House of COMMONS
MINUTES OF EVIDENCE
Wednesday 17 October 2007
MR CHRIS BOLT
and MR ANDY YOUNG
USE OF THE TRANSCRIPT
Taken before the Transport Committee
on Wednesday 17 October 2007
Mrs Gwyneth Dunwoody, in the Chair
Mrs Louise Ellman
Mr Philip Hollobone
Mr John Leech
Memorandum submitted by PPP Arbiter
Examination of Witness
Witness: Mr Chris Bolt, PPP Arbiter, gave evidence.
Chairman: Good afternoon. I am sure you already know our ground rules, Arbiter General. I would be grateful if you would allow us the indulgence of two seconds for a little bit of housekeeping. Any Member having an interest to declare?
Clive Efford: A member of Unite.
Graham Stringer: A member of Unite.
Chairman: A member of ASLEF.
Mrs Ellman: A member of Unite.
Q1 Chairman: I would be very grateful, sir, if you would identify yourself. Did you actually have something you wanted to say to us before we begin?
Mr Bolt: I am Chris Bolt, PPP Arbiter. I have set out in my submissions the background to my role and the issues I have been involved in recently. I would be very happy to move straight into questions.
Q2 Chairman: We are grateful for that. We know that you are very well versed both in the ways of this Committee and in the subject. Can I ask you why you have said in your written evidence that the basic structure of the PPP remains sound?
Mr Bolt: The reason I expressed that view is because the principle of the PPP, which is that the private sector delivers best when it is told what outputs to deliver and is free to decide what approach it should take to delivery of those outputs. That, I think, is a principle which has been well established in a number of sectors and the approach, for example, of Network Rail in delivering the high level outputs which Ministers have now specified for the heavy rail sector is another example. So I think that principle of specifying outputs is one which has been well established, and of course in the context of the PPP we have got the example of Tube Lines, which is in clear contrast to the experience of Metronet.
Q3 Chairman: Yes. We will come to Tube Lines, because although it is better there are still some considerable difficulties, as you know. The reality is that Metronet was unable to work successfully within its existing PPP agreements, was it not?
Mr Bolt: Clearly Metronet did not succeed in delivering the outputs in the contract at the price it had bid and the consequence, as we know, is that both Metronet and the Infracos are now in administration. I do not think that invalidates the principle of an output-based contract. It says much more about the way that contract was originally entered into by Metronet and the way the company was managed.
Q4 Chairman: So you really do not accept that there was a flaw in the original idea? You simply think it was the way the contract was written and carried out?
Mr Bolt: That is my view, yes.
Q5 Chairman: Metronet Infracos before they actually collapsed were not delivering either improvements in respect of stations and track work or some of the other targets which they had been set. What are the factors which led them to such a poor performance?
Mr Bolt: I think there is a whole range of factors which led to that, and some of them I set out in the annual report which I produced last November. If I would highlight two - and both of them are relevant, particularly in the context of the stations programme - one is that it took a particular approach to decide on its work programme, which is where there was any question about the scope of works to deliver. It sought to agree that with London Underground before it started work on the ground, and that contributed to the delays. The other major factor -
Q6 Chairman: I need a better explanation than that. By talking to the customer and deciding what it was they needed, that somehow contributed to the delay?
Mr Bolt: It was the level at which that was discussed and agreed. If you have got a contract which requires you to modernise or refurbish a station and the contract says broadly what that involves, then you have got a choice in a sense, whether you take your own view about what that means in terms of complying with the contract or whether you work up a detailed plan and take it along to your customer and say, "Do you agree that that's the right sort of handrails we install?"
Q7 Chairman: In general terms, although it may seem very old-fashioned in a modern industry, is it not quite a good idea to ask the people who are paying the bill whether they know what they want and whether it happens to coincide with what you are offering?
Mr Bolt: If that is the basis on which the contract is written, yes, provided it does not slow up the process unduly, and with Metronet it contributed to a very slow start to the stations programme. The other element - not attributing out of proportion to those things - clearly was the structure of the supply chain with Metronet's shareholders being the main contractors for carrying out this work. That raised a number of issues which also applied in other parts of the programme, such as the track renewal programme, where it was contributing to Metronet's failure to ramp up its delivery in the way the contract envisaged.
Q8 Chairman: If you were running such a contract yourself and you knew that you were operating under what in effect was a tied contract, would you not assume that an efficient company would at some point not only go back to the people with whom it had this relationship but also to its customers and say, "This is not working. We need to change it somewhat quickly"?
Mr Bolt: The principle of the PPP clearly was it was left to the Infracos to decide how to deliver the obligations and in the initial bid evaluation (not a process I was involved with) my understanding is that London Underground did look at the supply chain arrangements being proposed by all of the Infracos and take a view on whether they were capable of delivering the obligations, and it is reflected in the wording in the contract that London Underground accepted that a "tied" supply chain was one that was capable of delivery.
Q9 Chairman: Yes, but from the first, Mr Bolt, was it not clear that London Underground were actually quite restrained and restricted in what they could ask for in relation to the Infracos? Surely it is the other way round? If you are an administrator in a company and you are required to deliver the goods and it becomes clear to you that you are not delivering the goods, would you not expect to take some responsibility and not say, "Well, it's because the customer is taking a long time to discuss it"?
Mr Bolt: That is why I was not attributing proportions to those different causes. I think the fundamental problem with Metronet's cost overruns and failure to deliver was its management of the arrangements, including the supply chain. I would have expected - and I said this in my report on Metronet last year - that a well-managed company would have resolved those issues well before Metronet started addressing them.
Q10 Chairman: They were doing some of the things you had asked them to. They were getting a bit better. Do you think if they had been given a lot more money they would have been able to become efficient and economic?
Mr Bolt: I think they were moving in the right direction but not quickly enough. That was essentially the conclusion I reached last November, and the work I have been doing subsequently suggests they are still not operating at a level which is in line with the test of efficiency, economy and good industry practice.
Q11 Clive Efford: TravelWatch have said in their evidence that they do not want to see periodic reviews become an opportunity for unfunded price rises and for the scope of investment plans to be cancelled or reduced in scope. Do you agree with that, or do you have any comment on it?
Mr Bolt: I think we need to be very clear about the way the contract was originally set up. It is a 30 year contract, but with a clear recognition on both sides that to try and price obligations on a 30 year basis would be unduly risky for both sides because changes in prices and changes in technology can lead to increases and reductions in price. So the periodic review process was always seen as one which allowed that re-pricing to reflect the emerging view on what was efficient costing, but with the additional factor that if prices were rising - and that was a risk which London Underground accepted - and there were issues about affordability it might need to de-scope its requirements at the periodic review. That is entirely a decision for London Underground. My job is simply to price whatever obligations and outputs London Underground believes it wants delivered.
Q12 Clive Efford: Can you just clarify something for me in terms of how we got to this position? The situation is that Metronet has delivered significantly less than was expected in its bids at high unit cost. It earned less performance revenue than expected, for example over the last three years of its contract Metronet's subsurface lines delivered ten of an anticipated 18 station refurbishments at a unit cost of £7.5 million rather than £2 million, and Metronet BCV delivered only four of 17 anticipated stations. That must have taken a heck of a lot of time to deliver that sort of failure. What is the reporting mechanism for actually highlighting that there is a serious problem?
Mr Bolt: There are essentially two and one is London Underground's responsibility as the customer under this contract for monitoring delivery of the obligations in the contract, and delivering stations on time is one of the obligations. London Underground has, other than this year, produced an annual report on performance under the PPP. The other mechanism is the annual report process envisaged in the contract, whereby London Underground and Metronet come jointly to me for a report on economy and efficiency and good industry practice, and the words you were quoting I recognise as ones I wrote in my annual report on Metronet last November.
Q13 Clive Efford: Can you clarify the position of when you were anticipating doing an interim report, and was that not delayed? Why was that?
Mr Bolt: The contract envisaged that the first annual report would be produced in 2005 for the period from transfer, which was April 2003 up to the end of the financial year, 31 March 2005. I should say that I only produce that report when I am asked to do it by the parties. I do not have powers under the GLA Act to produce it unilaterally. In the event, London Underground and Metronet agreed between themselves not to seek that report in 2005 and Metronet under the terms of its loan agreements sought and obtained a waiver from its lenders from seeking that report. It was originally envisaged that it would happen then. Metronet and London Underground agreed not to ask for that report in 2005.
Q14 Clive Efford: That is what happened. Did anyone say why that is what they were asking for?
Mr Bolt: Not explicitly. I think there was a recognition, even at that stage, that Metronet's performance was not as anticipated and a view that Metronet needed to take some action internally to improve its performance before it was reported on publicly.
Q15 Clive Efford: So there was a concern that your report might have had the sort of dramatic impact that it subsequently had a year later?
Mr Bolt: I think they were concerned that my report would highlight issues, some of which they had already identified.
Q16 Clive Efford: Do you think that added to the problems?
Mr Bolt: The absence of a report in 2005? Yes, my view is that had these issues been brought out publicly sooner, Metronet with London Underground would have started to address the problem sooner. It might not have been sufficient to avoid administration, but it would certainly have avoided some of the additional costs which are now being incurred.
Q17 Clive Efford: So the people of London, who rely on the London Underground, are really poorly served by that decision to delay that report?
Mr Bolt: That is my view, yes.
Q18 Clive Efford: Has the PPP agreement succeeded in transferring this from the public sector to the private sector?
Mr Bolt: Yes, and the fact that the original shareholders in Metronet have written off their shareholding shows that there was some risk transfer, but it was not as great as I think some people understood just in terms of the way the contract is written. As we have already highlighted, any increasing costs which are efficiently incurred were always a risk to be borne by London Underground. This is not a fixed price deal, and I think there has been some misunderstanding about the scale of the risk transfer from the public sector to the private sector.
Q19 Clive Efford: Is it the case that Metronet, where shareholders invested £350 million, was awarded potentially profitable contracts for the maintenance and upgrade work and where at least a 95% debt was secured by the taxpayer? In what sense then do you think risk is significantly transferred to the private sector?
Mr Bolt: The four elements of risk clearly are the equity, the 5% on the borrowing, and Metronet also for each Infraco bore the first £50 million of efficient cost overruns, and of course it bore wholly the risk of any inefficiency.
Q20 Clive Efford: Explain to me, if I am being a bit dim then, if TfL, as it seems to have confirmed, guarantees 95% of Metronet's debt and it could be liable for up to £2 billion, how have we significantly transferred the risk from the public to the private sector?
Mr Bolt: This was always set up as a limited recourse contract. It was not unlimited in the risk that was transferred. That was the basis of the original contract. I emphasise again, it is not a process I was involved in. My job is simply to take decisions under the basis of the risk allocation in the contract as signed by the Infracos and London Underground.
