July in 2004 funding was withdrawn.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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