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10 Mar 2008 : Column 99

I attend many Select Committees and have been doing so for a long time. Sometimes they can be tedious, but the hearings that we had in the Transport Committee on 17 October and 9 November were shocking, startling and in some ways exciting. It was like listening to a case involving embezzlers and fraudsters being described and knowing that they had got away with it. It was an extraordinary process. If Tony Soprano or his ilk in New Jersey knew what was going on with Metronet, they would have left New Jersey and come over to London, where they could have given advice and got hundreds of millions of pounds, risk free. It is an amazing story.

Tube Lines has been mentioned as being better than Metronet. It is undoubtedly better than Metronet, but it is far from perfect. There were problems with the improvements on the Northern Line. There is good management there, but when we look at the basic assessment of the financing, even of Tube Lines, and then look at the public sector comparator and read what the National Audit Office said about public sector comparators, which is the basis that shows that these schemes would be more profitable, we find that the NAO backs away and says, “These comparators are so subject to the assessment of risk that you can’t really judge them”. That is a way of saying, “ There is a fiddle factor in there that we cannot assess, and the experience is that they probably won’t save the money that you expect.”

With reference to the financing of Tube Lines, where much of the finance was guaranteed because it could not be obtained from the markets, what happened as soon as Tube Lines got the contract? It refinanced on the open market, which was an indication that it could have been financed at a better rate and that what was driving the process, as a number of my hon. Friends said, is ideology. Tube Lines also had a much higher materiality threshold. We heard that no risk was transferred, and that 95 per cent. of the money was secured; not only 95 per cent. but an extra £500 million—I am talking about the consultants—on the cost of borrowing, so there was no risk to the lenders. Those who would normally be expected to exert pressure were exerting no pressure at all.

The results on the ground—my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman) referred to some of these—were that on the Metronet surface lines, 10 out of 18 stations were done. Instead of costing £2 million each, they cost £7.5 million each. On the other Metronet contract, four stations out of 17 were done. Effectively, between two and four stations were paid for and only one was delivered. That is the story that we heard. Although it is difficult to know exactly how much money was overspent, it looks as though it was £1 billion. Nobody can assess it because the funding was available and it is not yet known what the cost was.

As I said, there was no pressure from the bankers because they had the money. Either it was secured or they got extra money for what they were doing. They did not put any extra pressure on. One would normally expect the owners of equity to want to know what was happening with their money, but this is where the real corruption in the Metronet contract comes. The people
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who were the equity owners and who had £350 million at risk were effectively paying themselves to do the work at those extraordinary prices. It is easy, isn’t it? One of the companies—Bombardier, for example—says, “There’s my £70 million. I will overprice this contract at twice the rate. I’m already expecting 20 per cent. return on the capital, so I’ll get my money back very quickly indeed.” When the Secretary of State gave evidence to the Select Committee, I told her that

She said:

There is direct evidence of corruption. Those people paid themselves out of public money to do less work than they should have done while taking no risk whatsoever.

The other pressure that normally applies to people who are building things comes from clients, but London Underground was kept out of the matter. Metronet would not tell London Underground what was going on, and the contractors would not tell it what was going on, which was an extraordinary situation. We asked Mr. Pimlott, who was chairman of Metronet for a period, why he did not stop paying the contractors, who were effectively his fellow members on the board, ridiculous sums of money. He said that when he made that suggestion he was threatened with legal action by other members of the board. The story is extraordinary.

If the scheme were publicly funded, there would be direct lines of accountability, and if it were a private sector scheme, the private sector would take the risk and the loss, but we have neither public accountability nor risk. The Mayor is not responsible—he was against the scheme from the beginning. The Government say that they are not responsible in a direct sense, although pressure from the Treasury undoubtedly caused the situation. The companies have walked away with a great deal of money, so they are not responsible. When the Secretary of State was asked what she thought, who was responsible and what should happen, which might have involved an inquiry or someone having to go, she said this about the infracos:

On 6 March, The Guardian stated that Balfour Beatty, which was one of the bad five in this case, had reported a 48 per cent. rise in profits and that it was on the verge of signing a new deal on the underground to carry on doing the work for which it has already ripped off the public sector. If that is not a scandal and corruption, I do not know what is and words have lost their meaning.

