Examination of Witnesses (Questio Numbers
80-99)
DEPARTMENT FOR
TRANSPORT AND
LONDON UNDERGROUND
PPP ARBITER
19 OCTOBER 2009
Q80 Mr Mitchell: Subject to arbitration.
Mr Devereux: Yes. He was the man
who would determine which side of the line it fell. It is not
true to say that they were somehow limited to £50 million.
No.
Q81 Mr Mitchell: Mr Bolt, you have
no responsibility to maintain or defend the public interest in
arbitration, you are just arbitrating.
Mr Bolt: I have statutory duties
in the GLA Act to promote economy and efficiency. The restrictions
come from only being able to exercise functions at the request
of the parties and to do that on the basis of some of the specific
provisions which are written into the contract. The periodic review
reference I have had recently from London Underground in respect
of Tube Lines—
Q82 Mr Mitchell: In that situation,
if you find problems arising, to whom do you talk? Whom do you
tell, Transport for London or the Department of Transport?
Mr Bolt: I publish all the guidance
and directions that I am asked to give.
Q83 Mr Mitchell: You do not ring
up the Department for Transport and say "Watch it. This is
going to be a disaster".
Mr Bolt: As Mr Devereux has highlighted,
he and I had regular meetings since I was originally appointed
at the end of 2003.
Q84 Mr Mitchell: Yes, but chat between
chaps is no way of supervising a contract like this.
Mr Devereux: May I return to the
lesson I have already adduced. This contract was set up on the
basis that the Arbiter had certain information rights. I am proposing
to you, and you are now agreeing with me, that the contract would
have been better, for which my Department bears responsibility,
had it been the case that when the Arbiter concluded something
was amiss something could have happened to the taxpayer cash flow
into the company. The contract did not provide for that. I am
telling you today that a lesson learnt is that that is not a smart
thing to do.
Q85 Mr Mitchell: Okay but you must
have gone into the situation of this extraordinary lack of direct
control with a good deal of faith in Metronet, its corporate governance,
in TfL, in London Underground and their ability to manage it.
Mr Devereux: That is not an unreasonable
statement. We went in with the proposition that £500 million
of other people's money would concentrate their minds.
Q86 Mr Mitchell: To make them virtuous
and efficient.
Mr Devereux: That is what risk
is about. They had equity.
Q87 Mr Mitchell: That is a wonderful
faith.
Mr Devereux: I am trying to engage
with you on what we must have been assuming at the time. If you
actually say to somebody "If this goes belly up you are going
to lose your £350 million or your £190 million of debt",
you might have imagined that would of itself cause people to take
action. The reality is that the action taken was insufficient.
Q88 Mr Mitchell: Why was the £1.7
billion overrun, loss, disaster not charged to local government
in London? Why did you take it on your shoulders?
Mr Devereux: Because, as I am
clearly failing to describe adequately, the nature of this transaction
was that we repaid on the day the outstanding borrowing that Metronet
had incurred. That borrowing would otherwise have been paid for
by the public sector year after year after year, by London Underground
backed by a grant from me. So in the grand scheme of things I
have essentially prepaid what I would have paid anyway so that
is not something which is obviously to be put on the shoulders
of London Underground.
Q89 Mr Mitchell: When there was a
discrepancy the problem was discovered in February and then you
wait for the Arbiter's report until November. Surely this must
have produced considerations as to who is going to be responsible
for this funding. The question was: why is London not responsible
for it? Let me put it another way. It must have come out of your
budget as a department and that budget covers the rest of the
country. Are we suffering with transport projects cut back and
things which should be done in the north because of this overrun
in London which you are forking out for?
Mr Devereux: The answer to the
question in respect of the £1.7 billion that we paid is that
was an additional grant which has been paid to the Department.
Q90 Mr Mitchell: So our budgets were
not cut back.
Mr Devereux: Your budget has not
been cut back. I do have slightly more to say about that, but
it is at your discretion.
Q91 Chairman: Twice you have used
the word "counterfactual" both in answer to me and to
Mr Mitchell. You said that we need to compare the loss to the
taxpayer to a counterfactual. Presumably by that you mean the
cost overruns previously under London Transport and all the rest
of it, that we have to compare what we lost here and what used
to be lost in history. Is not the real comparator between the
promises made to you that we are going to put an end to all these
cost overruns and inefficiencies? That is the real comparator,
is it not, not what happened in the dim and distant past and the
failures of London Transport?