Q21 Clive Efford: So did the different levels of Materiality Threshold for Metronet and Tube Lines affect the relative transfer of risk, and what impact might this have had on the approaches of the two organisations?
Mr Bolt: My view is that it did have an impact. Clearly, the £200 million Materiality Threshold in the first review period for Tube Lines means that more of the efficient cost overrun is potentially borne by the shareholders. But the other important element which distinguishes the two contracts is that there is a mechanism within the Tube Lines agreement requiring them to come to me for, in a sense, endorsement of any cost overruns in £50 million tranches being efficient. So there is a very clear signal well before Tube Lines would get to the Materiality Threshold. I emphasise they have not had to come to me because they have not incurred cost overruns. With Metronet, not only could they use up all the Materiality Threshold but I was not asked to take a view on the efficient level of cost overruns until the actual number was £1 billion per Infraco, 20 times the Materiality Threshold.
Q22 Clive Efford: Is there an explanation for the different approach?
Mr Bolt: It was an outcome of the original contract negotiations, as I say, to which I was not a party.
Q23 Clive Efford: You also say in your submission that there are questions about the effectiveness of lenders to hold Metronet to account. What did you mean?
Mr Bolt: What I meant was that under the terms of the lending agreements the lenders have certain rights both for information and in a sense to get more involved in decision making if there were cost overruns of this sort. I am surprised that they did not exercise those rights sooner and more vigorously than they did. My understanding is that from March 2006, so for more than 12 months before the Extraordinary Review was triggered, they were waiving the right they had to stop Metronet drawing down on its debt and effectively requiring it to trigger an Extraordinary Review. Going back to the answer previously, if the Extraordinary Review had been triggered twelve months sooner, I think we might have avoided some of the problems we are now facing.
Chairman: We might want to actually discuss some of that.
Q24 Mrs Ellman: Looking at the lessons of what has happened, do you think the position that Tube Lines have to approach you if there is an overspend should be applied in the same way to Metronet?
Mr Bolt: As I have just explained, the detailed risk provisions in terms of what each Infraco was exposed to was different and that was a feature of -
Q25 Mrs Ellman: I accept it is different. I am asking you now, looking at what should be done to change the situation, do you think it would be better if the agreement with Metronet had reflected the same points as that with Tube Lines?
Mr Bolt: It would clearly be better, in my view, if there was a mechanism which stopped an Infraco building up, in a sense, expected cost overruns without a clear view being taken about the responsibility for that, whether they are London Underground's risk or the shareholders' risk. That would have prompted and forced earlier action to address some of the problems which Metronet has experienced.
Q26 Mrs Ellman: How did it come about that the two were different?
Mr Bolt: I think you would have to ask those who were involved in the initial negotiation.
Q27 Mrs Ellman: What would you say the liability or the responsibility of London Underground was?
Mr Bolt: I think, as the Chairman indicated at the start, there are limits to the powers of London Underground to take action under the terms of the contract and to get information on the detailed activities of the Infracos. In that respect, ironically my information powers given by Parliament are broader than London Underground's, but they still are monitoring delivery on a day to day basis and have powers to take corrective action, as indeed they have sought to do on the Metronet stations programme, which could ultimately lead to them stepping in if an Infraco is in breach of its contractual obligations. Whether it could or should have done more than it did I think is again a matter for them to explain.
Q28 Mrs Ellman: What is your view on that?
Mr Bolt: Going back to the answer I gave earlier, with hindsight (which is a wonderful thing) it might have been preferable, for example, if London Underground had not agreed with Metronet to waive the requirement for the 2005 Annual Report. That would have actually strengthened its own position in taking action under the contract to deal with under-delivery and cost overruns.
Q29 Mrs Ellman: What about the issue of the condition of the assets of London Underground? Were they in a poorer condition than was disclosed?
Mr Bolt: Again, it was always recognised that some of the assets, the so-called grey assets, were ones where the condition was not properly understood and where the detailed provision for costs would be addressed at the first period review. One of the other things which Metronet has claimed is that in other areas, other than grey assets, the condition of the assets was worse than they expected. Again, if they did not price properly in the bid for those assets, but the costs of maintaining and renewing them are efficiently incurred, London Underground bears that risk. So it may be an area which, since that better understanding of the risk allocation, might suggest that if we were going through this exercise again a better understanding of the condition of assets and the action needed to maintain them would lead to better value for money.
Q30 Mrs Ellman: Tim O'Toole suggested to the London Assembly Transport Committee that perhaps your analysis was not sufficiently accurate. Have you any views on that?
Mr Bolt: Clearly, I am working on the basis of information provided to me in their representations by Metronet and London Underground, but also other analyses and information including benchmarking with other operators, and I am starting to work on international benchmarking. This is one of the reasons the initial thoughts document I published a couple of weeks ago had ranges in them. I have not come to a firm view on the precise numbers, but I believe that the analysis is sufficiently robust to say that some of the cost overrun has been efficiently incurred - not the majority of it, but some of it - and under the terms of the contract the efficient cost overrun is borne by London Underground, apart from the Materiality Threshold. So there is further work to do, but I believe it is robust within the terms of the analysis so far.
Q31 Mrs Ellman: Do you have a view on the legality of Transport for London taking over Metronet's PPP Agreement?
Mr Bolt: That is clearly an issue for the administrators to work through the options and what represents the best outcome in terms of their responsibility to creditors. If Metronet is acquired by a public sector company, my view would be that it will remain important to benchmark performance between Metronet and Tube Lines to establish and demonstrate value for money. I think the need for some independent body or person to be involved in that benchmarking performance would remain valid in those circumstances.
Chairman: Value for money is not just something that comes to mind, is it?
Q32 Mrs Ellman: You would not raise any issues of legality?
Mr Bolt: Not as far as I am aware, no.
Q33 Mr Hollobone: Are there any powers which you, with hindsight, think the Arbiter should have, perhaps to be enacted in a pre-emptive way, which might have avoided this situation?
Mr Bolt: As I said earlier, I can only give guidance or directions when asked by one or other of the parties. I have further powers to prepare for giving guidance or directions, but cannot act unilaterally. With hindsight, possibly - and it reflects my answer to the last question - a power to report on performance whether or not I was asked to might have highlighted the problems at an earlier stage. If I had, for example, the power to produce an annual report on performance without being asked. But the way that was set up very much reflected the negotiations which led to the initial agreement and I am well aware that Tube Lines took the view that they did not want that sort of annual report process in their agreement.
Q34 Mr Hollobone: But going forward from where we are now, would it be a sensible recommendation to the Government that that aspect of your role be changed?
Mr Bolt: If that was the view the Committee came to, it is certainly a role which I would be happy to fulfil, and in a sense the work I have been doing on Metronet's performance, which has included looking at Tube Lines' performance for benchmarking purposes, would make that a natural extension.
Q35 Mr Hollobone: If Transport for London was to take over Metronet, what do you think your role in relation to the Metronet PPP Agreement might consist at that point?
Mr Bolt: It is a bit difficult to say at this stage, because it clearly depends on the structure of the arrangements that we put in place in those circumstances. In terms of the statutory provision, my role remains but, as I say, I only exercise statutory functions when asked by one or both of the parties and if London Underground is in a sense on both sides of the contract it might take the view that it did not want to ask me to give guidance or directions.
Q36 Mr Hollobone: Do you think there might be a useful role, though, for a regulator regarding maintenance and improvement to the Underground network for those bits which are taken back into the public sector?
Mr Bolt: I think you are reflecting the answer I just gave. Having an independent review of value for money looking across different modes of delivery - so my role clearly continues in terms of Tube Lines for the periodic review - would be a natural extension and although, clearly, as PPP Arbiter I do not have any direct access to Network Rail, my two offices (putting my other hat on for a moment as Chairman of ORR) do collaborate so that we can compare the performance of Network Rail on, say, track renewal, which is an obvious comparator with a lot of the work we have done on the Metropolitan line in the other sections. So to have that role, looking at value for money, on an independent basis and reporting on it is a valuable protection for value for money.
Q37 Mr Hollobone: If Transport for London did take over Metronet, would you be surprised if they did not try to scrap some of the upgrade work?
Mr Bolt: That, as I said earlier, is entirely a matter for them in terms of what they are able to afford and the priorities between different parts of the programme. If they were to decide to de-scope some elements of the programme, whether it is stations or upgrade, in terms of my role it is simply pricing at an efficient level the programme of outputs they would like to see delivered.
Q38 Mr Hollobone: Would you like to have a say in the quantity and quality of the upgrade work that London might require, or are you happy simply to price the programme which is put before you?
Mr Bolt: No, I am happy just to price it, and I think that model very much reflects the division of responsibilities between ministers and DfT and ORR in the case of the heavy rail network. It is entirely appropriate that elected officials decide how much public money is spent and what the priorities are. Having an independent verification that that is being delivered efficiently, I think reinforces those roles.
Q39 Mr Hollobone: My last question is that other regulators with other utility companies do take a proactive role in engaging with the public as to what services are required and then price those into the programme, but you would not want to absorb those powers into your brief?
Mr Bolt: That issue of public engagement I think is important where the private sector has choices. In the case of the PPP, the choices are about effectively the technique and the way of delivering obligations. It is TfL, in this case London Underground, who are reflecting the views of passengers about priorities for the services. If you had a different model, if you had the equivalent of the franchising model on the national rail network where the franchise operators had some degree of commercial freedom at the margins, then the position might be different.
Chairman: You would not have got 10 out of 18 stations, you would have got five!
Q40 Graham Stringer: You have said that it might have helped had you been required to do an annual report. Are there any other things, with the benefit of hindsight, which could have been done to avoid this?
Mr Bolt: I think the two key issues are monitoring of progress and I think highlighting the problems of Metronet sooner, potentially through an annual report, is one of those issues. The other question is, were there things which, with hindsight and certainly learning lessons going forward, could or should have been done differently at the time of the initial contract award? Again, clearly those are questions which need to be addressed to London Underground, but certainly my view is that although a tied supply chain of the form Metronet entered into is capable of delivering efficiently, in the circumstances of the PPP it was highly unlikely to achieve that and maybe in the initial bid evaluation those are issues which London Underground might have taken a different view on.
Q41 Graham Stringer: That is highly unlikely. It is very easy money, is it not? They are paying themselves to do the work.
Mr Bolt: Yes.
Q42 Graham Stringer: I am not using it in the legal sense, but it is corrupt, is it not, to allow a contract like that?
Mr Bolt: There are supply chains of that sort which work, but what is very important is that the role of the partners as shareholders is very clearly distinguished from their role as providers. That was one of the reasons why, in the annual report I produced last November, I argued for an independent chairman to help the board of Metronet separate those two roles, because my impression is that before Andrew Lezala was appointed as managing director he did not have as much freedom to decide on the efficient supply chain that a managing director would expect to have.
Q43 Graham Stringer: Do you know, and if you do can you remind us, what was the cost of setting up this contract?
