Examination of Witnesses (Questions 20
- 39)
WEDNESDAY 17 OCTOBER 2007
MR CHRIS
BOLT
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 periodic 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,
given a 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!
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