What should we do? There should clearly be a public inquiry, because there is no accountability. Who has suffered? We do not know exactly because we do not know the cost. In the end, however, the fare payer will pay and passengers will suffer. For example, Transport for London has indicated that it may not be able to fit cooling systems on the tube. The taxpayer will pay.

Finally—I care about this a lot—when huge expenditure achieves a fraction of what it should produce, it is not only the taxpayer who is affected, because in relative terms there has been a bigger increase in expenditure on transport in the south-east and London than in the
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regions, so the regions have suffered. The deal has been bad for everybody, and the lessons should have been learned 10 years ago. I hope that we never go into another opaque scheme in which no risk is transferred. The scheme has been bad for the Government’s reputation. Ken Livingstone was right and the then Chancellor of the Exchequer was wrong.

8.58 pm

Susan Kramer (Richmond Park) (LD): At the time of the PPP, I was on the board of Transport for London. I was a virulent opponent of the PPP, which I fought tooth and nail.

I will not repeat the comments that have been made already, but I will try to add to them, because the issue of lessons learned is important. I hope that the Treasury is listening, because it carries a large part of the responsibility for how the negotiations were handled and for the consequences for London’s transport system. The whole PPP negotiation was done in a very ideological context. The hon. Member for Leyton and Wanstead (Harry Cohen) was right; the Conservatives had taken the position that the PPP did not go far enough—

Justine Greening indicated dissent.

Susan Kramer: The hon. Lady shakes her head, but I stood on a platform day in, day out with the Conservative mayoral candidate in many venues; I can say that the Conservative party was seeking total privatisation as an answer.

Ken Livingstone had in this House voted twice for the PPP; only later was he converted to the idea that it was a flawed way to manage the future funding and structure of the tube. I am glad that he was converted. In the end, the struggle became one between London and the Treasury, and I was glad to be part of it.

The ideology set a dangerous context. It created an environment in which flawed decision making took place. Ideology overrode common sense and clear, analytical thinking. First, there was no asset register. Teams were trying to negotiate the upgrade of a system when they had no idea of its underlying condition. That automatically meant that there was likely to be a disaster, no matter what the outcome. How does one get value for money in such circumstances?

Then there was the negotiating team. I do not want to point fingers at very fine individuals, but put a fine individual in the wrong place and there is not a successful outcome. All the bidders—not just the successful bidders, Tube Lines and Metronet, but all the original ones—made sure that on their teams were world-class negotiators, whose skill and focus was to negotiate procurement contracts. The team that represented TfL—it was only nominally a TfL team; essentially, it was a Treasury-driven team—was largely made up of and driven by people with good academic and consulting backgrounds. Their skill set was wrong for taking on the kind of hard-nosed challenge involved in bids for which large amounts of money are at stake.

The consultants have been mentioned; the Treasury and the Government will have to think through the selection of consultants far more. The contract depended on successful risk transfer. One cannot discuss such a
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thing with people from investment banks. Such people know how to do deals; they are not part of organisations that take, carry and hold risk. They therefore do not understand risk transfer, and the same applies to consultants who come out of the various accounting firms. Such people have the wrong skill set—the Government were told that over and again, but never listened.

Kelvin Hopkins: The hon. Lady is suggesting that the Government had weak negotiators on their side. If they had had tough negotiators, as they should have, would the privateers not have walked away because they would not have been able to make any money and the risk would have transferred to them? Did they stay in only because they knew that they could make cash and eventually walk away?