Mr Devereux: And that is the basis
on which the C&AG has established the size of the loss.
Q92 Chairman: So this counterfactual
argument that you have been referring to is meaningless.
Mr Devereux: No, it is not meaningless
because several times your colleagues have sought to argue that
actually there is something fundamentally wrong about these contracts
which clearly everybody knew was going to produce this loss. I
am simply observing that the delivered loss on these contracts
is substantially less than has previously been the case. When
you ask whether the Department have acted rationally in seeking
to do this a different way, it seems to me I could plausibly answer
"Yes, it was rational to go down this route" and even
after the fact, even with the benefit of hindsight, that could
still be true.
Chairman: A fair answer.
Q93 Mr Davidson: May I just clarify
something in the documents we have here and whether or not you
agree with Metronet's failure as being the way in which it had
a weak central core basically and the five partners were more
interested in carving up a share of the pie for themselves than
contributing towards the general good?
Mr Devereux: I would agree with
all of that and also add that I am profoundly disappointed that
the banks did not do more by way of their lending rights.
Q94 Mr Davidson: I shall come to
them in a minute.
Mr Devereux: I will agree with
you. Lesson one: with these shareholders the company was not well
run.
Q95 Mr Davidson: Was this not foreseeable?
There are two elements here. One is an impression of a weak centre
and the other is the barons, as it were, having a vested interest
in pursuing their own interests rather than the interests of the
company as a whole. Was that not foreseeable at the time?
Mr Devereux: As I tried to answer
previously, that contractors might set up a purpose-built entity
in which they themselves get work is not unusual. This is not
something that came from planet Mars.
Q96 Mr Davidson: What I am trying
to clarify in a sense is that you mentioned before a couple of
road programmes with which you are familiar. What I am not clear
about is whether or not the structure here is exactly the same
structure that you have everywhere else and therefore whether
or not the criticism which is applied here about weak management
information, the barons being too powerful, applies in all these
other contracts.
Mr Devereux: That is a fair question.
I think the answer is that it does not, for two reasons. One fundamentally
is that I do not go round the country guaranteeing other people's
debts when I ask them to do a PFI deal. The M25 deal has very
substantial amounts of private lending in it, not a penny of which
has been guaranteed by me. When I said earlier on that I am only
paying, I am only paying at the point at which five miles of motorway
has been widened and another five miles is widened. I just do
not get into the game of worrying about the nature of their interaction
because my exposure is simply different. In addition to that,
notwithstanding the fact that I have in one sense very strong
incentives to do it properly, we have, in the case of the M25,
negotiated with the parties specific references to the way the
company will be run and operated, including giving the Secretary
of State rights in the event they do not run it the way they warranted
to us in the first place. So we have learned from this sort of
corporate failure.
Q97 Mr Davidson: That is helpful.
So the practices you are applying now are as a result of the lessons
of failure that you learned from this.
Mr Devereux: Yes, in that case.
My primary defence on all these other contracts is that I am simply
not paying for anything until I actually have it built.
Q98 Mr Davidson: I do understand
that. I recognise that this is different. From what I am reading
here, I would have thought that those who know more about these
things than I do ought to have been able to foresee that some
of these difficulties would have arisen. In particular, was the
lack of management information being provided to the centre by
Metronet and Metronet's inability to do anything and anything
it did discover not foreseeable at the time?
Mr Devereux: If you mean at the
time at which the contracts were let, the answer clearly, with
the benefit of hindsight, is no. People assumed that—and
I choose my words carefully—if shareholders actually owned
the company to the tune of £350 million equity, they would
have an interest in making sure that those perfectly normal flows
would be part of it.
Q99 Mr Davidson: To be fair, that
is a slightly different point. The idea that the shareholders
would look after their interests and therefore things would work
is not quite the same thing as saying that the centre of Metronet
would actually have the powers to get the information. It seems
to me, reading this, not being a London MP, not having followed
every last blow in this battle, that in fact if there is a lack
of power for the centre to get the management information to control
the suppliers, it surely ought to have been visible at the time.
Mr Devereux: I agree with that,
except that of course the person letting these contracts is Metronet.
They are not somehow or other asking other people to do some stuff.
The contract flows from Metronet, the corporate entity, down to
the shareholders.
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