Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 17 OCTOBER 2007
MR TERRY
MORGAN
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 £200 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 fixed 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
2010. 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.
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