Susan Kramer: The structure was fundamentally flawed. If we negotiate with the private sector, we should be aware that it has a duty to its shareholders to get the best from any negotiation. The team that I mentioned was weak not because the individuals were poor but because they did not have the necessary skill set, experience and capability of being a fair challenge. Such negotiations are a gladiatorial contest, and the skill base has to be there.

Kelvin Hopkins rose—

Susan Kramer: I must move on, because others want to speak.

To give a simple example, even the most senior engineers at TfL were consulted only about small aspects of the contracts. The contracts depend totally on engineering requirements—to upgrade track, carry out successful maintenance and rehabilitate stations. The engineers were brought in only on a narrow, need-to-consult basis and that utterly undermined any ability to be effective and powerful in the consultation process. From a very early stage, the negotiation went on to having a single preferred bidder. For a chess player, that would be equivalent to handing over their queen at a very early stage in the game. Once people are dealing with a single preferred bidder, the negotiation goes downhill because there is no ability to have competitive play. That was made clear time and again in the course of this negotiation, and it undermined the ability to move forward.

Underpinning all this was an assumption that one can handle relationships and build long-term dynamic arrangements through contractual and legal documents. The negotiation led to a series of document exchanges, with 135 documents, 2,800 pages, and constant cross-references—completely unworkable on a day-to-day basis. The fundamental philosophy behind these arrangements was that they would be based on legal and contractual relationships. That has proved to be a flawed concept, and that lesson must be learned by Government.

Then came the comparison between the PPP and carrying out the work within the public sector—the so-called public sector comparator. I have no ideological objection to using the private sector, but there must be a level playing field in comparing the work of the private sector and delivery from the public sector. I believe—I am working from memory; perhaps Ministers can remind us—that a cost overrun adjustment of 15 per cent., or
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perhaps 20 per cent., is automatically added to the costs of any work calculated or estimated in the public sector. In addition, the Treasury went to extraordinary lengths to devise a discount rate to come up with net present values to compare between the two potential providers. The discount rate that was used was 8.25 per cent., or something very close to that, while the cost of borrowing with the Treasury at the time was about 3 or 4 per cent. It was an extraordinary number to use. Nobody who looked at it thought that it was in any way fair or rational but that it was selected, just like the cost overrun number, to bias the solution towards the private sector.

Even that did not get us to a project where one would take the private sector option, so the Treasury came up with one more concept, which was on its website for a while but shortly thereafter abandoned—that of reputational cost, which basically said that if there is major borrowing by a public sector entity, the cost of that somehow reflects the total borrowing capacity of the country as a whole, so there is a pricing impact.

It took all those factors stacked together to come out with a number that suggested that taking the public-private partnership route made more sense in any kind of financial analysis. It was so artificial, and so clearly structured to achieve a specific end, that it lost all sense of the risk involved and of value for money to the public. We ended up with a procurement that was described by one of my colleagues as one that will be taught in American business schools as course 101 on how not to procure. That is not a situation that the British Government should ever get us into again.

We have heard about risk transfer. There has been evidence from the very beginning that risk cannot be transferred in this respect. London cannot see its underground network being strained in capacity and coming to a halt. The risk will always end up resting with the public sector, and that notion must be taken fundamentally into its thinking.

It was evident that the Metronet contract was in trouble almost from day one. In June 2005—there had been many previous comments, but this is the one that I was most easily able to lay my hands on—Bob Kiley gave evidence to the Greater London authority and talked about Metronet’s performance as “bordering on disaster”. This was a slow train wreck, which people could see happening gradually, but the contractual arrangements made sure that it would not be possible for TfL or anyone else to intervene. The underlying standards embedded in the contract were very much driven by what the banks would finance. The banks were clear that the performance required of the private sector had to be something that a modest company could achieve on a modest day. The targets were low and the mechanisms for intervening were minimal.