Mr Bolt: The figure which is referred to is of the order of £500 million, but some of that included restructuring, which I think London Underground would have had to have undertaken itself even without these contracts. I do not have any more detailed breakdown of that figure.
Q44 Graham Stringer: It is significant. What I am trying to get at, which is what I suspect the public will want to know, is how much does this cost the taxpayer? When you put the cost of what was a very complicated contract and the cost of this failure, how much has the taxpayer been charged for this? I know it is difficult to get a baseline for that assessment, but I would be interested in your assessment.
Mr Bolt: One question, clearly, is what are you comparing it with, and that was the purpose of the public sector comparator work which London Underground did at the time of the initial bid evaluation. Broadly, for Tube Lines and Metronet BCV the bids were within the range of the numbers of the public sector comparator. For sub-surface lines, the Metronet bid was well below the level of the public sector comparator. So that suggests that had there not been a PPP, London Underground's costs would have started at a higher level. Whether they would have been able to manage the cost increases which Metronet has experienced better than Metronet did is, in a sense, the hypothetical issue on which you would need to take a judgment.
Q45 Graham Stringer: That is what I am asking you to judge with, in terms of the extra costs which have been incurred here, where risk has not been transferred, plus the cost of the contract. How much has this cost the taxpayer against a baseline?
Mr Bolt: I think it would be very difficult to -
Q46 Graham Stringer: I am not saying it is easy.
Mr Bolt: No, and it is not a calculation I am required to do, or indeed have done. I think the important question is to be able to compare like with like. Had the PPP delivered efficiently - and in terms of the costs and the delivery of obligations broadly Tube Lines have - then I think you would have expected the outcome for the travelling public and the taxpayer to be beneficial. Given the experience of Metronet, there are clearly some significant additional costs which will fall on the public sector.
Q47 Graham Stringer: But we cannot quantify them?
Mr Bolt: I think it would be very difficult to quantify them without a fair bit of work. It is probably an exercise which would be worth having a go at to learn the lessons from this experience going forward, both for the Underground PPP and for PPPs and PFIs generally.
Q48 Mr Leech: What do you see as the reasons for the relative success of Tube Lines?
Mr Bolt: There is a number of factors. I think the supply chain structure, which has been based on competitive tendering of the major contracts, is more appropriate for this sort of arrangement has been one of the factors. The nature of the shareholders - as you would expect, with a company with Bechtel as one of its shareholders, project management has been one of the relative strengths of Tube Lines. So it is a variety of factors like that, but I think also the original structure and philosophy of the Tube Lines deal, which was very much around delivering this within the amount bid rather than seeing it, as I think Metronet almost did, as a cost-plus contract, has been an important factor.
Q49 Mr Leech: Do you see them continuing to succeed then?
Mr Bolt: Certainly on the basis of the evidence I have seen so far, I see no reason why they should not.
Q50 Mr Leech: So if this is a successful model, do you think we should be replicating their model to replace Metronet's, or if not the exact model what changes would you like to see to get the perfect model?
Mr Bolt: I think, as we have been discussing, there are some changes at the margin which might increase the transparency of the arrangement and the effectiveness of monitoring, but my view is that an output-based contract of the broad sort of the PPP, provided you have got the appropriate quality testing of the bidders, so you have confidence in their ability to deliver within that structure, will deliver the best outcome for passengers and taxpayers.
Q51 David Simpson: I do not think you have dealt with this point, but you say in your report, or your submission, that there are questions about the effectiveness of lenders in using their powers under the funding agreements to hold Metronet to account. What did you mean by that?
Mr Bolt: I think it goes back to the point I was making before. Under the terms of the lending agreement the lenders could, as I understand it, have required Metronet to trigger an Extraordinary Review sooner. The lenders also had to waive their rights, or decided to waive their rights, to stop Metronet drawing down its funding. They could have taken the view well before they did in the middle of this year that it was right to go through a process of clearly allocating responsibility for the overspend between the shareholders and London Underground and I am surprised that they allowed the position to run on as long as they did.
Q52 David Simpson: So do you think the fact that the vast majority of Metronet's debt was secured reduced the incentive for the funders to look after the debt?
Mr Bolt: I think that may have affected their view, yes.
Q53 Chairman: Can I ask you why you are going ahead with your Extraordinary Review? Mr O'Toole said he thought it was bizarre and the administrator for Metronet said that he considers the review process ought to be in suspense.
Mr Bolt: A reference has been made to me by Metronet BCV. It has not been withdrawn and the administrators have told me they do not intend to withdraw it. In that situation, I have functions given to me by Parliament which Parliament says I shall fulfil, and I intend to fulfil them.
Q54 Chairman: Admirable! You asked for representations by 12 October. Have London Underground and the administrators responded?
Mr Bolt: Yes.
Q55 Chairman: Given the opposition to the Extraordinary Review and the view of Metronet's administrator, do you expect to complete that process?
Mr Bolt: I expect to complete that process. The only situation in which I will not is if Metronet BCV withdraws the reference.
Q56 Chairman: But you are not expecting that to happen?
Mr Bolt: Not currently, no.
Q57 Chairman: Would I be unkind if I summed up your view that the original contracts were not only deficient but useless, that the differences between the two companies was so marked that one did not sort out its situation in relation to its own suppliers and the other was more ruthless and did more limited work, and therefore knew what it was about, that in fact what has happened has made it very clear that no real risk was transferred to the private companies because although in theory they invested £250 million, in fact they were getting a Hell of a lot of money back, and that as far as you can see there is still no very clear indication that anybody is going to finish up with two effective contracts at the end of all this, or do I paraphrase unfairly?
Mr Bolt: You paraphrase the words I would have used. The risk transfer was not as great as some people understood. Metronet's performance clearly has been deficient and I think even on the basis of the evidence at the time some of the problems with the supply chain could have been anticipated and should have been dealt with sooner. There are clearly big issues about how, from the position we are now in, we can move forward in a way which gets best value for money going forward.
Q58 Chairman: So we do not know how much it has cost, we do not really have at the moment anybody trying to find out how much it has cost, and we are not even sure whether from this position we can go forward to an efficient deal?
Mr Bolt: One of the outcomes of the Extraordinary Review will be a clear number which says, "These are the costs which an efficient company would have incurred in addition to its bid." That is one element of the calculation.
Q59 Chairman: With respect, Mr Bolt, I have the greatest admiration for you and I have never had any problems with your professionalism, but you do give a range of costs which are really quite remarkable, £150 million - I am not good at arithmetic, but even I perceive that from £100 million to nearly £500 million is quite a broad spectrum.
Mr Bolt: But that is against the background that Metronet claimed (Metronet BCV) that the efficient cost overrun for the seven and a half year period was £992 million and London Underground argued it was zero, so the range has narrowed.
Q60 Chairman: I am not saying that they were not asking for five times more, I am saying that the range you have come back to is still, even though you said, "Knock it off, lads, you are pushing for too much," or whatever the arbitrator's language is for that sort of phrase, you still said it is somewhere between £100 million and nearly £500 million?
Mr Bolt: Yes, and that was on the basis of initial work. I have now had, as I explained earlier, the further submissions from Metronet and London Underground and on 12 November I will publish a number for the efficient cost overrun, a single number.
Q61 Chairman: We will have to wait in some suspense until that moment!
Mr Bolt: I am afraid you will.
Q62 Clive Efford: I just want to ask one last question. You have said that had you been allowed to go ahead with your independent review in 2005 you may have been able to highlight the problems earlier. How early in the contracts were you aware that there were difficulties?
Mr Bolt: I was aware that there were issues about delivery pretty early on, because one of the bits of information my office gets is delivery of the stations programme and you could see that slipping. What I was not aware of was the scale of the cost overrun until I carried out the 2006 Annual Report.
Q63 Clive Efford: So has your inability to actually step in and insist on an independent report at that stage, when you became aware of those concerns, contributed to the problem?
Mr Bolt: My view is that had I carried out the Annual Report in 2005, some of the issues would have been put on the table -
Q64 Clive Efford: Would you have been able to do it earlier, had you had that power?
Mr Bolt: We were ready to do it. I was fully staffed and we developed the work programmes carried out.
Chairman: As always, Mr Bolt, you have been very instructive. We are always very impressed with your use of language. It does not always convey exactly what we would like, but I think we have got there. Thank you very much for coming. We look forward to seeing your report.
Memoranda submitted by RMT and Unite Amicus
Examination of Witnesses
Witnesses: Mr Bob Rixham, Amicus National Officer, Mr Brian Harris, Amicus Regional Officer, Unite; Mr Gerry Doherty, General Secretary, and Mr Andy Young, Regional Organiser, Transport Salaried Staffs' Association (TSSA), gave evidence.
Q65 Chairman: Good afternoon, gentlemen. Thank you very much for coming. I am sorry to say that Mr John Leach - not the John Leech who graces this Committee but the John Leach who should have been with us from RMT - has unfortunately been taken ill, so we will have to proceed without him. Gentlemen, can I ask you firstly to identify yourselves for the record, starting on my left?
Mr Young: I am Andy Young, Regional Organiser for the TSSA with responsibility for Metronet.
Mr Doherty: Gerry Doherty, General Secretary, Transport Salaried Staffs' Association.
Mr Rixham: Bob Rixham, National Officer for Unite Amicus, section railways, buses and ferries.
Mr Harris: Brian Harris, Regional Officer for Amicus Unite. I look after Metronet at the moment.
Q66 Chairman: Thank you very much. Do any of you have anything you wanted to say briefly, or may we go directly to questions?
Mr Doherty: I understand the inquiry is into PPP, but having listened to the last witness you interviewed and having been back over the research that we have had, can I just say at the outset that we wholeheartedly agree with comments which you yourself made in respect of the last investigation this Committee had, and I do quote: "I welcome the fact that the Government is at last putting real money into the Tube, but I cannot see why it needs the PPP to do it." Nothing has happened since then to have changed their minds, and indeed with Metronet the battle has only served to confirm our view that PPP was poorly conceived in the first place, it was inappropriate, it was unable to deliver the improvement to the London Underground system and we think what has happened in recent times just bears out our view, and yours.
Q67 Chairman: Thank you very much. Can we just explore some of the aspects of this? What has happened to safety levels on the network since our last inquiry in 2005?
