Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 17 OCTOBER 2007
MR CHRIS
BOLT
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. Given
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.
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