I need to wind up my remarks quickly, so I shall make a couple of further comments; I would love the opportunity to share more of the understanding that we developed of these projects on another occasion. We must have some absolute parameters. Cost must not fall on Londoners, and I hope that we will get that assurance. We must have an understanding of where the Government see the contracts going. Will we be
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using a concession model, which I would favour over taking the process back in-house? London Overground and docklands light railway are excellent examples. We must know what Londoners will lose in the way of upgrades, such as air conditioning and all of the other plans that were laid out.

As the Government will be aware, those who opposed the PPP felt that there should be bond issues based on the farebox and on future streams of grants from Government. That concept of financing would have enabled far lower pricing and far more effective systems—splitting the financing from the concession to carry out the work. It would have put the responsibility on the body that would hold it best, and I would like to hear whether the Government will consider moving to that model in their recovery from the Metronet disaster.

9.11 pm

Clive Efford (Eltham) (Lab): I start by saying how much I regret the fact that the Chair of our Select Committee, my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody), is unable to be here. I wish her all the best, and I hope that she makes a swift recovery and returns to her duties in the House as soon as possible.

It is inevitable in a debate on the failure of Metronet that everyone will repeat the arguments of 10 years ago, when people were raising questions about the public-private partnership, and they have jumped to the conclusion that the entire PPP has failed. I say to the hon. Member for Lewes (Norman Baker) that if he reads the conclusions of the report, he will find that paragraphs 21 to 24 all refer to severe failures of Metronet and its internal structures, but they do not condemn PPP. We take a strong position on the failures of the part of the PPP that Metronet was involved with, but the Committee is far from saying that PPP is a bad idea. Many of us in this House come from local government, where public-private partnerships are commonplace. It would be a foolish position to take to say that we were flatly opposed to PPP.

The hon. Member for Hammersmith and Fulham (Mr. Hands) is unfortunately no longer in his place. I used to share my office with the previous Member for that constituency when it was a Labour seat, and I have to say that he made a lot more sense. At the 1997 general election, the Conservatives’ manifesto stated unequivocally that they would introduce proposals to privatise the London Underground. A little later, in 2000, their mayoral candidate, Steve Norris, was cited in The Times on 29 January:

The article went on to say:

some echoes there of what happened to the Liberal party last week. Only a few months later, the hon. Member for Poole (Mr. Syms) reverted to Conservative old ways and said:

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Londoners are clearly not protected by Conservative proposals. Conservatives would seek to use the private sector in the PPP in future. Their mayoral candidate already has a hole of £100 million in his budget, so Londoners know what to expect should they elect him.

Stephen Hammond: The calculation was redone at the weekend and the figure of £100 million constitutes a false allegation. How did the hon. Gentleman reach that figure, against the calculation by independent people, which shows that the figure is about £10 million not £100 million?

Clive Efford: I would take the hon. Gentleman through the miscalculations—[Hon. Members: “Go on!”] If I am to allow the hon. Member for Putney (Justine Greening) to get in, I cannot go down that route.

We are considering the failure of the unbridled privatisation of the London underground. Tube Lines has a completely different internal structure, containing incentives and higher materialisation thresholds, which encourage it to incentivise, innovate and keep its costs down. Metronet was a cash cow, on which stakeholders and shareholders fed until there was nothing left. It was unable to impose any form of accountability or efficiency on the stakeholders and shareholders. Moneylenders to Metronet did not impose any restrictions and the whole edifice came tumbling down. We finished up with 50 delayed station upgrades and no risk transfer from the public to the private sector.

In the short time available, I want to emphasise to the Government that there are lessons to be learned, as everybody has said. We must not repeat the mistakes that we made in the run-up to PPP 10 years ago. The London underground needs stability and time to plan ahead. We cannot enter into another enforced PPP, whereby a private sector partner is levered in to take over the contracts that London Underground currently runs. The administrators have attempted to introduce the private sector and they have failed. Indeed, they said that pursuing that would be a waste of public money. We need London Underground to retain the management of Metronet’s contracts and a period of stability for the benefit of Londoners. Metronet has let Londoners down and we must not put another Metronet in place to repeat that exercise.

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