Mr Doherty: We have certainly got concerns that safety levels are being underpinned by the very structure of PPP itself. Only last month we had emergency brake problems which led to the suspension of the Hammersmith, City, Circle and District lines, and in July hundreds of passengers were stranded and 11 were taken to hospital when three carriages came off the rails between Mile End and Bethnal Green on a westbound Central line tube train. We have sought the views of our workplace representatives with regards specifically to safety and the feedback we have had from one indicates that the main problem is that the contractors do not comply with safety regulations on the Underground, and indeed the auditing by LUL is limited and pressure is put on management and staff to allow the contractors to get on with things and to turn a blind eye. To give you one specific example, one of our safety representatives came across the storage of explosives in Golders Green Station. This is Tube Lines, it is not under the remit of Metronet, but these explosives were stored without any permission and this was resolved following an HMRI investigation, but what we actually found was unauthorised storage of detonators at Golders Green Station without licence. Our concern is not that specific incident, because I am certain that the media - and I did some media interviews this morning - is concerned that in light of the terrorist attacks in recent times on the Tube that is a danger in itself. We do not think in itself it was a danger, but what it does do is it says to us that safety standards are slipping under PPP - and this is not Metronet, this is Tube Lines.
Q68 Chairman: Unite actually said in their evidence that a lack of "joined up thinking" could have been to blame for the incident on the Central line on 4 July 2007. Do you want to tell us a bit about that?
Mr Rixham: Yes. Some debris was left on the line by contractors. I think the reports we are getting back about that incident and others is the lack of communications between the various contractors undertaking the work. This repeats itself over and over again.
Q69 Chairman: What are we talking about, Mr Rixham, when you say something like "over and over again"?
Mr Rixham: We are told by the shop stewards that you have got companies which work in isolation and they tend not to share information with the other companies or communicate with other sectors of workers, and that seems to be a general problem not with just one of the groups but, as I say, across the range of contractors.
Q70 Chairman: Mr Doherty, I should have asked you, what length of time was there before you got an immediate response to your Health & Safety officer on that particular one at Golders Green?
Mr Doherty: It was discovered on 17 September, so we are a month away from it now, and I have to say that Tube Lines have dealt with it. Our concern is what else is out there that we have not found.
Chairman: I am sure that is an interesting point.
Q71 Mrs Ellman: In the evidence we have got from the Office of Rail Regulation they say that as a result of the PPP rail defects are now more likely to be detected before they become rail breaks and that there is no indication that the PPP has had a detrimental effect on rolling stock maintenance. Is that a finding you would agree with, or is it something which surprises you?
Mr Rixham: I do not think we would oppose that on rolling stock maintenance. We have said in our evidence that we have not provided anything on that, so we would accept that to be the case. Just going on to our evidence, before we move off to Health & Safety, we have also indicated the incidents in March 2007 when 12 electricians were actually found on site to be working over and above - they had been working all week and then coming on to Tube Lines to actually do additional work, and they were thrown off, so it is a lack of control over people working on the contracts.
Q72 Chairman: Can we establish what the circumstances were? Are you saying they were working beyond the hours they would be expected to work?
Mr Harris: It was a group of individuals who had done already a shift of work on day shift for a company and had then been found to have come on for another subcontract company to work the night shift on the Underground, and for us that breaks any Working Time Directive, the length of time, it breaks safety regulations, et cetera, and that for us is not acceptable.
Mr Doherty: Just to answer your specific point, Mrs Ellman, on the train maintenance, I did indicate that it was only last month that emergency brake problems led to the suspension of the Hammersmith & City and the Circle and District lines, and that is directly attributable to maintenance of the trains, not of the track.
Q73 Chairman: Is there any other incident? That is a major incident, but is there any other incident which comes to mind at the moment?
Mr Doherty: Not that comes immediately to mind, Chairman.
Q74 Mrs Ellman: Are there any problems with communications on reporting concerns or faults with the Infracos or the Underground?
Mr Harris: I think the basic problem we have with the structures that exist is that the structures with the Infracos themselves, with Tube Lines and with Metronet, on safety are set up as per the London Underground systems previously and where those are working - I say that in a loose form - it takes an awful lot of time to get minor concerns driven through and safety changed quickly because of the disjointed nature of management within the companies. Where there is an emergency situation, such as the brake failures, then that is dealt with quickly because quite clearly that is a major safety concern and it is in the public eye, but where we have a major problem is in the systems which are in place. They just do not work. The lack of communication between the companies and the contractors where you may have a gang who are a contract gang working on a repair who are not employed and under the control of the foreman from Metronet or Tube Lines and there seems to be a lack of communication or communication systems to enable safety to be taken seriously.
Q75 Mrs Ellman: Is that problem being addressed?
Mr Harris: That problem in terms of the problems with Metronet, in my experience of working with the company on a day to day basis, no, because if you look at the history over the past six to eight months of what we have been doing as a body of employees working within the company is that we have lurched from one crisis to another in terms of issues which the company raised. First of all, we had an issue with the fleet transfer, which basically was a transfer of up to 1,000 people initially to Bombardier, who then lurched from that, once that was resolved, to a reorganisation which could have resulted in over 700 people losing their jobs. We then lurched from that and in the middle of that straight into PPP, which is where we find ourselves now. So we have been trying to work these things through, but I think the management's priority has been elsewhere and what has resulted is that safety has been put on the back burner and has been let go in the medium term.
Mr Young: There were just two quick points I was going to make. Firstly, to go back to the explosives detonators issue at Golders Green, the safety rep for a TSSA who was looking to deal with that situation, when he came upon it, actually had some real problems about who to address the issue to because it was a Tube Lines storage area, if you like, but on a London Underground station. So there were real issues about who to report it to and ultimately resolution was by him writing to the HMRI, which cut through those kinds of problems.
Q76 Chairman: Has anybody done an audit of similar circumstances where the lines of communication are not clear?
Mr Young: Not to my knowledge. The other point I was going to make is that it struck me - and I am relatively new to the industry - at the Health & Safety committees for London Underground the Infracos are not represented at the highest level at the company Health & Safety committee.
Q77 Chairman: You have made that point, presumably?
Mr Young: Yes. There are inevitably some issues there. That lack of communication is almost built into the system.
Q78 Chairman: Has there been a report from the HMRI on that?
Mr Young: There was into the Golders Green situation, yes, which made recommendations for Tube Lines.
Q79 Mrs Ellman: But on the other point of not being represented, has anything happened on that?
Mr Young: I think the argument that LU and the Infracos would make is that they are involved in different structures, but it has struck me that when we go there - and one of the issues we were discussing, for example, last week at the Health & Safety Council, and that is the highest level within London Underground - a lot of the issues related to lack of consultation, lack of involvement of our safety reps, related to issues with Tube Lines or Metronet, and obviously London Underground management then have to undertake to go away and talk to them, et cetera. So it is bound to add in an extra element of complication.
Q80 Mrs Ellman: Is there any difference in dealing with Metronet or Tube Lines?
Mr Young: Well, one is in less crisis than the other, I think! Other than that, I have had limited experience with Tube Lines thus far, but in terms of safety mechanisms, if you like, on London Underground then no, I do not think there is any difference. In terms of the companies, then yes, they are somewhat different, but one at the moment is completely driven by the fact that it is financial meltdown, clearly.
Mr Harris: The difference I have experienced between the two companies is that one is vastly bigger than the other. One seems to be much more focused on delivery and the other seems to be much more focused on its profit margins for its previous shareholders.
Q81 Clive Efford: Name names!
Mr Harris: The five shareholders as are listed in the report, so the five shareholders of Metronet, if I can recall them, are Balfour Beatty, WK Atkins, Thames Water, Bombardier, and the fifth one escapes me. The difference between the two companies, despite the fact that they are doing very similar jobs, is that Tube Lines just seem to be leaner and just seem to be able to respond quicker and better than Metronet. Whether one is in a worse financial state than the other - if you believe the press reports, they are both obviously in serious financial difficulty. I think the main difference at the moment is that one is in PPP administration and one is not. Whether that will happen, time will tell.
Q82 Mrs Ellman: What do you think should happen to Metronet now?
Mr Harris: Without a doubt, in Amicus Unite's opinion, it should be brought back under a public umbrella of some sort, back into TfL. That is our view.
Mr Doherty: From our point of view, as far as Metronet is concerned, we would like to see Metronet coming under the auspices of Transport for London and therefore under the Mayor. There is another model. We have had experience of what happened in the mainline railway where both performance in terms of delivery and performance in terms of finance was turned round specifically when Network Rail came in and ran the business on a not-for-profit basis. So that is another model that is a possibility. What we certainly do not want is Metronet being handed back to the private sector on a different model where we still have the profit margin being built in, because it is quite clear that as far as infrastructure is concerned and our railways it is a failure. It has happened in both the mainline and now it has happened in the Underground.
Q83 Mrs Ellman: Would you leave Tube Lines as it is?
Mr Doherty: At the moment nobody knows what is happening with Tube Lines. If we believe what is being said in the press, as my colleague says, if we believe what is being said from our own members from within, then they are not that far behind Metronet. But I cannot give you any concrete proof to that effect, I can only tell you what has been said.
Mr Rixham: From the Unite Amicus point of view, I just confirm that we, too, would really look at the Network Rail model as well. We think that has been successful. Obviously Brian has already mentioned TfL, but either of those two options, we think, has got to take the programme forward.
Q84 Clive Efford: I just want to go back to something that was asked earlier on, because the Office of the Rail Regulator has concluded in the evidence they have given to the Committee that overall safety on LUL continues to improve. "We have no evidence that the PPP has or is having a detrimental effect on safety performance." Is what you are saying about the communication that we could improve safety, or are you actually saying, contrary to what we are being told by the Office of the Rail Regulator, that safety has actually got worse under the PPP?
Mr Doherty: We have given you some examples this afternoon as to specific incidents. Safety is one of these things that you either have your finger on the pulse and you learn the lessons from near-misses and you get the structures right to prevent any accidents, because accidents, whether it is on the mainline railway or on the Underground, are huge, huge incidents. There is a big loss of life. There is a lot of interest in it. What we are saying is, do not wait until you get the same specific instances that you had on the mainline railway through fragmentation and through privatisation before we do something about bringing the railway infrastructure back to where it should be and get proper control of it. What we are saying is that what has happened on the Underground is a mirror of what happened on the railway before we had all of those accidents and before we took action by bringing infrastructure and maintenance back in-house. Do we really want to wait until we actually have an accident before we say these structures are not delivering and we have to change them? There are some instances there. We have given you some of the instances. At the end of the day the more near-misses there are, one of these days it will not be a near-miss, it will be a big hit. We say learn the lessons beforehand, and we have got a model. We have seen what has happened on the mainline. Certainly safety has improved since Network Rail has come in, so has performance and so has financial performance.
Q85 Clive Efford: When you raised those concerns - and you raised them with LUL, not with the Infracos - you are saying those concerns, where you feel you could contribute to improving safety, are just not being heard?
Mr Doherty: When we speak to perhaps two individual companies, individual companies will say they are not responsible for the structure. They will deal with us under the ambit of their own responsibility. They will not say, "We'll go off and talk to people and try and get a better structure in place." The structure that they have is the structure they will deal with. They are not interested in changing the structure; we are.
Q86 Clive Efford: So that I am clear, just specifically how would you change that structure?
