Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 17 OCTOBER 2007
MR CHRIS
BOLT
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 of 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 is 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
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 a 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 risk 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 I 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.
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