Examination of Witnesses (Questio Numbers
60-79)
DEPARTMENT FOR
TRANSPORT AND
LONDON UNDERGROUND
PPP ARBITER
19 OCTOBER 2009
Q60 Keith Hill: Is the Arbiter going
to play a bigger role than heretofore in achieving that?
Mr Devereux: The Arbiter's actual
role is defined by statute in respect of the PPP.
Q61 Keith Hill: But you can always
change the law.
Mr Devereux: I can change the
law, parliamentary time permitting.
Q62 Keith Hill: Are you envisaging
that?
Mr Devereux: What ministers and
the Mayor are trying to sort out at the moment is the best way
in which the substance of this can be given effect to.
Q63 Keith Hill: Mr Bolt, let me finally
ask you as the Arbiter, would you welcome these additional powers?
Mr Bolt: I would welcome them,
to build on what I am doing already but with one hand tied behind
my back.
Q64 Mr Mitchell: I began to think
I should change places with Keith Hill after that astounding opening
statement. Really you must feel like the fall guys. You did not
devise this insane structure, you did not devise the financing
arrangements, it was forced on you by Treasury, was it not?
Mr Devereux: It is kind of you
to say that I did not devise it. I have already been slapped for
seeming to imply, which I did not, that I was not responsible.
Let me be clear, I do not think that the PPP structure per se
is the thing which is at fault so you are not going to tempt me
into—
Q65 Mr Mitchell: Why not? There was
a long argument between the Chancellor and Ken Livingstone as
to how this contract should be managed, who should run it and
how it should be financed.
Mr Devereux: Correct.
Q66 Mr Mitchell: Ken Livingstone
lost and you face the consequences.
Mr Devereux: Yes.
Q67 Mr Mitchell: Do you agree?
Mr Devereux: What I am agreeing
with is this ...
Q68 Mr Mitchell: You carried the
can.
Mr Devereux: No, no. You are asking
me whether I am going to dissent from the creation of the PPP
in the first place. I am making an observation.
Q69 Mr Mitchell: That was not your
job but you carried the can effectively for the failure of the
arrangements made by Treasury and the Chancellor.
Mr Devereux: The Department went
into this. My predecessor as accounting officer signed off that
this was a good value for money deal so I am not going to take
that we were taking dictation.
Q70 Mr Mitchell: Okay, if you want
to bring others down with you it is not my business. Surely in
that situation it is insane to give a guarantee that you would
step in if the Private Public Partnership failed? Why did you
do that?
Mr Devereux: I think the short
answer to that is that in order for this deal to be done and completed
it turned out to be necessary to have a degree of guarantee.
Q71 Mr Mitchell: Were you under instructions
from Treasury to do that?
Mr Devereux: No, it was clear
that the market appetite for this was such that it was not going
to happen with a 0% guarantee.
Q72 Mr Mitchell: Would the deal have
gone ahead without that?
Mr Devereux: I think not. I am
not sure what the counterfactual is. The only thing we have is
that the deal was done on the basis of a 95% guarantee. Let us
be clear about some of the things which were being tackled here.
This is not a simple bit of road widening or something we had
done hundreds of times before. We are talking about an outcome
contract which gives maximum flexibility to the private sector.
Q73 Mr Mitchell: Yes, but we have
been told for years that the advantage of these contracts is that
we can get the efficiency of capitalism and private enterprise
and they will bear the risk. In fact you took the risk on from
the start.
Mr Devereux: I had clearly taken
on a very large proportion of the risk and we can argue about
whether that was the right proportion to take. I did not take
on 100% of it.
Q74 Mr Mitchell: You did not object
to taking on the risk, you just argued about the proportion.
Mr Devereux: No. I think you are
misrepresenting the proposition here. The proposition here is
that you could have left this to be done by London Underground
in traditional fashion. Right? There would have been no outcome
specification.
Q75 Mr Mitchell: That was decided
against. We now bring in business and we are bringing in big companies
which are supposed to take the risk and you rushed to take it
from their shoulders.
Mr Devereux: No, I did not rush
to take it from their shoulders and at the end of the day £500
million of private money was at risk in this deal and has gone.
You may wish it had been £1 billion, £1.5 billion or
£2 billion but the market at the time did not bear that sort
of calculation, largely because the extent of the work that was
necessary was not entirely clear.
Q76 Mr Mitchell: Actually it was
because a lot of greedy people wanted to make money out of being
suppliers and do the contract in the first place and the Government
did not have the business nous, Transport for London did not have
the business nous, London Underground did not have the business
nous and you certainly did not, to control this monster.
Mr Devereux: I am not sure I accept
that. You can make that as an assertion.
Q77 Mr Mitchell: Another assertion.
Can a structure in which you cannot directly control the performance
of the businesses, you are supervising somebody else who is supervising
somebody else, with a very unsatisfactory corporate governance
arrangement, it would seem in retrospect certainly, can that structure
possibly work?
Mr Devereux: You very kindly helped
me out here by just observing the points you are making are with
the benefit of hindsight. At the moment I am sitting here with
a reality of where Metronet is. It is clear, as I have already
said, that tied supply chains of themselves do not necessarily
mean that things will fail. I have a tied supply chain which delivered
me the A1 upgrade for example. I have a tied supply chain on the
M25. The nature of that contract, because it is work which I understand
how to do, is such that nobody is going to be paid anything for
widening the M25 until several miles have been widened. We will
pay for it as and when we see some widening. That is not the nature
of this contract because of the complexity of completing complete
line upgrades, including rolling stock and signalling across an
entire line and network. We are dealing with a different kettle
of fish and therein lies why I suspect we find ourselves in a
position where there were substantial cost overruns.
Q78 Mr Mitchell: They only had to
pay the first £50 million of unexpected extra costs.
Mr Devereux: They had to pay all
uneconomic costs.
Q79 Mr Mitchell: The first £50
million.
Mr Devereux: No, they had to pay
the first £50 million economic cost above their bid. They
had to pay all uneconomic cost above their bid.
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