Mr Doherty: Hopefully, we will get some sort of report coming from this Committee which gives us some political leverage to say, "Can we learn the lessons?" I would love to be able to go to the Secretary of State for Transport and say, "We have spoken to the Transport Select Committee. The Transport Select Committee agree with us," and you do agree with us on a lot of things we have said about the mainline railway. Unfortunately, because of the changes in the number of Secretaries of State for Transport that we have had, by the time they catch up with what is going on in the mainline railway they have moved on again.
Chairman: I think this Committee has quite enough troubles without micro-managing the Underground, but that is only a personal view.
Q87 Clive Efford: Just to move on, if we are to proceed, if London Underground were to be both the provider and the contractor side of it, do you see similar problems continuing in that relationship?
Mr Doherty: If London Underground were to have both, I can see, for example, the communication problems that have been exposed here this afternoon at least being addressed, if not resolved. It is one body then.
Q88 Clive Efford: What I am trying to understand is where the problem lies in the communication. I think people who are actually doing the job have probably a lot to contribute towards highlighting deficiencies in the system. If that is not being listened to, that seems to be a serious problem. Where do we actually have to go to improve those lines of communication? Going through the Secretary of State or this Committee is a very disjointed way of doing it. How do we improve communication within the industry, within the service itself?
Mr Doherty: If you are not going to change the structure of the industry, then certainly we could put some sort of pressure in the industry to some overarching body as far as safety is concerned. There are other issues as well, but as far as safety is concerned, when all of the representatives from all of the companies are coming together and sharing information - because that is not going on either.
Mr Harris: From Unite Amicus's perspective, in terms of improving safety there are always margins on safety that can be improved. Where I see the main issues are at the top level of the company, that you speak to the directors, the senior vice-presidents, et cetera, on safety, and that we are all singing off the same hymn sheet. There is no difference in our approach, it is that as it filters down, somewhere from the top level to the operational level, the message is lost and the issues of safety are not being made clear. Also, from the bottom up the issues being raised by our safety reps locally with their management are not getting to the appropriate level. One piece of legislation that would focus senior executives' minds on safety is a corporate manslaughter bill, which would enable unions and people who do get injured and the families of those who get killed to attribute blame at the top level of companies so that individuals who make the profits out of these companies are brought to book when safety issues cause a major loss of life.
Q89 Clive Efford: So if one of your safety officers raises a serious concern with their line managers, because of the structure of the PPP that just gets lost and no one responds?
Mr Harris: I am not saying every single individual issue, but it seems to me, looking at an overview of it, that a lot of issues which are raised take either an inordinate amount of time to get through the system and resolved or they just never get resolved, they get swept to one side.
Q90 David Simpson: Now that Metronet has gone into administration, and listening to your comments, I take it that you have not a lot of time for Tube Lines either. I do not know why I have come to that conclusion! However, if you had a clean sheet of paper, what would you say would be the best way forward, the most appropriate way forward from here on in? Secondly, are you concerned that the withdrawal of private investment, the long-term funding arrangement, will have a negative effect on your members?
Mr Rixham: I think immediately we have got a situation where the administration in itself is costing a lot of money and the sooner we can pass through this phase and focus the operation on what it should be doing, the better. I think we have already indicated that we believe the contract should be taken in-house by TfL. There are other options, as indicated earlier. In respect of the money put in by the private investors, then quite clearly each company had a hit of something in the order of £70 million when they lost, but if you have a look at the £2 billion worth of debts then it really is not a shared risk basis that the PPP was founded upon. So although we do recognise that the PPP up to now has pushed forward in some areas the improvements that are required on the Underground, the fact of the matter is that the risk has not been equally shared. Therefore, it is our belief that taken in-house with TfL and given the proper management structures and good management, then it could go forward and be successful. Obviously, that is what the workforce, our members, want to happen.
Q91 Mr Leech: Do you think if the risk had been more equally shared there would have been better performance by Metronet?
Mr Harris: No.
Mr Rixham: I think we are star-gazing. I do not know. I am sorry, just repeat the question.
Q92 Mr Leech: If the risk had been properly shared between the private and public.
Mr Rixham: Would it have been more focused on actually delivering? Yes, we think it would have been. Quite clearly, as Brian said earlier, as an officer dealing with it on a hand to hand basis you can see the difference in focus of the two companies, Tube Lines and Metronet.
Q93 Mr Leech: You do not believe, though, that if the new contract was won by another company, or Tube Lines for that matter, where the risk was shared, that could produce better outcomes than taking it in-house?
Mr Harris: No.
Mr Rixham: It may do. We believe that the right way forward is to take it in-house within TfL.
Q94 Chairman: Can I just ask you one or two things? I take it you do not really think the private sector has contributed a great deal?
Mr Doherty: I do not think it has contributed to anything as far as the passenger is concerned and as far as the public purse is concerned.
Q95 Chairman: Why do you think Tube Lines were able to reduce the time taken to refurbish an escalator by nine months to around nine weeks when they took over?
Mr Doherty: From our perspective, Tube Lines is a better run company than Metronet, but being better does not mean good, and it certainly does not mean best. We think there are better ways to deliver contracts than either Tube Lines or Metronet. I am repeating myself, but we have had the experience in the mainline and we have seen the money that has been wasted in the public purse. We have seen the deterioration in services and we have not yet even touched on the effect on the employees, and it has been quite enormous as far as Metronet is concerned. Even when Metronet went into liquidation there were still threats hanging over a number of employees of redundancies in one instance, of being transferred to Bombardier in the maintenance contract, and it was only the threat of industrial action that has managed to stave that off. Coming back to Mr Simpson's question about what we think should be done, we think the sooner Transport for London - and their view is that they should take it back in-house - the sooner that is done, the better we can quickly get on with what needs to be done. We are less than five years away now for looking to try and upgrade the Underground as far as the Olympics is concerned. London is going to be on show to the rest of the world and unless we get our act together rather quickly, because a lot needs to be done, then we do not think that trying it out in the private sector is an option or even a luxury that the country can afford, because if you give it time and it fails again, how near are we going to be to the Olympics then and what is this country going to look like to the rest of the world at that time?
Q96 Chairman: Can I ask you very specifically, when you say, "We've got an example that works. We know what we can and cannot do," are you referring very specifically to taking back infrastructure in the sense of lines and stations, or are you referring to a wider recovery by the public sector?
Mr Doherty: There is the infrastructure side and there is the stations side, but there is also the train maintenance side. Bombardier are still at this stage saying they have a contract. That is a contract they signed while they were a partner of Metronet. They were an integral part of it and that is the way that Metronet operated. Whatever contracts it had, it did not put them out to tender in the private sector, they dished them out amongst themselves and that was an integral part of the problems, I think. Bombardier are still saying they have got this contract. We have managed to control the situation as far as Metronet in administration is concerned, but if we end up with it back in the private sector and if we end up with Metronet still insisting that we are going to have 500 people, or whatever it is, transferring across to Bombardier in order to fulfil these contracts, then I am afraid we will have further industrial relations problems in the future. The way to get around that, in our view, is to give control of the Underground to the Mayor via TfL.
Q97 Chairman: There is the suggestion that Tube Lines invested £10 million in the training facility in Stratford. Do you think that would have been possible if they had been publicly owned?
Mr Doherty: It is about priorities, Chairman. We would always argue for investment for the training of staff. Staff is the biggest cost that any company has and if you value your staff, as most companies tell us they do, then why would you not want to invest in them, whether in the private sector or in the public sector? Trades unions would always argue for that investment.
Q98 Chairman: So if I say that your view is that the original contracts were flawed, that there were very clear problems of communication, particularly in terms of Health & Safety, that these continue in one form or another, and that you assume that were there to be a re-letting of these contracts under the same sorts of conditions you would have continuing problems, am I misrepresenting what you say?
Mr Doherty: Not my view, Chairman.
Chairman: Gentlemen, you have been very helpful. Thank you very much indeed.
Memorandum submitted by Tube Lines
Examination of Witness
Witness: Mr Terry Morgan, Chief Executive, Tube Lines, gave evidence.
Q99 Chairman: Good afternoon. I know, sir, that you know our ground rules, so may I invite you to identify yourself for the record?
Mr Morgan: My name is Terry Morgan. I am Chief Executive of Tube Lines.
Q100 Chairman: Did you have something you wanted to say to us?
Mr Morgan: I did. I wanted to make a few points, but in terms of the last session I also wanted to add a little bit more, if I could, just to balance the story.
Q101 Chairman: Please do. On the whole, we do not restrict freedom of speech.
Mr Morgan: I know you do not. I would like to say Tube Lines has made good progress since we were last here three years ago. We are investing more. We employ more people, 1500 more people than when we first started. We continue to deliver all our projects on time. That was a statement we made three years ago and that is still the case today. The service is more reliable. Yes, there are huge challenges out there, but it is more reliable and we are able to do our upgrade and maintenance programmes much quicker than before. My second point is that I do believe quite strongly that PPP is working. Risk is transferred, investments increased and performance has improved, but I always caveat that by saying there are huge challenges and obstacles along the way, particularly around making the partnership work as effectively as we would all wish it to, but we are confident we can overcome those challenges as we have overcome those that we have faced to date. My supplementary comment was really on the question of safety. I cannot tell you how important safety on the railway is to everybody in Tube Lines, including myself. I listened to a few comments made this afternoon and I just feel very strongly the need just to try and clarify what I think is happening. We ask our employees, everybody in the business, what they think about working for Tube Lines. One of the key questions we ask them is, "How do you feel about safety?" There is a number of themes you have through an employee survey and safety and their views about safety is the strongest response we get back in terms of the approach which everybody in the business takes. Yes, there are examples, as we heard this afternoon, and I do agree with the stock comment made this afternoon. When we find those examples through audit the criticality is to ensure that we respond to what we have learnt and make sure that it cannot be repeated. There is a couple of things I would like to say. If you are an employee of Tube Lines, you are four times less likely to have an injury at work today than you would have done four years ago. Four times. When we first started there is a process in London Underground, as you would expect, that if there are systematic concerns around safety then there is a process in London Underground to regularise that process and you have to confirm, where there is a concern, what actions you have taken and you formally close it off. When we started four years ago there were 290 examples of regulatory notices on Tube Lines to actually deal with issues the engineering function had with regard to the railway. Today there are four concerns. So we have focused very, very heavily on the whole question of safety. There were some things talked about representation. There is representation, both at management and at shop steward level with regard to London Underground and its mechanism for safety. It is clearly a risk when you have a number of different organisations delivering a service to the public and it is a risk that we are only too consciously aware of and something which drives us. If I use an example, every Monday I have an executive meeting. First on the agenda is safety. "What were the issues we had last week? What are we going to do about them and how do we ensure that they can't be repeated?" So it is a really important subject for us.
Q102 Chairman: I do not think, Mr Morgan, to be fair, the criticism of you was that you were not particularly interested in safety. The difficulty which was being highlighted was that when there was a specific problem the communications within the company were so poor that it appeared to get stuck at a certain level in middle management and never reach much higher than that.
Mr Morgan: I am not aware of that, and it is interesting that it has stuck. This incident took place five weeks ago and was dealt with five weeks ago. HMRI confirmed their satisfaction with our mitigation three weeks ago. It is pretty obvious to me that this story came up today because this event is happening today.
Q103 Chairman: But then, on the other hand, you would not presumably dissent from their suggestion that it was only when they went to HMRI that they managed to get that clearance because there were no obvious lines of communication?
Mr Morgan: Let me assure you. I mentioned that on Mondays we have an executive meeting. This particular incident was discussed at the executive a few days after the incident. I have - which I switched off this afternoon - a Blackberry in my pocket. Every single incident which occurs on the railway with regard to safety gets text'd to me the minute it is reported. I get that and so does the whole of my executive.
Q104 Chairman: Then do you think you are not communicating too clearly to your own employees how you are dealing with the safety problems if they really think that they do not know who to report to and they do not know that anybody is taking any notice when they do report? Do you think maybe there is a failure in communication? I put it no higher.
Mr Morgan: I hope not. Clearly there is a distinction - and perhaps I have tried to make that - between the way I would want to represent it, which is the views of the employee, and the membership views in the way that it got expressed in the previous session. What I would say is that again in terms of communication -
Q105 Chairman: Let me be sure. You are saying that your individual employees have not given you a problem, so the unions must be wrong?
Mr Morgan: Let me use an example. I said we use an employee survey. We asked our people were they satisfied with the level of communications they get. We had a measure which four years ago, just after we started, said that 40% of our people were satisfied with the level of communication. It moved within two years to 70% of our people saying they were satisfied with the level of communication. A 30% change in two years is huge in terms of changing attitudes and people responding to those sorts of questions. So it is a measure we take very seriously. Yes, we can improve, but we do things, the things you would expect us to do, weekly news, team briefs, platform magazines. So there is a lot of things we try to do to communicate with people in our business to ensure they are engaged with the things we are trying to do. It is very important.
Q106 Clive Efford: You are talking about your own survey of your staff. Does that lead you then to ignore legitimate concerns which may come through the trade union representatives of your employees?
Mr Morgan: Not at all. As you would expect me to say, we have a very robust Health & Safety regime which includes a full representation from trade union shop stewards in the business and they are very heavily engaged throughout the business in terms of carrying out both the duties they see as a responsible trade union, but equally importantly representing the views of many people in the organisation in terms of changes we could make. We have a process. It is there to identify concerns and to deal with them. The point I was trying to make was that in terms of that process, my measures which come back to me suggest that we are making progress.
Q107 Chairman: Can I come back to why you are going better than Metronet? Why do you think? Do you think that the £200 million Materiality Threshold, which is different from the £50 million which was your opponent's, has had any effect upon how you work?
Mr Morgan: I honestly do not think so. Chris Bolt made reference this afternoon to the fact that we have a mechanism within our deal that says at £50 million we are obliged to report a concern that we have that we are working into an area which is beyond the cost we had indicated we could do the work for. We have never needed to trigger that mechanism, so although it is slightly different we have never got to the £50 million level.
Q108 Chairman: Why is that? Because you are so very much better at housekeeping? Because you are doing less complicated systems? Because you have a much higher level of executive planning? What is the reason, Mr Morgan?
Mr Morgan: I can tell you about Tube Lines. It would be very difficult for me, obviously, to start making comparisons.
Q109 Chairman: You must have thought about it?
Mr Morgan: Of course.
Q110 Chairman: You must benchmark yourself against someone who is a private company working within an exactly comparable organisation, surely, or are you above these things?
Mr Morgan: No, of course not. We take a view that we started from the same place, and clearly throughout the four or five years we have been engaged in this process we are continually assessing ourselves, "Are we doing the right things? What can we learn?" and we continually compare ourselves with Metronet because not everything in Metronet actually is in the sort of category of failure. There are some very good things that occurred in Metronet that we have taken back into the business and learned from.
Q111 Chairman: So I ask you again, why are you operating much more successfully than Metronet?
Mr Morgan: Tube Lines is delivering its objectives because, first of all, I have to say the management team which is in Tube Lines was there in 2003 with a few changes. So we have seen this journey all the way through. So we knew where we started and we know where we are today. Reference is often made to the supply chain and those arrangements. I am in no doubt at all. I would not wish to have the Metronet supply chain running in Tube Lines. It would be an impediment to the effectiveness of the business. We procure competitively, but at the same time we have recruited a lot of very good people who can manage those projects so that they deliver the objectives that we set for them. The one thing I would say, and perhaps in a way I have already emphasised this at the beginning, which is that we have spent a lot of time talking to our people. We have spent a lot of time trying to understand what are the blockers, to actually allow them to perform and we have spent a great deal of time and effort talking about the cultural changes that we need to achieve now you are in the private sector. So this whole driver around delivering performance, "Don't tell me why you have failed, tell me how you are going to succeed," is very much the language of the private sector which I think brings out the best in people and that is something we place huge emphasis on. Our investment at Stratford which you made reference to, I can well remember why we did it. I went to Acton, where there was a training centre. It was raining. This is what we inherited. I gave up counting how many buckets were actually catching the water coming through the roof. For me, that was just not the message. So Stratford was my answer to actually say to people that we care about them. If they make a contribution, we are going to look after them. Stratford is now turning out superb technical officers to the extent - you may remember, or not, last time we talked about the concern of our huge dependence on subcontractors with core skills that we needed to have in the business. I can say today that we have now almost a 100% complement of competencies that we need to sustain this business through training.
Q112 Chairman: Yes. You are not actually blaming God for raining on the public sector?
Mr Morgan: I am blaming somebody for not looking after the training facility in such a way that it creates the message, "We really don't care about your training needs."
Chairman: Thank you very much.
Q113 Mrs Ellman: Is Tube Lines considering a bid to take over Metronet's PPP Agreement?
Mr Morgan: I think the first answer to that is that whatever we consider, I am not going to sacrifice what we are doing on the Jubilee, Northern and Piccadilly lines.
Q114 Chairman: That is not the question, Mr Morgan.
Mr Morgan: I know, but it is really important for me. The answer would be that people say, "Well, why don't you take it all on?" We are not capable of taking it all on, not at the same time having the risk that what we have achieved on the other three lines would be put at risk by taking on too much. Do we have the capacity to do more? The answer to that is, yes, and we have expressed that interest, that we would be able to take on more if the opportunity existed.
Q115 Mrs Ellman: Does that mean that you are considering a partial takeover?
Mr Morgan: My view is that we would do nothing in terms of trying to widen our interest in the Underground without the support of TfL and LU. It would not work unless they supported that proposition. Clearly, under a PPP regime we have learnt a lot about the benefits of working together and the disadvantages of being adversarial. So for us, if there was some encouragement to do that then there is interest in us doing more.
Q116 Mrs Ellman: What are your views on Transport for London taking over Metronet's PPP?
Mr Morgan: I have a concern because it feels like the way it used to be. It is the old model. I know what we have changed in the organisation to deliver what we have said. The one thing that is absolutely true in terms of PPP is the level of transparency between the operational side of the business and the support for the infrastructure, and my concern would be that if Metronet was to stay in the public sector this level of transparency and the level of risk would be much more difficult to find and see compared with what we are trying to achieve in Tube Lines.
Q117 Mrs Ellman: Tube Lines has been praised, but it has also been criticised for its work on the Northern line. What are you going to do about that?
Mr Morgan: When we came to this Committee three years ago that was a very, very hot topic and I gave certain assurances at that time that we would accelerate investment and that we would put additional investment into the Northern line, and that we had a PFI contract with Alstom on the fleet and that we would try to negotiate that contract so that it actually delivered the objectives we were committed to achieve. It was like pulling teeth, but I can proudly say today that we have now renegotiated the Alstom contract as of today. It is useful coming to meetings like this, but it is now concluded.
Q118 Chairman: I am glad we have concentrated your mind, Mr Morgan!
Mr Morgan: It concentrated everybody's mind that this was something which just could not be allowed to continue. So that is now done. The acceleration of investment means that on the Northern line, since the diabolical year that we had when we first reported to you, this year it is 30% better than it was in our first year and we are actually starting in bonus on the Northern line for the first time. But I am not going to get carried away. The Northern line is a huge challenge. It is a very old facility. Yesterday, for example, we had a very difficult day where a cable which was 50 years old failed on it, and that is something that we are just going to have to keep working at until we get all of our investment in place, which obviously for me is a very important message. The investment needed on the Underground has started. It is really important to keep that going.
Q119 Mrs Ellman: But your costs for station refurbishment have been higher than the bids?
Mr Morgan: They have.
Q120 Mrs Ellman: Why is that?
Mr Morgan: Managing the expectations is a challenge.
Q121 Chairman: What does that mean, Mr Morgan? It is a nice phrase, but what does it mean? It means people expect you to produce what you promised?
Mr Morgan: No. The issue is really about the fact that on the stations there was an affordability issue for the Underground and public sector. So in terms of stations, there were two types of stations, or three types of stations developed, one of which was a modernisation, which was a full kit-out with PA, tiling, flooring, new ticket hall, all sorts of things, the full works. There were other stations that were in what was called a better state but required some refurbishment, so a lighter touch. You will not be surprised that the stations that were going to get the lighter touch wanted the full modernisation, and that is where the expectations were, where one station was getting a full fit-out and another station was actually getting a less full fit-out because it did not need it. That is where a lot of the expectations that I referred to came across in terms of the challenge we faced. It is also true to say that on stations, when we took the contract they all had an end date. If I did not get to the end date, then I pay the penalty. But that required approvals from London Underground to start the work and that was very, very challenging. It meant that we threw a lot of time, resources and effort to get those first stations started and it cost us. I have to tell you as an example that stations we have completed in the last three months are 40% lower cost for the same specification than when we first started four years ago, because we are able now to get the process optimised, a common understanding about what the scope should look like and the opportunity to use what we have learnt to actually improve the next station that we work on.
Chairman: I want to bring both Mr Leech and Mr Efford in on this one, certainly Mr Leech.
Q122 Mr Leech: Just to bring you back on the Metronet contract, there have been some suggestions that TfL have been actively dissuading potential bidders. Have you come across that at all, or is there any evidence to suggest this is true?
Mr Morgan: I think it is on the public record that TfL and London Underground believes that the Metronet business has no value.
Chairman: Not too intimate, please, Mr Morgan, we are taking a record.
Q123 Mr Leech: In terms of them actively dissuading bidders, do you think that is right?
Mr Morgan: No, I do not think that is the case. It is not a question of actively dissuading, it is a question of what is offered that is of interest to the private sector and I think with the condition that Metronet found themselves in and the way the administrator is carrying out his role there remains a challenge to actually understand how the private sector might be able to take on the risk that is there and actually be able to deliver value both for the client in the London Underground and TfL environment and obviously demonstrate to the investors that this was a risk that could give a reasonable return.
Q124 Mr Leech: But do you believe there is a viable contract?
Mr Morgan: I think it is very difficult to imagine that anybody would pick up the Metronet contract as it went into administration. I think it is also true to say that it is on the public record that London Underground would wish to take it back into the public sector, and as soon as they do they would change the contract. That clearly is not available to the private sector.
Q125 Chairman: What is also on the public record is that the risk was not actually shifted, was it?
Mr Morgan: I vehemently believe it was.
Q126 Chairman: Which bit do you think was shifted, Mr Morgan, because we have obviously missed that?
Mr Morgan: Tube Lines is not in administration because it actually managed the risk, would be my argument. I have used the example on stations. We incurred an additional £200 million worth of cost on delivering the station programme. We had to manage that within the scope of work available to us, which meant that we delivered all our programme objectives but we used our contingency and had to find efficiencies elsewhere to ensure that we could do our station work. That to me is all about risk transfer. In the old model, it would have been, "I've done a station here. Here's my claim for some additional funding from London Underground." I could not do that. As an example, Arsenal Station, we went in there with a scope of work to complete. When we started we found that the roof actually required complete replacement. I did not make a claim on London Underground for the roof, I had to pay for that myself. So I do think there has been risk transfer, but of course in the example of Metronet that is more difficult to balance given the scale of the overrun.
Q127 Clive Efford: Just on that briefly, what Metronet have lost is the capacity to make money out of the Underground? Is that not all that has been lost in the sense that that is the only risk they ran?
Mr Morgan: I thought the shareholders lost their equity, so I think that is quite a bit. You will not be surprised that within Tube Lines we have taken a view of what actually happened in Metronet and I am very clear that we, in the way we run our business, would have called for an Extraordinary Review earlier than was actually called for. I think Chris Bolt has referred to that. The mechanism is intended to cap the overrun. From my point of view, it is intended to cap the overrun at £200 million. At that level of risk, if it is £2 million overrun, I pay for it. My shareholders pay for that. That is their risk. Over that, there is a process to be followed which is intended to actually call for an Extraordinary Review involving the Arbiter, and my view is that if we were in a similar position that is the mechanism we would have used.
Q128 Clive Efford: A previous witness alleged, I think it is more or less a quote, that Tube Lines is not far behind Metronet. I thought I would give you the opportunity to comment on that.
Mr Morgan: I heard the comment. I have no basis on understanding where that came from. We contracted to complete 47 stations by the end of August. We did so. We contracted to increase capacity on the Jubilee line. We did so. So we do not have a single programme that is running late. We have filed our results and as far as I am concerned, as we look forward to 2010/11, when the Periodic Review is in place, we expect to be there with a good performance.
Q129 Clive Efford: In your evidence you suggest that innovation has led to costs savings which could be shared with the public purse at Periodic Review in 2010. Is that not pie in the sky?
Mr Morgan: I wish it was. I could keep the innovation benefits for myself if that was the case. The model that is in place - and that is the role of the Arbiter - for example, I made reference to the fact that our station work now is 40% lower cost than we first started. When we come to a Periodic Review, the costs of a station going to the second review period will be based on the cost that I completed that last station at. So all the innovation benefits, in terms of cost reductions, in terms of time to complete work, is actually handed back to the public sector and I start again. I have to look for more ways of being more innovative.
Q130 Clive Efford: So if Metronet maintenance and upgrade work came back into the public sector, do you think it would be undertaken in the same effective way as you claim to be carrying out your work?
Mr Morgan: I think I have already said that my concern would be about transparency, risk and some understanding about how would that be different to what used to exist five years ago, and that would give me cause for concern with what I have learnt over the last four or five years about what we have improved upon.
Q131 Clive Efford: Are all the PPP agreements fixed price contracts?
Mr Morgan: Our view in Tube Lines is that we inherited a fixed price contract. It might sound semantics, but they are on the edges. For example, we take a view that there is a change in the scope requirements that London Underground wish to see happen or there is a change in the standards that London Underground want to apply, then there is a mechanism for us to actually make a claim for some additional expenditure, but at the heart of the business we do take the view it is fit to price, yes.
Q132 Clive Efford: Is there a significant level of risk transfer for the station programme?
Mr Morgan: All of it, except where we have disagreements about the scope of work.
Q133 Clive Efford: So does London Underground's approach to these projects affect your ability to deliver and on budget?
Mr Morgan: Totally, because if you take the station work, all of our projects not only are fixed price but they are fixed in time and any delays in a project will cost us huge amounts of money unless we deliver on time. But the mechanism is as you would expect. If we take a view that the behaviour of London Underground had delayed the project, then we would make a claim for the effects of that, but I have to say that on the 47 stations to date there are issues around scope and the work we have completed, but in time terms they have all been delivered on time.
Q134 Clive Efford: Will the fact that Tube Lines' Materiality Threshold will be reduced from £200 million to £50 million in 2010 in the periodic review affect the level of risk transfer from the public sector?
Mr Morgan: It means that we are less exposed to the Materiality Threshold in terms of risk in 200. Obviously, from running the business successfully I do not want the Materiality Threshold ever to be a consideration and it has not been for Tube lines to date.
Q135 Clive Efford: The question is about in terms of public risk and you think that it affects the level of transfer of public risk?
Mr Morgan: I just think there is a difference in risk in terms of as we move forward. When we first started our knowledge of the assets was low, as it was in London Underground. What we now have is a single asset register. We have a lot of our assets now in a known condition, so the level of risk around what we need to do with those assets is lower because we have a much higher knowledge of the assets that we are running.
Q136 Chairman: Government funding has tripled between 2001 and 2004/5, so what has the private sector actually added beyond a commitment to investment for which, after all, your shareholders are very well rewarded?
Mr Morgan: We have delivered 20% improvement on the Jubilee line in terms of capacity. I was going to say on time, but actually two days early. Delivered on time and for lower cost. When I came to this Committee last time, we discussed Wembley Stadium and the station work there and some concerns about whether the station would be ready in time for the new stadium. It was delivered twelve months before the stadium was actually opened.
Graham Stringer: Possibly because of the stadium being late!
Q137 Chairman: Yes, I was going to say that luckily you were assisted by the stadium being late.
Mr Morgan: The station, though, was delivered on time and on budget. The thing for me is really that we obviously have some experiences around what we inherited and what we are trying to do now and I do think, in terms of value for money and the projects we are delivering we are delivering for the cost profiles -
Q138 Chairman: So are you value for money?
Mr Morgan: I believe we are.
Q139 Chairman: When the review of 2010 provides you with an opportunity for the PPP agreement to be renegotiated, what are you offering? What are you going to ask for in order to make sure that we get value for money for the second seven and a half year review period?
Mr Morgan: In terms of 2010, work has already started. Chris Bolt made reference earlier to the need to benchmark.
Q140 Chairman: I understand that, but I need to know what it is that you will be asking for which you believe you can deliver, which will be value for money and which will be part of that negotiation.
Mr Morgan: The big project is that we will have done a great deal of work on the Jubilee line and we will have done a great deal of work on the Northern line by the time we come to the Periodic Review. The big issues around the Periodic Review I think is a number of issues. One is with regard to Piccadilly, a huge project to upgrade, both the signalling and to purchase a new fleet for 2004, so that has to be sorted and settled and moved forward before the Periodic Review. Clearly the Periodic Review is important in terms of confirming that. Secondly, bearing in mind that this contract in embryonic stage and negotiations started in the 1990s, the agenda has changed enormously since.
Q141 Chairman: That is exactly what we are asking you.
Mr Morgan: So the expectations around the environmental debate is something we expect to see built within the Periodic Review work that we will be asked to bid for. We have in the detail obviously gone through enormous learning curves about how we think, and London Underground think, we could make this deal more efficient. So again we have been sharing views. For example, concerns have been expressed about engineering overruns, how we can make that more effective. We have talked about how, in terms of when we go in to do some work, do we actually minimise disruption to the public, so again lots of discussions around more innovative ways of trying to get greater access to do the work, but at the same time to ensure that we can actually get the programmes completed on time. So we are fully engaged with London Underground on coming up with ideas to improve the work we can do -
Q142 Chairman: You are assuming that this will in its turn be a fixed price contract?
Mr Morgan: Our view is that we had a 30 year franchise and that the Periodic Review is all about agreeing the scope of work, pricing and the performance objectives that we are setting for the second review period. That is our approach to it.
Q143 Chairman: Why then do you think, finally, that there is this slight confusion in the minds of others that the contracts are not necessarily fixed price? What clarity of view, Mr Morgan, is it that you have got that is withheld from others?
Mr Morgan: The area that creates uncertainty about whether this is a fixed price contract is where there is a dispute, and where there are huge amounts of money around that dispute the consequences of that dispute can make it such that that ability to maintain a fixed price approach, knowing that there is then a dispute in place which might be quite substantial brings huge risk.
Q144 Chairman: Yet there is a very clear Arbiter with a responsibility and clear arbitration machinery?
Mr Morgan: You are right. The Arbiter, though, does not handle disputes. There is an arbitration procedure which deals with disputes, but it takes time. That is the issue.
Q145 Chairman: So the problem is not that you cannot ask for more money, it is not that you cannot demonstrate that you are worth more money, the problem is you have to take some time to produce the evidence and argue it?
Mr Morgan: That is part of it, but I equally have to say that delivering the projects on time gives you a huge advantage in terms of at least taking away the debate about whether things were delivered on time. When you have a time issue and a cost issue, it becomes very complicated.
Chairman: Mr Morgan, you have, as always, been very tolerant and helpful. Thank you for coming.
Memorandum submitted by London Assembly
Examination of Witness
Witness: Mr Roger Evans, Assembly Member, Chairman of the London Assembly Transport Committee, gave evidence.
Q146 Chairman: I have to adjourn the Committee in one minute because there will be a vote so I hope, Mr Evans, you will not regard this as a personal comment if we all get up and walk out.
Mr Evans: It will not be the first time.
Q147 Chairman: I can assure you we will return. Perhaps you would be kind enough, while we are waiting for the magic moment, to tell us your full name and station in life?
Mr Evans: Yes. Good afternoon and thank you for the invitation to join you today. My name is Roger Evans. I am a Member of the London Assembly, the Member for Havering and Redbridge, which is known to most people as Ilford and Romford in north-east London, but I am with you today because I am chairman of the London Assembly's Cross-Party Transport Committee, I should point out the evidence I will give you will be agreed cross-party, rather than my own political views.
Chairman: Thank you very much for that. The Committee is suspended, preferably for ten minutes, depending on how quickly Members can get back.
The Committee suspended from 4.36 pm to 4.49 pm for a division in the House.
Q148 Chairman: Mr Evans, you were about to tell us?
Mr Evans: Yes. I have a full introduction here, which I will not burden you with as you have already got our notes, but there are three key points which my committee asked me to emphasise. The first one is that we have heard from the Arbiter today about the tension over the continuing of the Extraordinary Review. We feel the Review should continue and I am pleased to hear that it will report on 12 November. I think there may be some lessons we can learn from this, and certainly it will be useful to have a clearer valuation around the Metronet contracts. Secondly, we feel - and we have said this in our report at the start of 2007 - that Tube Lines has shown that PPP can work and Metronet has shown us some of the problems which can stop it working. I think because of that we would not want to see the whole thing wound up.
Q149 Chairman: You would or you would not?
Mr Evans: We would not, no. Finally, as a plea on behalf of my voters almost, we do not feel that Londoners should pick up the tab for this. Figures like £2 billion are being bandied around here. Obviously there is only a couple of ways that we could pay for that through the transport budget, either by raising fares (which we have seen increase over the last few years anyway) or by cutting projects to find the money, and that would not be a suitable thing to do either given the state of transport that we have in London.
Q150 Chairman: What do you think of the performance of London Underground in fulfilling their responsibilities in the partnerships?
Mr Evans: I think London Underground's approach has been perhaps unnecessarily adversarial towards the PPP companies. Of course, you have to remember that we started with a situation where Transport for London went through litigation to try to prevent this being imposed. Our committee did not take a view. We wanted to look at what was actually going to be provided rather than have an arcane debate about the mechanism, but this having been imposed I think we feel London Underground could have worked better with the PPP companies.
Q151 Chairman: In what way? To work better is a lovely phrase, but they are all very professional. Mr O'Toole, it seems to me, has not only got an extraordinarily good track record but has shown himself capable of dealing with all sorts of highly complex situations. He has been lumbered with an arrangement that he did not negotiate. He was directly responsible for it, but not directly involved in it.
Mr Evans: Mr O'Toole is a very high quality public sector manager and we are very pleased with his performance, but if you look at the situation around station refurbishments, for example, there has been a lot of wrangling about what should go into a station refurbishment. The way the companies dealt with it were different. Metronet seemed to get drawn into long, drawn out arguments, which led to delays, and we have a situation where we have been left behind.
Q152 Chairman: But that can hardly be laid at the door of LUL, can it really, to be honest? Part of the problem with any customer/supplier argument surely is the customers will always got for what they want and the supplier will presumably have to decide whether or not they can do it f or the price?
Mr Evans: Yes, and the customer has a responsibility to make it very clear what they want from the outset. Our experience is that maybe something had been added to the specifications and minds have changed halfway through them. I think Tube Lines' approach was only just to say, "Well, do what you want and argue about the price afterwards," and maybe that has been a bit more of a successful approach.
Q153 Clive Efford: Could you say what the role of your committee is in scrutinising what is happening on the Underground?
Mr Evans: Yes, certainly. We have an entirely scrutineer role. We have no executive responsibility over what happens. The executive responsibility is exercised by the Mayor, who is the chairman for Transport for London through the board and the Commissioner there. We have no power to have our recommendations taken on by Transport for London, although in fact they do take them on when they wish to and when they feel that something we have done is useful for them.
Q154 Clive Efford: Is there a mechanism in place for your committee to be made aware of serious deficiencies in the performance of a contractor on the Underground?
Mr Evans: No, there is no mechanism in place to do that. What we do receive are the minutes of the board of Transport for London and the panels that comprise that board, so we might see indications from that that a contractor was failing or that something was wrong, but it is very much up to us to go through the material that is put in front of us. There is no formal mechanism to tell us.
Q155 Clive Efford: So we have got a virtually bankrupt contractor rattling around on the Underground, running two-thirds of it, and you do not know anything about it until it hits the buffers?
Mr Evans: I think that is a fair summary of the situation. I look back at my officers to see if they have anything else to say, but that is a fair summary.
Q156 Clive Efford: So I cannot accuse you of sleeping on the job while all this was going on?
Mr Evans: No. I think that would be unfair. If we had a responsibility, or if there was a reporting mechanism built in, then that would be the case, but Transport for London view our committee in some ways as being adversarial towards them and it is often a case of chasing information rather than having it provided.
Clive Efford: A bit like the way the Government views this Committee!
Chairman: Surely not! That must be a misconception on your part!
Q157 Chairman: Do you think it likely that there will be interest from other private sector companies to purchase Metronet?
Mr Evans: We had the Arbiter in front of us last month to talk to us about the work he is doing and I think the feeling is that if there is value in the contracts there may be interest from the private sector, but we need to actually see how the administrator's valuation comes out first. It may be that the contract is seen to lack value to such an extent and be such a bad deal that the only -
Q158 Chairman: Most people would regard the sort of investment they have put in and the sort of return they have got as being not bad value. I think we ought to be quite clear that we are not talking about a company having failed because it was not given a very considerable amount of leeway to make money, are we?
Mr Evans: No, we are not, and when I talk about the value of the contracts I am talking about a snapshot now. Would you want to come in and pick these contracts up with a margin of hundreds of millions of pounds of debt attached to them? Possibly London Underground may, according to the Arbiter, owe money to the contractors, possibly not. You have heard the range of figures talked about. So it is difficult to say in those circumstances whether someone would want to take them over. I have to say my view is they do not look very attractive.
Q159 Clive Efford: If there was a private sector company or consortium interested, should there be a restriction on the scale of the operation they take over in the future, or do you think it should be on the same lines as the previous PPPs?
Mr Evans: One of the problems that Metronet had, as opposed to Tube Lines, was the size of the task they faced. This is nine out of the 12 underground lines, probably about two-thirds of the system underneath one heading, and that has magnified a lot of the difficulties they have had. I think anyone would agree that it would be better managed in smaller chunks in future, yes.
Q160 Clive Efford: So what is your interpretation of s.210 of the GLA Act, which seems to forbid the public sector from operating an Infraco?
Mr Evans: I am not a lawyer and I did not write the Act, but my understanding is that there is the possibility that contracts could be effectively undesignated so they were no longer PPP contracts, and that would enable the pubic sector to operate the Act. We had a question time session with the Mayor this morning and I asked him about this. He told us he felt the Secretary of State would be amenable to that happening.
Q161 Clive Efford: How should the £900 million loan that TfL has made to Metronet's administrators be financed?
Mr Evans: Ideally, that and any other bills that are picked up from this should be financed from the national Government's coffers rather than through Transport for London.
Q162 Clive Efford: You are not aware of any changes TfL has made to its forward programme as a result of having to find this money?
Mr Evans: They have assured us that their programme of works has not been altered. I think the Mayor has said the station refurbishment programme may fall back in order to do this, but nothing else has been sacrificed.
Q163 Graham Stringer: Have you had any indication of the Government's position on the costs due to the failure of Metronet?
Mr Evans: No.
Q164 Mrs Ellman: There has been this major financial and operational collapse and you say there is no reason why you should have known about it. What other powers do you think you should have had or you would like so that you might be in a position of knowing in the future?
Mr Evans: I think a power we would like to have as a committee generally is to be able to vet and approve the Mayor's transport strategy for London, which is a huge area and would take into account a lot of issues which are important to Londoners. But remember we are a scrutiny committee, we are not a part of the executive here, although we occupy the same building as them. I think you said earlier it is not your job to micro-manage the Underground. I do not think it is our job to do it either.
Q165 Chairman: Mr O'Toole, I think, told you that £17 million a week was being paid for the loan to both Metronet and Infracos. Can I just get it plain in my own mind exactly what it is you are saying? You believe that even though that was an arrangement which was entered into by Transport for London, even though it is directly involved in a London infrastructure project it should be paid from the national purse?
Mr Evans: We believe the PPP is something which was imposed on London in opposition to the views of the Mayor, who was elected at the time and Londoners should not pick up the cost.
Q166 Chairman: Is your committee of the opinion it should not have been imposed and that we should still have them all within national control? Is that the position of the committee?
Mr Evans: No, the position of the committee was that we would wait to see what actually developed and how it worked at the time. Obviously, I have a committee which does not just involve the three major parties, we have Greens and people formerly known as UKIP as well, so there is quite a wide range of views there.
Q167 Chairman: Full of life's rich pattern. All I am asking you is what you view your responsibility as. You say you are a scrutiny committee. That is what we are, but we are also part of the Parliament which decides how much money is going to be spent on which particular heading at least once a year, sometimes twice if we are feeling violently enthusiastic! All I am saying to you is, are you really saying to us, "We didn't have anything to do with it. We're just scrutinising it, but on the whole we think you ought to pay for any gap there is because it's not us, Guv, it's the people next door"? I only ask. I just would like to have it on the record.
Mr Evans: Yes, it is a fair question, and certainly I believe that because this was imposed on London then the Government that imposed it should be the people who pick the bill up.
Q168 Chairman: And your committee would have opposed the imposition of this arrangement?
Mr Evans: No, we did not. We could have made a statement at the time.
Q169 Chairman: You did not oppose it at the time, but now you think you should have done and you want the cash?
Mr Evans: No, I think the committee's position was correct at the time. We did not agree to it being imposed either. We said we would monitor what was going on because that was our role. Please remember as well that we do not have that role of walking downstairs and seeing what is going on.
Chairman: You have been kind enough to explain that to us, Mr Evans, and it is because you are a scrutiny committee and because you are asking awkward questions and because, presumably, one of the things you scrutinise is where the Hell that amount of money is coming from each week. It is very important for us to know who is paying for it. It is boring, but you know that is what elected Members do.
Q170 Graham Stringer: You were listening to Mr Bolt's evidence earlier on?
Mr Evans: Yes.
Q171 Graham Stringer: Do you have an answer to the question I asked Mr Bolt about what you believe the cost to the taxpayer (whichever taxpayer) has been the failure of Metronet?
Mr Evans: That is an interesting question and it is one I was discussing with colleagues earlier on. There is that notional £500 million that was possibly spent on legal advisers and auditors, maybe. That is the figure we have seen in the press. I cannot sit here and substantiate it because I was not a party to that.. You might also add, of course, the cost of the legal challenge to the scheme and the work that was done on both sides during that process, and possible costs of delays bringing the PPP in because of that challenge. But then you might also look at the PPP and say, "Perhaps there are some things where we've saved money here, based on what could have happened before." One of the big problems has been the quality of the asset register that London Underground had and it does appear in hindsight no one really knew exactly what they were taking on.
Q172 Graham Stringer: So you do not have an answer to the question of taking the baseline being the public sector case?
Mr Evans: No, I do not have a ballpark figure for that. I think it would be very difficult to calculate.
Chairman: It is very nice to have heard you, Mr Evans. We do wish you the greatest luck with your scrutiny. Thank you for coming.